UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended November 30, 2014
	or
¨	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from __________ to __________
	Commission File Number:  333-177518

 

Aja Cannafacturing, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada	45-2758994
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
31500 Grape Street Suite 3-345 Lake Elsinore, CA 92532
(Address of principal executive offices)
(714) 733-1412
(Registrant’s telephone number)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicated 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 x 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.

 

¨ Large accelerated filer	¨Accelerated filer
¨ Non-accelerated filer	x 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 x No

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 923,984,484 common shares as of January 12, 2014.

 

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 (§ 229.405 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 x No ¨

 

 

TABLE OF CONTENTS

 

		Page
	PART I - FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4:	Controls and Procedures	19
	PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	20
Item 1A:	Risk Factors	20
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3:	Defaults Upon Senior Securities	20
Item 4:	Mine Safety Disclosures	20
Item 5:	Other Information	20
Item 6:	Exhibits	21

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Our unaudited financial statements included in this Form 10-Q are as follows:

 

Unaudited Financial Statements:
	Consolidated Balance Sheets as of November 30, 2014 and August 31, 2014 (unaudited);	F-2
	Consolidated Statements of Operations for the three months ended November 30, 2014 and 2013 (unaudited);	F-3
	Consolidated Statements of Cash Flows for the three months ended November 30, 2014 and 2013 (unaudited);	F-4
	Notes to Consolidated Financial Statements (unaudited)	F-5

 

 

AJA CANNAFACTURING, INC. (FORMERLY IDS INDUSTRIES, INC.) CONSOLIDATED BALANCE SHEETS (Unaudited)

 

		November 30, 2014				August 31, 2014
ASSETS
Current Assets:
Cash		$	5,868			$	43,993
Accounts receivable, net of allowance of $8,753 and $8,753, respectively			8,752				8,752
Prepaid expenses and other current assets			9,882				88,871
Total Current Assets			24,502				141,616
Total Assets		$	24,502			$	141,616
LIABILITIES AND STOCKHOLDERS’ DEFICIT
LIABILITIES:
Current Liabilities:
Accounts payable		$	177,866			$	154,178
Derivative liability			926,163				558,194
Accrued compensation			5,695				52,686
Accrued expenses			44,080				43,483
Accrued interest			33,957				26,051
Convertible notes payable, net of discount of $445,952  and $174,125, respectively			376,184				340,813
Notes payable – related party net of discount of $0 and $244,839, respectively			-				30,135
Other notes payable			25,100				52,455
Total Current Liabilities			1,589,045				1,257,995
Total Liabilities			1,589,045				1,257,995
STOCKHOLDERS’ DEFICIT:
Preferred stock, par value $.001, 10,000,000 authorized, 1,000,000 and 0 shares issued and outstanding, respectively			1,000				-
Common stock, $.001 par value, 3,000,000,000 common shares authorized, 434,932,056 and 127,184,335 shares issued and outstanding, respectively			434,932				127,184
Additional paid in capital			1,654,906				1,555,834
Accumulated deficit			(3,655,381	)			(2,799,397	)
Total Stockholders’ Deficit			(1,564,543	)			(1,116,379	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	24,502			$	141,616

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

AJA CANNAFACTURING, INC. (FORMERLY IDS INDUSTRIES, INC.) STATEMENTS OF OPERATIONS (unaudited)

 

		For the Three Months Ended November 30,
		2014				2013
Revenue		$	-			$	-
Operating expenses:
Professional fees			35,615				25,494
Stock based compensation			163,755				-
Salaries and wages			8,419				85,733
Marketing and advertising			9,150				23,850
General and administrative			175,488				105,018
Total operating expenses			392,427				240,095
Loss from operations			(392,427	)			(240,095	)
Other income and (expense):
Amortization of debt discount			(304,012	)			(81,482	)
Derivative expense			(422,992	)			-
Gain (loss) on derivative liability			386,023				126,960
Loss on debt conversion			(70,849	)			-
Penalty expense			(36,000	)			-
Interest expense			(15,727	)			(11,807	)
Interest income			-				2,807
Total other expense			(463,557	)			36,478
Loss before provision for income taxes			(855,984	)			(203,617	)
Provision for income taxes			-				-
Net Loss		$	(855,984	)		$	(203,617	)
Loss per share:
Basic and diluted		$	(0.00	)		$	(0.01	)
Weighted average shares outstanding: basic  and diluted			273,869,821				34,313,114

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

 

AJA CANNAFACTURING, INC. (FORMERLY IDS INDUSTRIES, INC.) STATEMENTS OF CASH FLOWS (unaudited)

 

		For the Three Months Ended November 30,
		2014				2013
Cash flows from operating activities:
Net loss for the period		$	(855,984	)		$	(203,617	)
Adjustments to reconcile net loss to net cash used in operations:
Stock based compensation and services			163,755				-
(Gain) loss on fair value of derivatives			(386,023	)			(126,960	)
Amortization of discounts			304,012				81,482
Loss on debt conversion			70,849				-
Derivative expense			422,992				74,738
Severance and penalty expense			161,314				-
Change in assets and liabilities:
(Increase)/decrease in prepaids and other current assets			3,034				33,485
(Increase)/decrease in note receivable – related party			-				38,889
Increase in interest receivable – related party			-				(2,807	)
Increase/(decrease) in accounts payable			23,689				49,692
Increase/(decrease) in accrued expenses			19,237				1,333
Net cash used in operating activities			(73,125	)			(53,765	)
Cash flows from investing activities:			-				-
Cash flows from financing activities:
Proceeds from convertible debt			38,000				35,000
Increase / (decrease) in note payable – related party			-				5,250
Increase / (decrease) in other notes payable			(3,000	)			11,555
Net cash provided by financing activities			35,000				51,805
Net decrease in cash			(38,125	)			(1,960	)
Cash at beginning of period			43,993				1,960
Cash at end of period		$	5,868			$	-
Supplemental Cash Flow Information:
Cash paid for interest		$	-			$	-
Cash paid for taxes		$	-			$	-
Supplemental disclosure of non-cash activities
Common stock issued for conversion of debt		$	320,020			$	-
Debt discount from fair value of embedded derivatives		$	331,000			$	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

AJA CANNAFACTURING, INC.

