NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016
AND 2015
NOTE 1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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NATURE OF OPERATIONS
CannaPharmaRx, Inc. (the “Company”)
is a Delaware corporation. As of the date of this Report the Company intends to engage in acquisitions or joint ventures with a
company or companies that will allow to become a national or internationally branded cannabis cultivation company, or otherwise
engage in the cannabis industry. Management is engaged in seeking out and evaluating businesses for acquisition. However, if an
opportunity in another industry arises the Company will review that opportunity as well. The proposed business activities described
herein classify us as a “shell company. Rule 12b-2 of the 34 Act defines a shell company as a company that has:
(1)
No
or nominal operations; and
(2)
Either:
(i)
No
or nominal assets;
(ii)
Assets
consisting solely of cash and cash equivalents; or
(iii)
Assets
consisting of any amount of cash and cash equivalents and nominal other assets.
HISTORY
The Company was originally incorporated
in the State of Colorado in August 1998 under the name “Network Acquisitions, Inc.” It changed its name to Cavion Technologies,
Inc. in February 1999 and subsequently to Concord Ventures, Inc. in October 2006. On December 21, 2000, the Company filed for protection
under Chapter 11 of the United States Bankruptcy Code. In connection with the filing, on February 16, 2001, the Company sold its
entire business, and all of its assets, for the benefit of its creditors. After the sale, the Company still had liabilities of
$8.4 million and was subsequently dismissed by the Court from the Chapter 11 reorganization, effective March 13, 2001, at which
time the last of the Company’s then remaining directors resigned. On March 13, 2001, the Company had no business or other
source of income, no assets, no employees or directors, outstanding liabilities of approximately $8.4 million and had terminated
its duty to file reports under securities law. In February 2008, after filing of a Form 10 registration statement pursuant to the
Securities Exchange Act of 1934, as amended, we were re-listed on the OTC Bulletin Board.
In April 2010, the Company re-domiciled
in Delaware under the name CCVG, Inc. (“CCVG”).Effective December 31, 2010, the Company completed an Agreement and
Plan of Merger and Reorganization (the “Reorganization") which provided for the merger of two of the Company’s
wholly owned subsidiaries. As a result of this reorganization the Company’s name became “Golden Dragon Inc.,”
which became the surviving publicly quoted parent holding company.
On May 9, 2014, the Company entered
into a Share Purchase Agreement (the “
Share Purchase Agreement
”) with CannaPharmaRX, Inc., a Colorado corporation
(“
Canna Colorado
”), and David Cutler, a former President, Chief Executive Officer, Chief Financial Officer and
director of the Company. Under the Share Purchase Agreement, Canna Colorado purchased 1,421,120 restricted shares of the Company’s
common stock from Mr. Cutler and an additional 9,000,000 common shares directly from the Company.
In October 2014, the Company changed its
legal name to “CannaPharmaRx, Inc.”
As
a result of the aforesaid transactions, the Company became an early-stage pharmaceutical company whose purpose was to advance cannabinoid
research and discovery using proprietary formulation and drug delivery technology then under development.
In
April 2016, the Company ceased operations. Its then management resigned their respective positions with the Company, with the exception
of Mr. Gary Herick, who remains as an officer and director.
As
a result, the Company is now considered a “shell” company as defined under the Securities Exchange Act of 1934, as
amended.
BASIS OF PRESENTATION
The accompanying financial statements have
been prepared in accordance with the Financial Accounting Standards Board (“
FASB
”) “FASB Accounting Standard
Codification™” (the “
Codification
”) which is the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted
accounting principles (“
GAAP
”) in the United States. Certain amounts in prior periods have been reclassified
to conform to current presentation.
The Company has been inactive since April
2016.
USE OF ESTIMATES
The preparation of our financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Due to
uncertainties inherent in the estimation process, it is possible that these estimates could be materially revised within the next
year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash
and highly liquid debt instruments with original maturities of less than three months.
