$AFAI Form 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.In this Quarterly Report on Form 10-Q, “Kaya Holdings, Inc..”, “KAYS” and the terms “Company”, “we”, “us” and “our” refer to Kaya Holdings, Inc.. and its subsidiaries, unless the context indicates otherwise.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial condition, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including those risks described in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”) on April 15, 2015, and the risks discussed in other SEC filings. These risks and uncertainties as well as other risks and uncertainties could cause our actual results to differ significantly from management’s expectations. The forward-looking statements included in this Quarterly Report on Form 10-Q reflect the beliefs of our management on the date of this report. We undertake no obligation to update publicly any forward-looking statements for any reason.

Background

Kaya Holdings, Inc. (“KAYS”, “”we”, “us”, “our” or the “Company”) was incorporated in Delaware in 1993 under the name Gourmet Market, Inc. and has engaged in a number of businesses. Its name was changed on May 11, 2007 to Netspace International Holdings, Inc. (“Netspace”). Netspace acquired 100% of the capital stock of Alternative Fuels Americas, Inc., a Florida corporation in January 2010 in a stock-for-stock transaction and issued 100,000 shares of Series C convertible preferred stock to existing shareholders. A Certificate of Amendment to the Certificate of Incorporation was filed in October 2010 changing the Company’s name from Netspace International Holdings, Inc. to Alternative Fuels Americas, Inc. (AFAI).

From 2010 to 2014, the Company was engaged in seeking to develop a biofuels business. In January 2015, the Company determined that it was in the best interests of its stockholders to discontinue its biofuel development activities, and to instead leverage its agricultural and business development experience and focus all its resources on the development of legal medical and recreational marijuana opportunities in the United States, which the Company had commenced pursuing in 2014.

In 2014, KAYS incorporated a subsidiary, Marijuana Holdings Americas, Inc. a Florida corporation (“MJAI”). Through MJAI, KAYS has focused on the development of opportunities within the legal recreational and medical marijuana sectors in the United States. In March 2014, MJAI, through an Oregon subsidiary, applied for and was awarded its first license to operate a MMD. The Company developed the Kaya Shack brand for its retail operations and on July 3, 2014 opened the Kaya Shack in Portland, Oregon. Initial customer acceptance and media coverage was very positive, including many references to KAYS as the “Starbucks of Medical Marijuana” by television news stations, news print publications and online news sources.

A Certificate of Amendment to the Certificate of Incorporation was filed in March 2015 changing the Company’s name from Alternative Fuels Americas, Inc, to Kaya Holdings, Inc and on April 6, 2015 FINRA approved the name and symbol change to “KAYS”.

Market Overview- Legal Recreational and Medical Marijuana

Twenty-seven states and the District of Columbia have either legalized medical marijuana or decriminalized marijuana possession — or both. Additionally, four states have voted-in recreational marijuana laws with active legal cannabis economies flourishing in Colorado and Washington, while Oregon and Alaska are phasing in legal recreational marijuana sales over the next year. Potential legislative actions and ballot initiatives are planned over the next two years for six more states- Arizona, California, Maine, Massachusetts, Nevada and Wyoming.

Table of Contents 20According to an article published by CBS News Moneywatch, the legal marijuana industry is the fastest growing business in the United States, with nearly 11 Billion Dollars in sales forecast for 2019. Steve Berg, a former managing director of Wells Fargo Bank has published a report citing Cannabis as being one of the fastest growing domestic industries, citing that “Domestically, we weren’t able to find any market that is growing as quickly.”

Estimates from various sources for the size of the long term market range from up to an excess of $100 billion if Federal Prohibition is repealed and marijuana sales become legal in all 50 states and Washington D.C. (for perspective beer is approximately a $100 billion market, with wine just under $30 billion and coffee approximately $12 billion).