(FORMERLY IDS INDUSTRIES, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2014

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Aja Cannafacturing, Inc. (“Aja” or the “Company”) is focusing on the breeding, cultivation, and processing of raw industrial Cannabis materials for industry specific applications such as building materials (Hempcrete), automotive (biofuels), plastics (healthcare) and textiles (fabrics).

 

The Company was formed as Step Out, Inc., a Nevada corporation on May 2, 2011. On July 18, 2011 Step Out issued 10,000,000 common shares to acquire 100% membership interest in SOI Nevada, LLC, a Nevada limited liability corporation from the sole shareholder. The membership interest was acquired at book value from the shareholder. SOI Nevada, LLC became a wholly-owned subsidiary of Step Out, Inc.

 

On September 19, 2012, the Company entered into an Agreement of Conveyance, Transfer and Assignment of Membership Interests and Assumption of Obligations (the “Agreement”) with our sole officer and director, Sterling Hamilton. Pursuant to the Agreement, the Company transferred all membership interests in our operating subsidiary, SOI Nevada, LLC, to Mr. Hamilton. In exchange for this assignment of membership interests, Mr. Hamilton agreed to assume and cancel all liabilities relating to our former business of developing a chain of flotation tank therapy spas. In addition, Mr. Hamilton agreed to release all liability under a promissory note due and owing to him in the amount of $2,000.

 

As a result of the Agreement, the Company is no longer pursuing its former business plan. Under the direction of our newly appointed officers and directors, as set forth below, we intend to develop a business focused on the design, development, manufacturing and distribution of renewable-energy based portable and mobile electrical generators and power stations under our own brand name, IDS Solar TechnologiesÔ.

 

Effective October 12, 2012, the Board of Directors approved a merger with our wholly-owned subsidiary, IDS Acquisition, Inc., pursuant to NRS 92A.180. IDS Acquisition was incorporated in the state of Nevada on September 25, 2012. As part of the merger with our wholly-owned subsidiary, our board authorized a change in the name of the company to “IDS Solar” Technologies, Inc.”

 

Effective February 7, 2013, the board of directors approved a twelve for one forward split of the Company’s common stock. All shares throughout these financial statement and Form 10-Q have been retroactively restated to reflect the forward split.

 

Effective May 29, 2013, the board of directors authorized a change in the name of the company to “IDS Industries, Inc.”

 

On February 6, 2014, the board of directors approved the launch of Propel Management Group, Inc. (PMG) a new wholly owned subsidiary. The core competency of this consulting service includes developing and implementing Program Management in product development, service industry, distribution and logistics. The addition of PMG has already proven to translate in-house core competencies in to additional revenue stream opportunities for IDS Industries.

 

On March 10, 2014, the board of directors approved the launch of Charge! Energy Storage, Inc. (Charge!) a new wholly owned subsidiary.

 

Effective August 7, 2014, the board of directors authorized a change in the name of the company to “Aja Cannafacturing, Inc.” The new name reflects the direction and focus of the Company more accurately.

 

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein. The interim results for the three months ended November 30, 2014 are not necessarily indicative of the results for the full fiscal year and should be read in conjunction with the August 31, 2014 Form 10-K. The Company has adopted an August 31 year end.

 

 

Principles of Consolidation

The consolidated financial statements include the accounts of Aja Cannafacturing, Inc. and its wholly-owned subsidiary Propel Management Group, Inc. and Charge! Energy Storage, Inc. All significant intercompany accounts and transactions have been eliminated.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. There were no cash equivalents as of November 30, 2014 and August 31, 2014.

 

Basic Loss per Share

Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Potentially dilutive shares were excluded from the computation as of November 30, 2014 and 2013 since they would have been anti-dilutive.

 

Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.

 

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses that result from the failure or inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability of accounts receivable based on past experience. Accounts receivable may also be fully reserved for when specific collection issues are known to exist. The analysis of receivables is performed quarterly, and the allowances are adjusted accordingly.

 

Fair Value of Financial Instruments

For certain of the Company’s non-derivative financial instruments, including cash and cash equivalents, receivables, prepaids, accounts payable, accrued liabilities, and notes payable, the carrying amount approximates fair value due to the short-term maturities of these instruments. The estimated fair value of long-term debt is based primarily on borrowing rates currently available to the Company for similar debt issues. The fair value approximates the carrying value of long-term debt.

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

·

Level 1. Observable inputs such as quoted prices in active markets;

·

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;

·

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The following presents the gross value of assets and liabilities that were measured and recognized at fair value, as of November 30, 2014 and August 31, 2014.

 

Derivative liability		Level I				Level II				Level III				Total
November 30, 2014		$	-			$	926,163			$	-			$	926,163
August 31, 2014		$	-			$	558,194			$	-			$	558,194

 

 

Stock-Based Compensation

The Company accounts for equity based transactions with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value of common stock issued for payments to non-employees is measured at the market price on the date of grant. The fair value of equity instruments, other than common stock, is estimated using the Black-Scholes option valuation model. In general, the Company recognizes the fair value of the equity instruments issued as deferred stock compensation and amortizes the cost over the term of the contract. During the three months ended November 30, 2014, the Company issued 58,000,000 shares of common stock valued at $63,800 to non-employees.

 

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation - Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.  The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered. During the three months ended November 30, 2014, the Company issued 4,000,000 shares of common stock valued at $23,000 to its employees.

 

Income Taxes

 Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carry-forwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence; it is more likely than not such benefits will be realized. The Company’s deferred tax assets were fully reserved at November 30, 2014 and 2013.

 

The Company accounts for its income taxes using the Income Tax topic of the FASB ASC 740, which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

Revenue Recognition

Sales of products or services and related costs of products or services sold are recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. These terms are typically met upon the prepayment or invoicing, and shipment of products.

