Cann American Corp. - Quarter Report: 2011 August (Form 10-Q)

BIOFLAMEX CORP.

(formerly Deer Bay Resources Inc.)

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loss Per Share

The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." A basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed exercise or conversion of stock options, warrants, and debt to purchase common shares, would have an anti-dilutive effect. As of August 31, 2011, potential common shares that have been excluded from the computation of diluted net loss per share include $60,500 of debt convertible into 6,050,000 shares of the Company’s common stock.

Convertible Debentures

If the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense or equity (if the debt is due to a related party) over the life of the debt using the effective interest method.

Revenue Recognition

Revenue is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104. As such, when the Company begins to generate revenue, it will recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable and collectability is probable. Sales are recorded net of sales discounts.

Income Taxes

The Company provides for income taxes using an asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect currently. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. No provision for income taxes is included in the statement due to its immaterial amount, net of the allowance account, based on the likelihood of the Company to utilize the loss carry-forward.

Foreign currency transactions

The Company’s functional and reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated in accordance with ASC 820, using the exchange rate prevailing at the balance sheet date. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the determination of income.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04—Fair Value Measurement (Topic 820); Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States Generally Accepted Accounting Principles (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”). ASU No. 2011-04 provides clarity to the fair value definition in order to achieve greater consistency in fair value measurements and disclosures between U.S. GAAP and IFRS. Additional disclosures are required regarding transfers of assets between Level 1 and 2 of the fair value hierarchy and regarding sensitivity of fair values for Level 3 assets. The effective date of this amendment is for fiscal periods beginning after December 15, 2011. The adoption of this amendment is not anticipated to have a material impact on the Company’s financial condition, results of operations or its liquidity.

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the financial statements of the Company. 

BIOFLAMEX CORP.

(formerly Deer Bay Resources Inc.)

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE 3 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. The Company’s ability to continue as a going concern is dependent upon attaining profitable operations based on the development of distributions platforms through which our products that can be sold. Management intends to use borrowings and security sales to mitigate the effects of the Company’s cash position, however, no assurance can be given that debt or equity financing, if required, will be available. The condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE 4 – INTANGIBLE ASSETS

On January 25, 2011, the Company entered into an Asset Purchase Agreement to acquire certain intellectual property related to a line of fire extinguishing and prevention products that are based on environment friendly and biological formulations. In consideration for the newly acquired assets, the Company issued 38,000,000 shares at $ 0.013 per share, totalling $ 1,190,000 to two individuals who became the entire Board of Directors and the two senior officers of the Company. The Company followed Staff Accounting Bulletin (“SAB”) Topic 5 G in determining value as the transaction was considered a non-monetary related party transaction. Value was determined based on historical costs associated with testing, patenting and trademarking the intellectual property and also supported by an independent valuation of the intellectual property. The entire purchase price was allocated to the intangible asset category of patents and trademarks.

NOTE 5 – CONVERTIBLE DEBENTURE

On December 13, 2010, the Company received $60,500 pursuant to a convertible debenture subscription agreement. The loan is convertible into 6,050,000 common shares of the Company at a rate of $ 0.01 of debt for each share issued and matures on December 13, 2012. The debenture is redeemable by the Company at any time until maturity subject to the holders’ right of conversion, at rate equal to 120% of the face value or $72,600.

NOTE 6 – RELATED PARTY TRANSACTIONS

Periodically the Company’s officers advance payment for Company expenditures and receive subsequent reimbursement. During the three months ended August 31, 2011, the officers advanced at total of $3,296 and were repaid $2,928. As of August 31, 2011, the amounts owed to the officers totalled $368.

NOTE 7 – COMMON STOCK

From August 24, 2004 (inception), the Company issued 43,800,000 shares of its restricted common stock at a price of $0.001 per share and total cash proceeds of $43,800.

On October 25, 2004, the Company issued 1,050,000 shares of its restricted common stock at a price of $0.01 per share and total cash proceeds of $10,500.

On January 5, 2005, the Company issued 260,000 shares of its restricted common stock at a price of $0.05 per share and total cash proceeds of $13,000.

On June 24, 2008, the Company issued 85,000,000 shares of its restricted common stock at a price of $0.0001 per share and total cash proceeds of $8,500.

On January 25, 2011, the Company issued 38,000,000 shares of its restricted common stock at a price of $0.313 per share or $1,191,111, pursuant to an asset purchase agreement dated January 25, 2011. (See Note 4)

On January 25, 2011, in connection with the aforementioned Asset Purchase Agreement, the Company’s former director and chief executive officer returned 75,643,333 shares of common stock for cancellation. The Company recorded a reduction in additional paid in capital of $7,564 representing the par value of the cancelled shares.

On April 26, 2011, the Company issued 333,334 shares of its restricted common stock at a price of $0.15 per share and total cash proceeds of $50,000.

As of August 31, 2011, there were no outstanding stock options or warrants.

NOTE 8 – SUBSEQUENT EVENTS

The Company has analyzed its operations subsequent to August 31, 2011 through the date the financial statements were submitted to the Securities and Exchange Commission and has determined that it does not have any additional material subsequent events to disclose in these financial statements.

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” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. 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 affect 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. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Company Overview

We are in the business of developing, producing, and marketing high performance fire extinguishing and prevention products that are based on environment friendly and biological formulations. We intend to build a leading position within the niche of environmentally friendly fire fighting and prevention solutions in the United States and internationally, both through organic growth and the acquisition of complementary companies and patents. We believe the time is right for our products. The general emphasis on environmental protection and the increased focus on health hazards in chemicals used in conventional fire fighting products paves the way for the substitution of chemical-based fire combatant products with “greener,” non-harmful products.