PROPERTY AND EQUIPMENT
Historically when the company acquired
fixed assets, depreciation expenses have been calculated using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to seven years.
Depreciation expenses total $-0- and $12,031
for the years ended December 31, 2016 and December 31, 2015, respectively.
DEFERRED COSTS AND OTHER OFFERING COSTS
All costs with respect to raising capital
in the two private placements of the Company’s common stock were expensed by the Company both in 2014 and 2015. These costs
were applied as internal operational expenses. The Company had no deferred costs or other stock offering costs as of either December
31, 2016 or December 31, 2015.
Future costs associated with raising capital,
be it debt or equity, may more likely be incurred as a direct variable cost with third parties. Our intent is to initially defer
these costs and ultimately offset them against the proceeds from these capital or financial transactions if successful, or expensed
if the proposed financial transaction proves unsuccessful.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
In the event that facts and circumstances
indicated that the cost of long-lived and intangible assets may be impaired, an evaluation of recoverability will be performed.
If an evaluation is required, the estimated future undiscounted cash flows associated with the asset will be compared to the asset’s
carrying amount to determine if a write-down to market value or discounted cash flow value will be required. The Company had no
intangible assets at December 31, 2016, or December 31, 2015.
FAIR VALUES OF ASSETS AND LIABILITIES
The Company groups its financial assets
and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value.
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Level 1:
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Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
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Level 2:
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Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments.
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Level 3:
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Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and long-term derivative contracts.
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The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of
December 31, 2016 and December 31, 2015, the Company does not have any assets or liabilities which are considered Level 2 or 3
in the hierarchy.
The Company may also be required, from
time to time, to measure certain other financial assets at fair value on a nonrecurring basis. These adjustments to fair value
usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no such adjustments
in the periods ended December 31, 2016, or December 31, 2015.
FINANCIAL INSTRUMENTS
The estimated fair value for financial
instruments was determined at discrete points in time based on relevant market information. These estimates involved uncertainties
and could not be determined with exact precision. The fair value of the Company’s financial instruments, which include cash,
prepaid expenses, accounts payable and the related party loan, each approximate their carrying value due either to their short
length to maturity or interest rates that approximate prevailing market rates.
INCOME TAXES
The Company accounts for income taxes under
the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as all
changes in stockholders’ equity (deficit), exclusive of transactions with owners, such as capital investments. Comprehensive
income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation
adjustments on investments in foreign subsidiaries and unrealized gains (losses) on available-for-sale securities. From our inception,
there have been no differences between our comprehensive loss and net loss.
INCOME (LOSS) PER SHARE
Income (loss) per share is presented in
accordance with Accounting Standards Update (“
ASU
”),
Earning per Share
(Topic 260) which requires the
presentation of both basic and diluted earnings per share (“
EPS
”) on the income statements. Basic EPS would
exclude any dilutive effects of options, warrants and convertible securities but does include the restricted shares of common stock
issued. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were
exercised or converted to common stock. Basic EPS calculations are determined by dividing net income by the weighted average number
of shares of common stock outstanding during the year. Diluted EPS calculations are determined by dividing net income by the weighted
average number of common shares and dilutive common share equivalents outstanding.
Stock options outstanding at December 31,
2016 to purchase 750,000 shares of common stock are excluded from the calculations of diluted net loss per share since their effect
is antidilutive.
STOCK-BASED COMPENSATION
The Company has adopted ASC Topic 718,
(Compensation—Stock Compensation)
, which establishes a fair value method of accounting for stock-based compensation
plans. In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees
and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option
pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects
to receive the benefit, which is generally the vesting period. The fair value of stock warrants was determined at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and
assumptions, including expected term, expected volatility, risk-free rate and dividend yield.