 

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued, that might have a material impact on its financial position or results of operations.

 

NOTE 2 – PREPAIDS AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following at:

 

		November 30, 2014				August 31, 2014
Prepaid consulting		$	-			$	75,955
Other assets			5,319				5,319
Unamortized original issue discount			4,563				7,344
Deferred financing costs			-				253
		$	9,882			$	88,871

 

 

NOTE 3 – CONVERTIBLE NOTES PAYABLE

 

On December 3, 2012, the Company executed a convertible promissory note with Steven J. Caspi (“Caspi”) for $125,000. The note bears interest at 5% and was due on or before November 30, 2013. Pursuant to the terms of the note, it is convertible into shares of the Company’s common stock at the option of the holder at any time in whole or in part at a conversion rate of $1.25. On the commitment date, management evaluated the conversion feature with respect to the benefit of the holder and determined the value of the conversion feature to be $60,000. This amount has been recorded as a discount against the outstanding balance of the note. The discount is being amortized to interest expense over the life of the debt using the effective interest method. The note also issued one warrant giving the holder the right to purchase 15,625 shares of common stock at a price of $2.00 per share for a period of five years. As required by ASC 470-20 the Company recorded a debt discount to additional paid in capital in the amount of $16,455 based on the discount to market available at the time of issuance. The discount has been fully amortized to interest expense. On March 10, 2014, the Company executed a forbearance agreement with the lender modifying the terms of the original agreement. Per the new agreement the conversion price was changed to $0.005 per share and the due date was extended to November 30, 2014. As a result of the new conversion price the Company recorded an additional debt discount of $48,539. The additional discount will be amortized over the remaining term of the note. On March 21, 2014, $25,000 of the note was converted into 5,000,000 shares of common stock. The note is currently past due, shown net of a debt discount of $0 and has accrued interest of $10,422.

 

On June 15, 2013, the Company executed a promissory note for $15,000 with a shareholder. The note bears interest at 10% and was due within ninety days. On October 15, 2014, the original $15,000, accrued interest of $600 and an additional cash loan of $8,755 was rolled into a new convertible promissory note for $24,355. The new note bears interest at 10% per annum and is convertible at a 49% discount of the VWAP occurring during the ten days preceding the conversion date. The Company recorded a debt discount in the amount of $24,355 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $35,664 based on the Black Scholes Merton pricing model using the following attributes: .68% risk free rate, 258% volatility and a three year term to maturity. As of November 30, 2014, $9,141 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $36,025 resulting in a loss on the change in fair value of the derivative. The note is shown net of a debt discount of $15,214 at November 30, 2014 as accrued interest of $2,704.

 

On June 19, 2013, the Company executed a Convertible Promissory Note (the “note”) with JMJ Financial (“JMJ”). The nominal principal sum of the Note is $300,000, with an original issue discount of ten percent (10%). The note matures one year from the effective date of each payment, which is made at the sole discretion of JMJ. The Note is convertible into common stock in whole or in part at a variable conversion price equal to a 40% discount to the lowest trade price in the twenty five trading days prior to conversion.

 

On September 30, 2013, the Company received its third payment on the original JMJ Financial convertible promissory note dated June 19, 2013 of $27,500, including a $2,500 original issue discount. The Company recorded a debt discount in the amount of $27,500 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $70,390 based on the Black Scholes Merton pricing model using the following attributes: .10% risk free rate, 261% volatility and a one year term to maturity. On June 5, 2014, $20,250 of principal was converted into 4,500,000 shares of common stock. In September 2014, the remaining balance on the note, including all interest, of $20,772 was converted into 10,883,336 shares of common stock. Due to the conversion the remaining debt discount of $2,184 was expensed and a gain on derivative of $19,877 recognized.

 

On February 27, 2014, the Company executed a convertible promissory note for $73,000 with Asher Enterprises, Inc. The note bears interest at 8% per annum and is due on or before December 3, 2014. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. The Company recorded a debt discount in the amount of $73,000 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $118,582 based on the Black Scholes Merton pricing model. During the three months ended November 30, 2014, all principal and interest of $73,000 and $2,920, respectively was converted into 42,830,672 shares of common stock. Due to the conversion the remaining debt discount of $70,080 was expensed and a gain on derivative of $91,120 recognized.

 

 

On March 5, 2014, the Company executed a Convertible Promissory Note (the “note”) with Black Mountain Equities, Inc. (“Black Mountain”). The nominal principal sum of the Note is $250,000, with an original issue discount of ten percent (10%). The note matures one year from the effective date of each payment, which is made at the sole discretion of Black Mountain. The Note is convertible into common stock in whole or in part at a variable conversion price equal to the lessor of $0.025 or a 60% discount to the lowest trade price in the twenty five trading days prior to conversion. The Company received its first payment towards the loan of $25,000. The Company recorded a debt discount in the amount of $27,500 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $110,515 based on the Black Scholes Merton pricing model using the following attributes: .13% risk free rate, 193% volatility and a one year term to maturity. During the three months ended November 30, 2014, $23,800 of principal was converted into 26,240,311 shares of common stock. In addition, due to not fulfilling a conversion request within the required time frame the Company incurred a $16,000 penalty. As of November 30, 2014, $20,343 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $35,303 resulting in a loss on the change in fair value of the derivative. The note is shown net of a debt discount of $7,157 at November 30, 2014 and has accrued interest of $2,750.

 

On March 19, 2014, the Company executed a convertible promissory note for $53,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before December 26, 2014. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. During the three months ended November 30, 2014, all principal and interest of 53,000 and $2,120, respectively was converted into 58,597,904 shares of common stock. Due to the conversion the Company recognized a loss on conversion of debt of $53,274.

 

On April 17, 2014, the Company received its fourth payment on the original JMJ Financial convertible promissory note dated June 19, 2013 of $44,000, including a $4,000 original issue discount. The Company recorded a debt discount in the amount of $44,000 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $104,127 based on the Black Scholes Merton pricing model using the following attributes: .11% risk free rate, 214% volatility and a one year term to maturity. During the three months ended November 30, 2014, $18,141 of principal was converted into 44,230,000 shares of common stock. As of November 30, 2014; $28,888 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $53,630 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of $15,112 at November 30, 2014.

