$CNAB Form 10-K

Certain statements set forth below under this caption constitute forward-looking statements. See “Forward-Looking Statements” preceding Item 1 of this Annual Report on Form 10-K for additional factors relating to such statements.

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Report.

Overview

United Cannabis Corporation (“we”, “our”, “us”, “UCANN”, or “the Company”) a Colorado corporation, was originally formed as a California corporation under the name MySkin, Inc. on November 15, 2007. MySkin was engaged in the business of providing management services to a medical spa in Los Angeles, California which provided various advanced skin care services until March 31, 2014, when this business was sold to the prior President of the Company.

In early 2014 we decided to exit the medical spa management business and change our focus to providing products, services and intellectual property to the cannabis industry.

UCANN was formed as a Colorado corporation on March 25, 2014, and on May 2, 2014, MySkin, Inc. merged into UCANN, a wholly-owned subsidiary of MySkin, Inc., for the purpose of changing domicile from California to Colorado and changing the corporation’s name to United Cannabis Corporation.

We own distinct intellectual property relating to the legalized growth, production, manufacture, marketing, management, utilization and distribution of medical and recreational marijuana and marijuana infused products. In our first year of operating in the marijuana industry we have entered into three significant agreements with partners outside of Colorado where we have agreed to provide intellectual property and consulting services and in which we have received an equity interest. These businesses are located in Nevada, Jamaica and Canada. We also have formalized strategic relationships with four other businesses located in Colorado and California in the marijuana industry and we provide consulting services, product placement services and licenses to our intellectual property in exchange for consulting and licensing fees.

Our primary goal is to advance the use of cannabinoids in medicine through research, product development and education. We are dedicated to improving the lives of patients through the creation of products using only the highest quality genetics, purest extractions and most effective protocols possible. Our ACT Now Program and patent-pending Prana Bio Nutrient Medicinals provide a comprehensive solution, designed to enable physicians and patients to design, implement and monitor effective cannabinoid therapy protocols.

Results of Operations

The Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

Revenues and Cost of Revenues

Revenues and cost of revenues were $186,557 and $7,031, respectively, during the year ended December 31, 2014, as compared to $0 during the year ended December 31, 2013, as we began our new business in 2014. Our revenues were comprised of our recognition of $150,000 of deferred consulting revenues relating to our investment in WeedMD’s non-marketable equity securities and $36,557 of licensing fees, product sales, other consulting fees and reimbursable expenses.

Our costs of revenues, $7,031, consisted of $1,000 of share-based compensation expense and costs totaling $6,031 for materials and supplies related to our products, direct costs associated with our license fees, and costs and reimbursable expenses associated with other consulting revenue and reimbursable expenses revenue.

Sales and Marketing Expenses

Sales and marketing expenses were $101,962 and $0 for the years ended December 31, 2014 and 2013, respectively. The increase in sales and marking expenses was due to the new business we entered into after our change in control. Our sales and marketing expenses were mainly comprised of third party consulting fees during the year ended December 31, 2014, and also include $9,200 of non-cash share-based compensation expense related to one service provider.

Research and Development Expenses

Research and development expenses (“R&D”) were $182,606 and $0 for the years ended December 31, 2014 and 2013, respectively. The increase in R&D was due to the new business we entered into after our change in control. Our R&D expenses during the year ended December 31, 2014, were mainly comprised of costs associated with a third party consultancy agreement.

General and Administrative Expenses

General and administrative expenses (“G&A”) were $1,709,040 and $33,661 for the years ended December 31, 2014 and 2013, respectively. The increase in general and administrative expenses was due to the new business we entered into after our change in control.

For the year ended December 31, 2014, our G&A consisted of $556,253 of wages and related expenses, $323,247 of professional fees, $175,000 of business development expense, $541,485 of non-cash share-based compensation expense and $113,055 of travel and office related expense.

During the year ended December 31, 2014, we incurred wages and related expenses applicable to our executive team beginning in March 2014 and the addition of two employees during the year. Professional fees were mainly comprised of $183,099 of legal fees during the year ended December 31, 2014, and also included fees for audit, accounting, investor relations, lobbying, investment banking and other consultants. During the year ended December 31, 2014, $123,821 of our share-based compensation expense related to shares issued to six service providers for investor relation, public relation, accounting, information technology and other services. In addition, we recorded $417,664 of share-based compensation expense applicable to 600,000 stock options granted to three executives on January 9, 2015, for services provided in 2014. We expect our G&A expenses to increase as our business expands in future periods.

Other Nonoperating Expense, net

Our other nonoperating expense, net totaled $595,390, net, during the year ended December 31, 2014, as compared to $0 during the year ended December 31, 2013. During this period, interest income of $37,837 and gain on revaluation of derivative liability of $6,099 was offset by the following: our $300,000 loss on non-marketable equity securities related to the expiration of our WeedMD warrants, interest expense of $131,479, amortization of debt discount of $161,402, loss on origination of derivative liability of $12,810 and loss on extinguishment of our debt to Typenex totaling $33,635.