BUSINESS SEGMENTS
Our activities during the year ended December 31, 2016 comprised
a single segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On June 10, 2014, the FASB issued update
ASU 2014-10,
Development Stage Entities
(Topic 915). Among other things, the amendments in this update removed the definition
of development stage entity from Topic 915, thereby removing the distinction between development stage entities and other reporting
entities from U.S. GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date
information on the statements of income, cash flows and stockholders’ equity, (2) label the financial statements as those
of a development stage entity; (3) disclose a description of the development stage activities in which the entity is engaged and
(4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the
development stage. The amendments are effective for annual reporting periods beginning after December 31, 2014 and interim
reporting periods beginning after December 15, 2015. However, entities are permitted to early adopt for any annual or interim reporting
period for which the financial statements have yet to be issued. The Company has elected to early adopt these amendments, and accordingly,
has not labeled the financial statements as those of a development stage entity and has not presented inception-to-date information
on the respective financial statements.
Management has reviewed all other recently
issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may
be expected to cause a material impact on our financial condition or the results of our operations.
NOTE 2.
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GOING CONCERN AND LIQUIDITY
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The Company had $-0- cash on hand as of
December 31, 2016, and no revenue-producing business or other sources of income. Additionally, as of December 31, 2016, the
Company had outstanding liabilities totaling $959,333 and stockholders’ deficit of $957,667. The Company had a working capital
deficit of $957,667 at December 31, 2016.
In the Company’s financial statements
for the fiscal years ended December 31, 2016 and 2015, the Reports of the Independent Registered Public Accounting Firm include
an explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. These financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. Based on our current financial projections, we believe we do not have sufficient
existing cash resources to fund our current limited operations.
It is the Company’s current intention
to raise debt and/or equity financing to fund ongoing operating expenses. There is no assurance that these events will be satisfactorily
completed or at terms acceptable to the Company. Any issuance of equity securities, if accomplished, could cause substantial dilution
to existing stockholders. Any failure by the Company to successfully implement these plans would have a material adverse effect
on its business, including the possible inability to continue operations.
As of December 31, 2016, the Company
had $1,667 in total assets comprised of prepaid expenses.
NOTE 4.
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES
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As of December 31, 2016, the balance
of accounts payable and accrued expenses was $769,333, which is primarily comprised of trade payables and accrued salaries and
wages and legal fees.
Additionally, accrued legal settlements
payable in cash over the next 12 months total $190,000 as of December 31, 2016, as discussed in Note 6 (Litigation and Accrued
Settlement Liabilities).
OPERATING LEASE
The Company had a non-cancellable operating
lease for its headquarters located in Carneys Point, New Jersey. The term of this lease ended April 30, 2016. As of December
31, 2016 the Company owed $18,540 on this lease and had not made any new commitments for office space.
NOTE 6.
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LITIGATION AND ACCRUED SETTLEMENT LIABILITIES
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On October 30, 2014, Gary M. Cohen (“
Cohen
”),
former President, Chief Operating Officer and a board member of Canna Colorado, filed a lawsuit against Canna Colorado and an individual
officer and board member, Gary Herick, who is currently an officer and director of the Company. On November 26, 2014, Cohen
filed an amended complaint naming the Company and Gerald Crocker, James Smeeding, Robert Liess and Mathew Sherwood, each of whom
was a member of the Company’s board of directors at that time, as defendants. In his amended complaint, Cohen alleged various
employment- related contract and wrongful termination claims, as well as claims alleging breach of fiduciary duty, misappropriation
of assets, violations of corporate law regarding his access to internal corporate information, and alleged violations of U.S. federal
securities laws, the Sarbanes- Oxley Act of 2002 and the U.S. Internal Revenue Code. Cohen’s claims arose out of the removal
of Cohen as an officer and board member of Canna Colorado, which occurred on or about October 23, 2014. The defendants successfully
removed Cohen’s lawsuit from state court in Hillsborough County, Florida—where it was filed originally—to the
U.S. District Court in Tampa, Florida.
On November 11, 2014, the Company, under
its former name Golden Dragon Holding Co., sued Cohen in U.S. District Court in New Jersey for libel and tortious interference.