 

On May 20, 2014, the Company executed a convertible promissory note for $53,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before February 23, 2015. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. The Company recorded a debt discount in the amount of $53,000 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $122,302 and derivative expense of $69,302 based on the Black Scholes Merton pricing model. As of November 30, 2014, $7,729 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $84,667 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of $45,271 at November 30, 2014 and has accrued interest of $2,485.

 

On May 31, 2013, the Company’s former CEO, Bruce Knoblich and the Company executed a promissory note for $289,998, $2,150 of which has been repaid. The note bears interest at 5% and was due November 30, 2013. On July 22, 2014, the principal and accrued interest were rolled into a new convertible promissory note for $304,973. The new note bears interest at 8% per annum and is convertible at a 49% discount of the average trading price during the ten days preceding the conversion date. The Company recorded a debt discount in the amount of $274,973 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $395,341 based on the Black Scholes Merton pricing model using the following attributes: .11% risk free rate, 230% volatility and a one year term to maturity. On July 22, 2014, $30,000 of the note was converted into 6,000,000 shares of common stock. On September 24, 2014 $19,250 of the note was converted into 5,000,000 shares of common stock. On November 6, 2014 an additional $20,000 was loaned to the Company. In addition, during the three months ended November 30, 2014, Mr. Knoblich made the following debt assignments: $20,000 to Blackbridge Capital, LLC; $50,000 to WHC Capital, LLC; and $50,000 to Beaufort Capital Partners, LLC. As of November 30, 2014, $139,249 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $188,690 resulting in a gain on the change in fair value of the derivative. The balance of the note is $155,723 and is shown net of a debt discount of $105,590 and has accrued interest of $7,029.

 

 

On June 24, 2014, the Company received its fifth payment on the original JMJ Financial convertible promissory note dated June 19, 2013 of $44,000, including a $4,000 original issue discount. The Company recorded a debt discount in the amount of $44,000 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $66,010 based on the Black Scholes Merton pricing model using the following attributes: .11% risk free rate, 214% volatility and a one year term to maturity. As of November 30, 2014, $22,060 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $86,144 resulting in a loss on the change in fair value of the derivative. The note is shown net of a debt discount of $21,940 at November 30, 2014.

 

On July 11, 2014, the Company executed a convertible promissory note for $31,500 with LG Capital Funding, LLC. The note bears interest at 8% per annum and is due on or before July 11, 2015. The note is convertible at a 45% discount any time during the period beginning 180 days following the date of the note. Accrued interest on the note as of November 30, 2014 is $987.

 

On August 18, 2014, the Company executed a convertible promissory note for $53,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before May 20, 2015. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. Accrued interest on the note as of November 30, 2014 is $1,104.

 

On September 17, 2014, the Company executed a convertible promissory note for $20,000 with Blackbridge Capital, LLC. The note bears interest at 5% per annum and is due on or before March 17, 2015. The note is convertible at a 50% discount any time. On September 18, 2014, the note was converted into 12,121,212 shares of common stock. Due to the conversion the Company recognized a loss on conversion of debt of $17,576.

 

On September 24, 2014, the Company executed a convertible promissory note for $50,000 with WHC Capital, LLC. The note bears interest at 12% per annum and is due on or before September 24, 2015. The note is convertible at a 49% discount at any time. The Company recorded a debt discount in the amount of $50,000 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $244,523 and derivative expense of $194,523 based on the Black Scholes Merton pricing model. On November 26, 2014, $5,148 of the principal was converted into 15,480,000 shares of common stock. As of November 30, 2014, $9,234 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $88,593 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of $40,766 at November 30, 2014 and has accrued interest of $1,061.

 

On October 24, 2014, the Company executed a convertible promissory note for $50,000 with Beaufort Capital Partners, LLC. The note is non-interest bearing and is due on or before October 24, 2015. The note is convertible at a 50% discount at any time. The Company recorded a debt discount in the amount of $50,000 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $118,894 and derivative expense of $68,894 based on the Black Scholes Merton pricing model. During November 2014, $10,750 of the principal was converted into 30,714,286 shares of common stock. As of November 30, 2014, $13,103 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $88,397 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of $36,897.

 

On October 30, 2014, the Company executed a convertible promissory note for $18,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before August 3, 2015. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. Accrued interest on the note as of November 30, 2014 is $122.

 

 

Pursuant to the terms of the Resignation and Departure Package of Scott Plantinga, the former CEO, the Company executed a convertible promissory note on October 20, 2014 for $45,000 with Mr. Plantinga. The note bears interest at 10% per annum and is due in the following installments: $25,000 on November 10, 2014 and $20,000 due February 10, 2015. Failure to pay on the due date will result in a one-time $20,000 penalty. The note is convertible at a 50% discount at any time. The Company recorded a debt discount in the amount of $45,000 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $67,822 and derivative expense of $22,822 based on the Black Scholes Merton pricing model. The Company failed to make the required $25,000 payment on November 10^th and therefore incurred the $20,000 penalty charge. As of November 30, 2014, $5,055 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $66,922 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of $39,945 at November 30, 2014 and has accrued interest of $137.

 

Pursuant to the terms of the Resignation and Departure Package of Scott Plantinga, the former CEO, the Company executed a convertible promissory note on October 20, 2014 for $133,000 with Mr. Plantinga. The note consists of all accrued salary and bonus and additional severance compensation, bears interest at 12% per annum and is due October 20, 2015. The note is convertible at a 50% discount at any time. The Company recorded a debt discount in the amount of $133,000 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $200,451 and derivative expense of $67,451 based on the Black Scholes Merton pricing model. As of November 30, 2014, $14,940 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $197,792 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of $118,060 at November 30, 2014 and has accrued interest of $1,793.