Fire extinguishers available on the market today mainly use dry chemical powder, chemical foam, CO2 or halon type of gaseous media as bases. These products in general will extinguish fires with varying efficacy, but most also contain chemical substances that harm the environment or compose a hazard to people. In addition, they can be messy and damage metals (corrosion), increasing the collateral damage. Our products offer water-based clean alternatives which are completely harmless to humans and the environment, and are non-toxic. Combined with their exceptional extinguishing characteristics, we believe these products point to the future of professional and personal fire fighting. In conventional forest fire fighting, the primary media is water which offers good extinguishing power, but has some drawbacks: it must be used in large quantities; it evaporates relatively quickly; and has a short lifespan in hot environments. Chemical AFFF foams and agents are often used to enhance the fire extinguishing or retardant capabilities, but these chemicals affect the environment and leave long-lasting toxic residue. The toxins found in foams accumulate in the food-chain and are detectable in human organs. We believe our products will have no such negative effect upon life.

We are in the final stages of testing and development of our proprietary range of products. Our goal is to develop 5-10 unique product formulations and application concepts covering fire fighting and fire prevention. We intend to market our products under the trademarks Bioflamex® and SAFIRE®. Our goal is to penetrate the key United States and international markets with our “clean” fire extinguishing products and fire retardants.

We are currently preparing and submitting United States and international patent applications for our product concepts to ensure the security of our intellectual property rights and enhance the market response to our product propositions. We hope to build a solid portfolio of intellectual property within the industry that can be licensed to third parties. We are currently in the process of applying for patents on our revolutionary products and processes.

We are also preparing the materials necessary to complete the necessary tests, approvals and certifications in the United States and key international markets, that are the prerequisite for sales and marketing. With these approvals and certifications, we hope to gain a solid geographical presence in the United States, key markets in Europe, the Middle East and parts of Asia. We intend to work through distribution partners, agents and/or license holders, and through that presence achieve strong sales with the consumers, professional, business, industrial and government service market segments.

Results of operations for the three and six months ended August 31, 2011 and 2010, and for the period from Inception (August 25, 2004) to August 31, 2011

We have not earned any revenues since our inception on August 25, 2004. We do not anticipate earning revenues until such time that we have fully developed and are able to market our products.

We incurred operating expenses in the amount of $17,076 for the three months ended August 31, 2011, compared with operating expenses of $11,524 for the three months ended August 31, 2010. We incurred operating expenses in the amount of $51,456 for the six months ended August 31, 2011, compared with operating expenses of $20,075 for the six months ended August 31, 2010. In all cases, the increase is mainly attributable to professional fees and office expenses.

We incurred operating expenses in the amount of $186,037 for the period from August 25, 2004 (Inception) to August 31, 2011. 

We incurred a net loss in the amount of $17,116 for the three months ended August 31, 2011, as compared with a net loss in the amount of $11,524 for the three months ended August 31, 2010. We incurred a net loss in the amount of $51,496 for the six months ended August 31, 2011, as compared with a net loss in the amount of $20,075 for the six months ended August 31, 2010. We incurred a net loss in the amount of $186,077 for the period from August 25, 2004 (Inception) to August 31, 2011. Our losses for each period are attributable to operating expenses together with a lack of any revenues.

Liquidity and Capital Resources

As of August 31, 2011, we had total current assets of $10,096. Our total current liabilities as of August 31, 2011 were $9,873. As a result, we had working capital of $223 as of August 31, 2011.

Operating activities used $49,963 in cash for the six months ended August 31, 2011. Our net loss of $51,496 offset by an increase in accounts payable and accrued expenses of $1,533 were the contributing factors to our negative operating cash flow. Investing activities used no cash for the six months ended August 31, 2011. Financing activities for the six months ended August 31, 2011 generated $50,000 as a result of the issuance of our common stock.

We will require a cash injection of $2,000,000 to begin operations, launch a full marketing and branding campaign, manufacture and deliver products and to begin and increase revenues from its products. In April of 2011, we raised $50,000 in a private placement to an accredited investor. Notwithstanding, as of August 31, 2011, we have insufficient cash to operate our business at the current level for the next twelve months and insufficient cash to achieve our business goals. The success of our business plan beyond the next 12 months is contingent upon us obtaining additional financing. We intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. 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, or at all.

Off Balance Sheet Arrangements

As of August 31, 2011, there were no off balance sheet arrangements.

Going Concern

Our financial statements are prepared using the accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we have not begun to generate significant revenues, and have incurred a significant operating loss as of August 31, 2011.

We are dependent upon our ability to secure equity and/or debt financing and there are no assurances that we will be successful. Without sufficient financing, or the achievement of profitable operations, it would be unlikely for us to continue as a going concern.

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.

Our accounting policies are set forth in Note 2 to the financial statements. Management does not believe that our accounting policies are critical enough to mention in the body of this quarterly report on Form 10-Q.

Recently Issued Accounting Pronouncements

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operation, 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

Disclosure Controls and Procedures

As required by Rule 13a-15 of the Securities Exchange Act of 1934, our principal executive officer and principal financial officer evaluated our company's disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our company in reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and to ensure that such information is accumulated and communicated to our company's management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of the following material weaknesses in internal control over financial reporting which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both United States generally accepted accounting principles and Securities and Exchange Commission guidelines. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.

We plan to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending February 28, 2012, subject to obtaining additional financing: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out above are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended August 31, 2011 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.