Discontinued Operations

On March 31, 2014, we sold all right, title and interest in the tangible and intangible assets, trademarks, customer lists, intellectual property and rights, which we owned and were related to our advanced skin care business. The assets were sold to MySkin Services, Inc. (“MTA”), a business partly owned by Ms. Stoppenhagen in exchange for a $15,000 payable we owed to Ms. Stoppenhagen and/or MTA. In addition, MTA assumed all costs associated with these assets starting on March 31, 2014.

The following details our income (loss) from discontinued operations:

                                                          Years Ended December 31,
                                                           2014               2013

Revenues                                               $      20,684       $   105,662

Operating expenses:
Selling, general and administrative                           63,872            57,146
Depreciation                                                       -            18,019
Loss on disposal of assets                                    15,704                 -
Total operating expenses                                      79,576            75,165

Income (loss) from discontinued operations, before
income taxes                                                 (58,892 )          30,496
Provision for income taxes                                         -                 -

Income (loss) from discontinued operations, net of
income taxes                                           $     (58,892 )     $    30,496

Our consolidated financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. During the year ended December 31, 2014, we incurred losses of $2,468,364 and used cash of $1,189,057 in our operating activities. As at December 31, 2014, we had a working capital deficit of $1,304,209 and an accumulated deficit of $2,624,967.
Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and, or, obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. There is no assurance that these events will be satisfactorily completed.

Net cash used in operating activities for the years ended December 31, 2014 and 2013, was $1,189,057 and $25,816, respectively. This increase was primarily due to the expenses incurred in connection with our new business as a result of our change in control in March of 2014.

Net cash used in investing activities for the years ended December 31, 2014 and 2013, was $52,309 and $18,215, respectively. This increase was mainly due to a $50,000 equity method investment completed during the current period compared to fixed asset purchases totaling $18,215 in the year ended December 31, 2013.

Net cash provided by financing activities for the years ended December 31, 2014 and 2013, was $1,530,305 and $0, respectively. The increase was due to $900,000 from the sale of our common stock, $761,500 of borrowings under our notes payable and $225,000 of borrowings under our convertible note payable. These amounts were offset by a $356,195 cash settlement related to our convertible note payable. During the year ended December 31, 2013, we both received and repaid $50,000 under our note payable related party.

During the next 12 months, we anticipate that we will incur a minimum of $1 million of general and administrative expenses in order to execute our current business plans. We also plan to incur significant sales, marketing, research and development expenses during the next 12 months. We must obtain additional financing to continue our operations. We may not be able to obtain additional funding on terms that are favorable to us or at all. We may not be able to obtain sufficient funding to continue our operations, or if we do receive funding, to generate adequate revenues in the future or to operate profitably in the future. These conditions raise substantial doubt about our ability to continue as a going concern.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported. Note 2 – Summary of Significant Accounting Policies of our consolidated financial statements describes the significant accounting policies used in the preparation of our consolidated financial statements. The accounting positions described below are significantly affected by critical accounting estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparation of our consolidated financial statements, actual results could differ materially from the amounts reported based on variability in factors affecting these statements.

Investments in Non-Marketable Equity Securities – Our investments in non-marketable equity securities are carried at cost, less write-down-for-impairments, and are adjusted for impairment based on methodologies, including the valuation achieved in the most recent private placement by an investee, an assessment of the impact of general private equity market conditions, and discounted projected future cash flows.

Long-Lived Assets – Our intangible assets and other long-lived assets are subject to an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible assets and other long-lived assets may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows.

Deferred Revenue – We defer revenue for which product or service has not yet been delivered or is subject to refund until such time that we and our customer jointly determine that the product or service has been delivered or no refund will be required.

Revenue Recognition – We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on our management’s judgments regarding the fixed nature of the selling prices of the products and services delivered and the collectability of those amounts.

Revenue for services with a payment in form of stock, warrants or other financial assets is recognized when the services are performed. The value of revenue is measured using the Black-Scholes model for warrants.

Cost of Revenues – Our cost of revenues consists primarily of costs associated with the production and delivery of our products and services. These include expenses related to the production and labeling of our Prana medicinals products and consulting expense related to our advisory services.

Stock-Based Compensation – We periodically issue shares of our common stock to non-employees in non-capital raising transactions for fees and services. We account for stock issued to non-employees in accordance with ASC 505, Equity, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

Income Taxes – Income taxes are recorded using the asset and liability method. Under the asset and liability method, tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that enactment occurs. To the extent that we do not consider it more likely than not that a future tax asset will be recovered, we will provide a valuation allowance against the excess.

Recent Accounting Pronouncements

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 – Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8 of this Report.

ITEM 7A.