 

A summary of the status of the Company’s debt discounts, derivative liabilities and original issue discounts, and changes during the periods is presented below:

 

Debt Discount		August 31, 2014				Additions				Amortization				November 30, 2014
Asher – 2/27/14			70,080				-				(70,080	)			-
Beaufort Capital			-				50,000				(13,103	)			36,897
Black Mountain – 3/5/14			14,013				-				(6,856	)			7,157
Caspi			10,094				-				(10,094	)			-
JMJ – 9/30/13			2,184				-				(2,184	)			-
JMJ – 4/17/14			27,606				-				(12,494	)			15,112
JMJ – 6/24/14			32,910				-				(10,970	)			21,940
KBM – 5/20/14			-				53,000				(7,729	)			45,271
Knoblich			244,839				-				(139,249	)			105,590
Neal			17,238				-				(2,024	)			15,214
Scott Plantinga			-				133,000				(14,940	)			118,060
Scott Plantinga			-				45,000				(5,055	)			39,945
WHC Capital			-				50,000				(9,234	)			40,766
		$	418,964			$	331,000			$	(304,012	)		$	445,952

 

 

Derivative Liabilities		August 31, 2014				Initial Valuation				Revaluation on 11/30/14				Change in fair value of Derivative
Asher – 2/27/14			91,120				-				-				(91,120	)
Beaufort Capital			-				118,894				88,397				(30,497	)
Black Mountain – 3/5/14			33,509				-				35,303				1,794
JMJ – 9/30/13			19,877				-				-				(19,877	)
JMJ - 4/17/14			60,776				-				53,630				(7,146	)
JMJ – 6/24/14			63,221				-				86,144				22,923
KBM – 5/20/14			-				122,302				84,667				(37,635	)
Knoblich			269,185				-				188,690				(80,495	)
Neal			20,506				-				36,025				15,519
Scott Plantinga			-				67,822				66,922				(900	)
Scott Plantinga			-				200,451				197,792				(2,659	)
WHC Capital			-				244,523				88,593				(155,930	)
		$	558,194			$	753,992			$	926,163			$	(386,023	)

  

Original Issue Discount		August 31, 2014				Additions				Amortization				November 30, 2014
Black Mountain – 3/5/14		$	1,405			$	-			$	(624	)		$	781
JMJ – 9/30/13			185				-				(185	)			-
JMJ – 4/17/14			2,499				-				(986	)			1,513
JMJ – 6/4/14			3,255				-				(986	)			2,269
		$	7,344			$				$	(2,781	)		$	4,563

 

NOTE 4 – NOTES PAYABLE

 

On June 12, 2013, the Company executed a promissory note for $15,000. The loan was due August 12, 2013. The note does not bear interest but its principal balance includes a loan fee of $5,000. This loan has been extended with no specific terms of repayment.

 

As of November 30, 2014, the Company owed various shareholders $10,100 for advances made to cover certain operating costs. The loans accrue interest at 8% per annum and are due on demand.

 

NOTE 5 – STOCK WARRANTS

 

Pursuant to the terms and conditions of the convertible promissory note dated February 27, 2013, the Company issued a warrant to purchase 50,000 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $2,044 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $0.20, 1.30% risk free rate, 64% volatility and expected life of the warrants of 3 years.

 

Pursuant to the terms and conditions of the convertible promissory note dated November 30, 2012, the Company issued a warrant to purchase 15,625 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $16,455 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $2.00, .63% risk free rate, 85.9% volatility and expected life of the warrants of 5 years.

 

Pursuant to the terms and conditions of the convertible promissory note dated February 4, 2014, the Company issued a warrant to purchase 1,000,000 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $11,769 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $0.02, 1.46% risk free rate, 197.6% volatility and expected life of the warrants of 5 years.

 

 

 

 

Pursuant to the terms and conditions of the Warrant agreement dated February 27, 2014, the Company issued a warrant to purchase 2,000,000 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $44,169 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $0.01, 2.11% risk free rate, 246% volatility and expected life of the warrants of 7 years.

 

A summary of the status of the Company’s outstanding warrants and changes during the periods is presented below:

 

		Shares available to purchase with warrants				Weighted Average Price				Weighted Average Fair Value
Outstanding, August 31, 2014			3,065,625			$	0.03			$	0.03
Issued			-				-				-
Exercised			-				-				-
Forfeited			-				-				-
Expired			-				-				-
Outstanding, November 30, 2014			3,065,625			$	0.03			$	0.03
Exercisable, November 30, 2014			3,065,625			$	0.03			$	0.03

 

Range of Exercise Prices				Number Outstanding at 11/30/14				Weighted Average Remaining Contractual Life		Weighted Average Exercise Price
	$0.10 - $2.00				3,065,625			5.7 years		$	0.03

 

NOTE 6 –COMMON STOCK TRANSACTIONS

 

On October 21, 2014, the Company’s Board of Directors approved a resolution to amend its Articles of Incorporation to increase the aggregate number of common shares that it may issue to three billion (3,000,000,000) shares.

 

On September 18, 2014, the Company issued 12,121,212 shares of common stock to Blackbridge Capital, LLC in conversion of total principal and interest of $20,000 (see Note 3).

 

On September 24, 2014, the Company issued 5,000,000 shares of common stock to the Company’s former CEO, Bruce Knoblich in conversion of $19,250 of the amount due to him.

 

On November 6, 2014, the Company issued 15,480,000 shares of common stock to WHC Capital, LLC in conversion of principal of $5,418 (see Note 3).

 

During the three months ended November 30, 2014, the Company issued a total of 42,830,672 shares of common stock to Asher Enterprises, Inc. in conversion of total principal and interest of $75,920 (see Note 3).

 

During the three months ended November 30, 2014, the Company issued a total of 55,113,336 shares of common stock to JMJ Financial in conversion of total principal and interest of $38,912 (see Note 3).

 

During the three months ended November 30, 2014, the Company issued a total of 23,240,311 shares of common stock to Black Mountain Equities, Inc. in conversion of total principal and interest of $23,800 (see Note 3).