On March 30, 2015, the Company executed
a Confidential Settlement and Release of Claims Agreement dated March 30, 2015, by and between the Company, Canna Colorado,
Cohen and the other individuals named above (the “
Settlement Agreement
”). Pursuant to the terms of the Settlement
Agreement, the lawsuit filed in Florida on October 30, 2014 against the Company, Canna Colorado, Herick, Crocker, Smeeding,
Sherwood and Liess by Cohen has been resolved and dismissed. The parties amicably resolved their differences before any discovery
occurred or before any decision by the court on the merits of any claims. The Company and all the individuals who had been sued
categorically denied of all Mr. Cohen’s claims and allegations, maintained that the allegations were false and were prepared
to assert counterclaims of their own. As part of the parties’ resolution, Cohen retracted his allegations.
As part of the Settlement Agreement, the
Company agreed to purchase all of Mr. Cohen’s 2,250,000 shares of Canna Colorado for a purchase price of $350,000, with
$85,000 payable up front and the remainder payable in equal installments of $15,000 per month over the next 17 months, and a payment
of $10,000 in the eighteenth month. In addition, on May 4, 2015, the Company issued 600,000 unregistered restricted shares
of its common stock to Mr. Cohen as part of the Settlement Agreement. The Company valued those shares at $1,597,500 based
on the trading average of the Company’s stock over the ten days preceding entry into the Settlement Agreement and recorded
an expense in such amount during the period ended December 31, 2014. Pursuant to the Settlement Agreement, $160,000 has been paid
to Mr. Cohen in cash through September 30, 2015 in accordance with the settlement payment terms, leaving a remaining liability
of $190,000 as of December 31, 2015 to be paid in cash in the future, since no payments were made subsequent to September 30, 2015.
In addition, the Company and Cohen have
resolved their differences in the Company’s lawsuit filed against Cohen on November 11, 2014 in New Jersey. The Company has
dismissed its claims against Cohen of libel and tortious interference.
NOTE 7.
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STOCKHOLDERS’ EQUITY
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PREFERRED STOCK
The Company is authorized to issue up to
10,000,000 shares of one or more series of preferred stock, at a par value of $0.0001, all of which is nonvoting. The Board of
Directors may, without stockholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution,
conversion rights, voting rights and any other preferences. No shares of preferred stock were issued or outstanding as of December
31, 2016.
COMMON STOCK
The Company is authorized to issue 100,000,000
shares of common stock, par value $0.0001 per share. As of December 31, 2016, 17,960,741 shares of common stock were issued and
outstanding.
RECENT ISSUANCES OF COMMON STOCK
In March 2015, the Company began offering
in a private placement of shares of its restricted common stock to accredited investors at $1.50 per share (the “
Private
Placement
”). Through December 31, 2015 the Company issued a total of 556,334 shares in exchange for $804,550 of
gross proceeds.
On June 25, 2015, the Company issued 100,000
shares of the Company’s common stock to Benjamin & Jerold Brokerage I, LLC, an Illinois limited liability company
(“
B&J
”), which had provided advisory and capital raising services to the Company. These shares were expensed
to stock-based compensation costs during the period and were valued at $350,000 based on the trading average of the Company’s
stock over the ten days preceding issuance of those shares.
WARRANTS
On January 20, 2015, the Company
issued a 3-year warrant (the “
First Warrant
”) to Viridian Capital & Research, LLC (“
VCR
”)
as compensation for the services rendered by VCR in connection with the delivery of a company report describing the business,
technology and products, markets, growth strategy and financial aspects of the Company. The First Warrant is exercisable for 244,283
of the Company’s fully-diluted common shares at an exercise price equal to the price per share of the Company’s common
stock on the 10 days preceding January 20, 2015 or $2.90. The First Warrant has a 3-year life, a cashless exercise provision and
is fully transferable with the Company’s approval, which may not be unreasonably withheld. The First Warrant is callable
on 60 days’ notice if (i) the Company’s common stock trades on the NASDAQ and (ii) the Company’s common
stock trades at three times the exercise price of the First Warrant for 20 consecutive trading days. These warrants were valued
at $630,067 using the Black-Scholes method of valuation.