 

During the three months ended November 30, 2014, the Company issued a total of 58,597,904 shares of common stock to KBM Worldwide, Inc., in conversion of total principal and interest of $55,120. As a result of the conversion the Company recognized a loss on conversion of debt of $53,274 (see Note 3).

 

  

During the three months ended November 30, 2014, the Company issued a total of 30,714,286 shares of common stock to Beaufort Capital Partners in conversion of total principal and interest of $10,750 (see Note 3).

 

NOTE 7 – PREFERRED STOCK

 

On October 17, 2014, our board of directors approved a Certificate of Designation for Class A Convertible Preferred Stock. This newly designation class of preferred stock consists of one million (1,000,000) shares. Class A Convertible Preferred Stock votes together with our common stock at a rate of three thousand (3,000) votes for each preferred share held. In addition, Class A Convertible Preferred Stock is convertible to shares of our common stock, at the option of the holder, at a rate of one share of common stock for each preferred share held. In any liquidation, holders of our Class A Convertible Preferred Stock will participate pro-rata with the holders of our common stock. Shares of Class A Convertible Preferred Stock have no dividend rights.

 

On October 17, 2014, our board of directors approved an Executive Employment Agreement (the “Agreement”) with Kendall Smith under which Mr. Smith was retained to serve as the new President. Under the Agreement, Mr. Smith will serve as the President and CEO for an initial term ending on August 31, 2015, with an automatic renewal for an additional year unless the Agreement is terminated by advance notice. As a signing bonus under the Agreement, Mr. Smith was issued 1,000,000 shares of our newly-designated Class A Convertible Preferred Stock. As a result of the issuance 1,000,000 shares of Class A Convertible Preferred Stock to Kendall Smith, as discussed above, Mr. Smith is deemed to have acquired control of the company on October 17, 2014.

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

During the three months ended November 30, 2014, the Company issued 4,000,000 shares of common stock to employees for compensation. The shares were valued at the closing stock price on the date of grant for total non-cash expense of $23,000.

 

On November 6, 2014, our Board of Directors approved a Severance and Release Agreement (the “Agreement”) with our departing former CEO and board member, Scott Plantinga. The Agreement resolves all claims for compensation, benefits, or other consideration due to Mr. Plantinga under his Executive Employment Agreement dated September 1, 2013.

 

NOTE 9 - GOING CONCERN

 

As of November 30, 2014, the Company has a working capital deficit of $1,564,543, limited revenue and an accumulated deficit of $3,655,381. The financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. The Company’s management plans on raising cash from public or private debt or equity financing, on an as needed basis and in the longer term, upon achieving profitable operations through its business activities.

 

NOTE 10 - SUBSEQUENT EVENTS

 

Subsequent to November 30, 2014, Beaufort Capital Partners, LLC converted $17,680 of the amount due to them into 63,266,667 shares of common stock.

 

Subsequent to November 30, 2014, JMJ Financial converted $19,680 of the amount due to them into 82,600,000 shares of common stock.

 

Subsequent to November 30, 2014, Black Mountain Equities, Inc. converted $12,850 of the amount due to them into 50,428,571 shares of common stock.

 

Subsequent to November 30, 2014, the Company cancelled the 12,121,212 shares issued to Blackbridge Capital, LLC, on September 18, 2014 for conversion of debt. The $20,000 of debt still due was then converted into 74,500,000 shares of common stock.

 

  

Subsequent to November 30, 2014, WHC Capital, LLC converted $15,273 of the amount due to them into 61,905,500 shares of common stock.

 

Subsequent to November 30, 2014, KBM Worldwide, Inc. converted $45,030 of the amount due to them into 188,072,902 shares of common stock.

 

On December 11, 2014, the Company executed a convertible promissory note for $18,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before August 3, 2015. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note.

 

On December 11, 2014, the John Neal note in the amount $24,355 plus accrued interest of $2,730 was assigned to Beaufort Capital Partners, LLC. Concurrent with this assignment, we entered into a replacement Convertible Promissory Note with Beaufort Capital Partners, LLC.

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to November 30, 2014 through the date these financial statements were issued and has determined that it does not have any material subsequent events to disclose in these financial statements other than the events described above.

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

Company Overview

 

Our business focuses on the breeding, cultivation, and processing of raw industrial cannabis materials for industry specific applications such as building materials (Hempcrete), automotive (biofuels), plastics (healthcare) and textiles (fabrics). We are currently negotiating an exclusive production agreement with Luna Agro & Earth Science, LLC (“LAES”), a Company partly owned by our CEO. The agreement would provide us with exclusive rights to twenty (20) acres of land dedicated to cultivating our planned line of proprietary industrial cannabis genetics. Under the production agreement, we would pay LAES a production fee of five percent (5%) of our total wholesale price of all materials supplied.

 

Products

 

Our line of products is scheduled to be available in the third quarter of our current fiscal year. At that time we will offer four products. Our lineup includes 1) Sterilized hemp seed, 2) Hemp bark fiber, 3) Hemp hurds, and 4) Raw hemp essential oil.

 

Expansion and Development Plan

 

Our strategy includes providing consulting opportunities, allowing new mergers and potential growth opportunities by educating commercial enterprises how thousands of additives currently used across all industries can be substituted with a natural and more cost effective material. Our pending agreement with LAES will allow for us to expand our agricultural foot print from 20 acres to 50 acres by the fourth quarter of our current fiscal year, more than doubling our production/supply capacity. We feel that having such a large dedicated footprint will place us in a position to become the leader and main supplier of all domestic raw industrial cannabis material.

 

Results of Operations

 

Results of Operations for the Three Months ended November 30, 2014 compared to the Three Months Ended November 30, 2013.

 

Operating Expenses

Professional fees for the three months ended November 30, 2014 were $35,615, as compared to $25,494 for the three months ended November 30, 2013, an increase of $10,121 or 40%.  Professional fees mainly consist of legal, auditor and other fees associated with the Company’s quarterly filings and year end audit. The increase in the current period is attributed to an increase in audit fees that were incurred.

 

Stock based compensation was $163,755 for the three months ended November 30, 2014, as compared to $0 for the three months ended November 30, 2013.  This non-cash compensation expense consists of stock issued to employees and to third parties for various consulting and marketing services.

 

Salaries and wage expense for the three months ended November 30, 2014 decreased $77,314 or 90% to $8,419, as compared to $85,733 for the prior comparable period. The large decrease is the result of a reduction of staff resulting in fewer employees in the current period.

 

Marketing and advertising expense for the three months ended November 30, 2014 was $9,150, as compared to $23,850 for the three months ended November 30, 2013. The decrease of $14,700 is in conjunction with change to the Company business model.

 

  

General and administrative expense for the three months ended November 30, 2014 increased $70,470 to $175,488 as compared to $105,018 for the prior comparable period. Although, a majority G&A expense actually decreased, this decrease was offset with the recognition of $153,000 of severance expense.

 

Overall there was a $152,332 increase in operating expenses for the comparable period ended November 30.

 

Other Income and Expense

During the three months ended November 30, 2014 we incurred $304,012 of expense for amortization of debt discount and had a gain on the change in fair value of our derivative liability of $386,023. These gains and losses are a result of the derivative accounting required for the issuance of convertible debt. We also incurred $422,992 of derivative expense compared to $0 in the prior period, a $70,849 loss on conversion expense and $36,000 of penalty expense, none of which were incurred in the prior period. Overall, other income and loss went from other income for the three months ended November 30, 2013 of $36,478 to a loss of $463,557 for the three months ended November 30, 2014.

 

Net Loss

Overall we recorded a net loss of $855,984 for the three months ended November 30, 2014, as compared to a net loss of $203,617 for the three months ended November 30, 2013, an increase of $652,367. Much of the loss is attributed to non-cash expense from amortization of debt discount, derivative expense.

 

Liquidity and Capital Resources

 

We have received short term loan financing to fund operations under various promissory notes. Our promissory note obligations currently issued and outstanding are as follows:

 

We owe the principal sum of $100,000 to Steven J. Caspi under the terms of a Forbearance Agreement issued March 10, 2014 which modified the terms of the original Convertible Promissory Note and Security Agreement (the “Note”) issued November 19, 2012. The Forbearance Agreement bears interest at an annual rate of five percent (5%), with all principal and interest being due on or before November 30, 2014. The Note is convertible to shares of our common stock, in whole or in part at the option of Mr. Caspi, at a conversion price of $0.005 per share. This note is currently past due and has accrued interest of $10,422.

 

On May 31, 2013, the Company’s former CEO, Bruce Knoblich and the Company executed a promissory note for $289,998, $2,150 of which was been repaid. On July 22, 2014, the principal and accrued interest were rolled into a new convertible promissory note for $304,973. The new note bears interest at 8% per annum and is convertible at a 49% discount of the average trading price during the ten days preceding the conversion date. On July 22, 2014, $30,000 of the note was converted into 6,000,000 shares of common stock. On September 24, 2014 $19,250 of the note was converted into 5,000,000 shares of common stock. On November 6, 2014 an additional $20,000 was loaned to the Company. In addition, during the three months ended November 30, 2014, Mr. Knoblich made the following debt assignments: $20,000 to Blackbridge Capital, LLC; $50,000 to WHC Capital, LLC; and $50,000 to Beaufort Capital Partners, LLC. As of November 30, 2014, $139,249 of the debt discount has been amortized to interest expense. In addition, the Company fair valued the derivative at $188,690 resulting in a gain on the change in fair value of the derivative. The current principal due on this note is $155,723. Accrued interest as of November 30, 2014 was $7,029.

 

On June 19, 2013, we entered into a $300,000 Promissory Note (the “Note”) with JMJ Financial (“JMJ”). The face amount of the Note includes an original issue discount of $30,000. Funds are loaned to the Company under a series of advances made under the Note. Loans made under the Note mature in one year from the date of the advance and, if repaid within ninety (90) days from the date of issue, the loans will not bear interest. Upon ninety days after the date of issue, a onetime interest charge of twelve percent (12%) of the principal amount will be applied. JMJ may convert all or part of the balance under the Note, at its discretion, into shares of our common stock. The conversion price is sixty percent (60%) of the lowest trading price for our common stock in the twenty-five trading days immediately preceding the conversion date.

 

Our outstanding loans with JMJ under the Note are as follows:

 

Date		Due Date		Principal and Interest Amount
April 17, 2014		April 17, 2015		$	11,957
June 24, 2014		June 24, 2015		$	49,777
		Total		$	61,734

 

  

On March 5, 2014, the Company executed a Convertible Promissory Note (the “note”) with Black Mountain Equities, Inc. (“Black Mountain”). The nominal principal sum of the Note is $250,000, with an original issue discount of ten percent (10%). The note matures one year from the effective date of each payment, which is made at the sole discretion of Black Mountain. The Note is convertible into common stock in whole or in part at a variable conversion price equal to the lessor of $0.025 or a 60% discount to the lowest trade price in the twenty five trading days prior to conversion. The Company received its first payment towards the loan of $25,000. Due to not fulfilling a conversion request within the required time frame the Company incurred a $16,000 penalty. The current principal due on this note is $6,850. Accrued interest as of November 30, 2014 was $2,750.

 

We have also received short term financing from KBM Worldwide, Inc. (“KBM”) under a series of Securities Purchase Agreements (the “SPAs”) and a Convertible Promissory Notes (the “Notes”). The Notes bear interest at an annual rate of 8%, with principal and interest coming due approximately nine (9) months from issue. The Note may be converted in whole or in part, at the option of the holder, to shares of our common stock, par value $0.001, at any time following 180 days after the issuance dates of the Notes. The conversion price under the Notes is a 49% discount to the average of the 3 lowest closing prices for our common stock on the 30 trading days immediately preceding the conversion dates.