On February 23, 2015, the Company
issued another 3-year warrant (the “Second Warrant,” and together with the First Warrant, the “VCR Warrants”)
to VCR as compensation for VCR’s services in managing and implementing investor relations strategies with the U.S. investment
community and industry. The Second Warrant is exercisable for 244,283 of the Company’s fully-diluted common shares at an
exercise price equal to the price per share of the Company’s common stock on the 10 days preceding February 23, 2015
or $2.50. The Second Warrant has a 3-year life, a cashless exercise provision and is fully transferable with the Company’s
approval, which may not be unreasonably withheld. The Second Warrant is callable on 60 days’ notice if (i) the Company’s
common stock trades on the NASDAQ and (ii) the Company’s common stock trades at three times the exercise price of the
Second Warrant for 20 consecutive trading days. These warrants were valued at $523,576 using the Black-Scholes method of valuation.
The Company has not issued any warrants since February 23
rd
, 2015.
STOCK OPTIONS
As a result of all stock option activity
to date, the Company has recorded aggregate stock-based compensation charges of $728,125 for the year ended December 31, 2016 and
$7,435,004 during the year ended December 31, 2015. As of December 31, 2016, 750,000 vested options were outstanding, all
of which belonged to Mr. Herick and all had been fully expensed.
As of December 31, 2016, the Company has
approximately $6,322,000 of federal net operating loss carryforwards, respectively. The federal net operating loss carryforwards
begin to expire in 2030. State net operating loss carryforwards begin to expire in 2034. Due to the change in ownership provisions
of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards could be subject to annual
limitations against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards.
The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore
no determination has been made whether the net operating loss carry forward is subject to any Internal Revenue Code Section 382
limitation. To the extent there is a limitation, there could be a substantial reduction in the deferred tax asset with an offsetting
reduction in the valuation allowance. As of September 30, 2016, the Company has no unrecognized income tax benefits.
The tax years from 2014 and forward remain
open to examination by federal and state authorities due to net operating loss and credit carryforwards. The Company is currently
not under examination by the Internal Revenue Service or any other taxing authorities.
NOTE 9. SUBSEQUENT EVENTS
In April 2018, the Company issued 60,000
shares of its Series A Convertible Preferred Stock at $1.00 per share to its current management, all of whom are accredited investors.
Each share of Series A Convertible Preferred Stock is convertible into 1,250 shares of common stock and vote on an as converted
basis. The rights and designations of these Preferred Shares include the following:
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entitles the holder thereof to 1,250 votes on all matters submitted to a vote of the shareholders;
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The holders of outstanding Series A Convertible Preferred Stock shall only be entitled to receive dividends upon declaration by the Board of Directors of a dividend payable on our Common Stock whereupon the holders of the Series A Convertible Preferred Stock shall receive a dividend on the number of shares of Common Stock in to which each share of Series A Convertible Preferred Stock is convertible;
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Each Series A Preferred Share is convertible into 1,250 shares of Common Stock;
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In July 2018, the Company commenced an
offering of up to $2MM of convertible notes. The notes carry an interest rate of 12% and are convertible into shares of the Company’s
common stock at the lesser of $0.40 or 50% discount to the market price on the date of conversion. The term of the notes is
for one year and they must be converted upon closing a financing, acquisition or other form of business combination in an amount
greater than $5 million. As of the date of this report the Company has accepted aggregate subscriptions of $640,000 in this Offering,
none of which has been converted. The offering remains open as of the date of this Report.
On April 1, 2018, the Company changed
its principal place of business to 2 Park Plaza, Suite 1200 – B. Irvine, CA 92614. This space is provided on a twelve month
term by a company to which Mr. Nicosia, one of the Company’s directors, serves as Chief Executive Officer. Monthly rent
is $1,000, however, as of the date of this filing the Company has not made any rent payments and continue to accrue those amounts
as accounts payable.