 

Our outstanding loans with KBM are as follows:

 

Date		Due Date		Principal Amount
May 20, 2014		February 20, 2015		$	1,270
August 18, 2014		May 20, 2015		$	53,000
October 30, 2014		August 3, 2015		$	18,000
December 11,  2014		September 15, 2015		$	17,500
		Total		$	89,770

 

On July 11, 2014, the Company executed a convertible promissory note for $31,500 with LG Capital Funding, LLC. The note bears interest at 8% per annum and is due on or before July 11, 2015. The note is convertible at a 45% discount any time during the period beginning 180 days following the date of the note. Accrued interest on the note as of November 30, 2014 was $987.

 

On September 24, 2014, the Company executed a convertible promissory note for $50,000 with WHC Capital, LLC. The note bears interest at 12% per annum and is due on or before September 24, 2015. The note is convertible at a 49% discount at any time. The current principal due on this note is $29,579. Accrued interest as of November 30, 2014 was $1,061.

 

Pursuant to the terms of the Resignation and Departure Package of Scott Plantinga, the former CEO, the Company executed a convertible promissory note on October 20, 2014 for $45,000 with Mr. Plantinga. The note bears interest at 10% per annum and is due in the following installments: $25,000 on November 10, 2014 and $20,000 due February 10, 2015. Failure to pay on the due date will result in a one-time $20,000 penalty. The note is convertible at a 50% discount at any time. The Company failed to make the required $25,000 payment on November 10^th and therefore incurred the $20,000 penalty charge. The current principal due on this note is $65,000. Accrued interest as of November 30, 2014 was $137.

 

Pursuant to the terms of the Resignation and Departure Package of Scott Plantinga, the former CEO, the Company executed a convertible promissory note on October 20, 2014 for $133,000 with Mr. Plantinga. The note consists of all accrued salary and bonus and additional severance compensation, bears interest at 12% per annum and is due October 20, 2015. The note is convertible at a 50% discount at any time. The current principal due on this note is $133,000. Accrued interest as of November 30, 2014 was $1,793.

 

On October 24, 2014, the Company executed a convertible promissory note for $50,000 with Beaufort Capital Partners, LLC. The note is non-interest bearing and is due on or before October 24, 2015. The note is convertible at a 50% discount at any time. The current principal due on this note is 21,750.

 

On October 30, 2014, the Company executed a convertible promissory note for $18,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before August 3, 2015. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note. Accrued interest on the note as of November 30, 2014 is $122.

 

On December 11, 2014, the Company executed a convertible promissory note for $18,000 with KBM Worldwide, Inc. The note bears interest at 8% per annum and is due on or before August 3, 2015. The note is convertible at a 49% discount any time during the period beginning 180 days following the date of the note.

 

On December 11, 2014, the John Neal note in the amount $24,355 plus accrued interest of $2,730 was assigned to Beaufort Capital Partners, LLC. Concurrent with this assignment, we entered into a replacement Convertible Promissory Note with Beaufort Capital Partners, LLC.

 

We will require significant additional financing in order to move forward effectively with the development of our current business plan. We intend to fund the development of our new business through debt and/or equity financing arrangements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, in amounts sufficient to fund our planned acquisitions and other activities, or at all. 

 

  

Going Concern

 

As of November 30, 2014, we had an accumulated deficit of $3,655,381 and a working capital deficit of $1,564,543. For the three months ended November 30, 2014, net cash used in operating activities was $73,125 and we received $35,000 from financing activities. This has raised substantial doubt about our ability to continue as a going concern.  Without realization of additional capital, it would be unlikely for us to continue as a going concern.

 

Our activities to date have been supported by equity and debt financing.  Management continues to seek funding from its shareholders and other qualified investors to pursue its business plan.

 

Off Balance Sheet Arrangements

 

As of November 30, 2014, there were no off balance sheet arrangements.

 

Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Currently, we do not believe that any accounting policies fit this definition.

 

Recently Issued Accounting Pronouncements

 

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information required by this Item. 

 

Item 4. Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of November 30, 2013. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of November 30, 2014, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the period ended November 30, 2014.

 

Management determined that the material weaknesses that resulted in controls being ineffective are primarily due to lack of resources and number of employees. Material weaknesses exist in the segregation of duties required for effective controls and various reconciliation and control procedures not regularly performed due to the lack of staff and resources.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Internal Controls

 

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

  

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A: Risk Factors

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On September 18, 2014, the Company issued 12,121,212 shares of common stock to Blackbridge Capital, LLC in conversion of total principal and interest of $20,000.

 

On September 24, 2014, the Company issued 5,000,000 shares of common stock to the Company’s former CEO, Bruce Knoblich in conversion of $19,250 of the amount due to him.

 

On November 6, 2014, the Company issued 15,480,000 shares of common stock to WHC Capital, LLC in conversion of principal of $5,418.

 

During the three months ended November 30, 2014, the Company issued a total of 42,830,672 shares of common stock to Asher Enterprises, Inc. in conversion of total principal and interest of $75,920.

 

During the three months ended November 30, 2014, the Company issued a total of 55,113,336 shares of common stock to JMJ Financial in conversion of total principal and interest of $38,912.

 

During the three months ended November 30, 2014, the Company issued a total of 23,240,311 shares of common stock to Black Mountain Equities, Inc. in conversion of total principal and interest of $23,800.

 

During the three months ended November 30, 2014, the Company issued a total of 58,597,904 shares of common stock to KBM Worldwide, Inc., in conversion of total principal and interest of $55,120. As a result of the conversion the Company recognized a loss on conversion of debt of $53,274.

 

During the three months ended November 30, 2014, the Company issued a total of 30,714,286 shares of common stock to Beaufort Capital Partners in conversion of total principal and interest of $10,750.

 

The above shares were issued in reliance upon exemptions from registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended. 

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

  

None

 

  

Item 6. Exhibits

  

Exhibit Number	Description
31.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

 

+In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.

 

  

SIGNATURES

 

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.

 

	Aja Cannafacturing, Inc.
Date:	January 20, 2015
	/s/ Kendall Smith
By:	Kendall Smith
Title:	Chief Executive Officer, Chief Financial Officer, President and Director