Implementation

Following the successful introduction of legal recreational marijuana use in Colorado and Washington, the Company incorporated its majority owned subsidiary Marijuana Holdings Americas, Inc. (MJAI) to operate as a grower, processor, distributor and/or retailer of legal recreational and/or medical marijuana in jurisdictions where it has been or is expected to be approved. After an evaluation of several factors including barriers to entry, cost factors and potential rewards for success, the Company targeted Oregon as the first market to open a state licensed medical marijuana dispensary (MMD).

Oregon: Current and Future Operations

Kaya Shack Retail Medical Marijuana Dispensary Operations

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In March 2014, MJAI, through an Oregon subsidiary, applied for and was awarded its first license to operate a MMD. The Company developed the Kaya Shack brand for its retail operations and on July 3, 2014 opened the Kaya Shack Medical Marijuana Dispensary in Portland, Oregon and became the first US publicly traded company to own and operate a MMD.

Table of Contents 21Kaya Shack Medical Marijuana Products

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Our Portland facility currently features over 30 popular strains of marijuana including our proprietary, high-grade “Kaya Kush” (independent testing performed on 11/10/2014 confirms a total THC/Cannabinoid content in excess of 25%), various concentrates including butane hash oil (B.H.O.) and CO2 oil extract (wax, shatter) which range in potency from approximately 40% to over 80% THC, high grade Oils and Tinctures which are sought after for pain and cancer symptom alleviation, high CBD – low THC strains and “Kaya Candies”, “Kaya Caramels” and an assortment of cookies and cakes for patients who do not smoke.

Kaya Farms Medical Marijuana Grow

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In April 2015, KAYS announced that it had formed the Kaya Farms Medical Marijuana Grow to feed the Kaya Shack supply chain, becoming the first US publicly traded company to own a majority interest in a vertically integrated legal marijuana enterprise in the United States. As of April 30th, KAYS employees and contractors have harvested the final round of our first medical marijuana crop trials which yielded the company nearly 25 pounds of Oregon Connoisseur-Grade Medical Marijuana since January 1, 2015. With planned expansion, our grow operations will rotate varieties utilizing the perpetual harvest room to include more than 50 strains of marijuana and substantially increase our production volume while lowering costs. The Company is currently evaluating various alternatives for the expansion of our grow operations, as well as developing a roll-out of proprietary strain-specific concentrates for sale through our retail network as well as potential distribution lines to other dispensaries.

Table of Contents 22Our first 10 months of operations have yielded approximately $120,000 in sales at our first medical marijuana dispensary and a wealth of experience and data that we are using to build out our infrastructure to steer our expansion efforts, which we hope to achieve in Oregon and beyond under the Kaya Shack banner. While we had first sought to open multiple dispensary locations in Oregon by the end of 2014, our first few months in operation led us to understand that this is an industry with unique challenges and opportunities, especially for a public company. We elected to concentrate our immediate efforts on building out our infrastructure to facilitate growth and also to set up operations to grow our own supply of Connoisseur Grade Cannabis to supply our planned retail locations so that we could control costs and maintain a steady enough supply of quality Cannabis.

While the Company intends to both maintain and increase operations within the medical marijuana market in Oregon through potential acquisition of existing MMDS and the formation of new medical grow operations pursuant to existing Oregon State Licensing Regulations, Management believes that the larger opportunity will be with the new recreational market that will be unfolding in Oregon as Measure 91 is implemented that involves vertical integration utilizing Producer, Processor, Wholesaler and Retailer licenses. Unlike the medical marijuana program, there are no restrictions or limitations with the Recreational Market regarding patient qualifications, and a much larger market will open up for retail demand, which the Company intends to aggressively exploit by leveraging their Oregon MMD experience and public company status.

Other Markets

The Company intends to seek additional licensing opportunities in various states and territories throughout the country which have legalized recreational and/or medical marijuana use, as well as select states and territories where legalization is pending or is otherwise under consideration through joint efforts with the Drug Policy Alliance and the Drug Policy Alliance’s lobbying affiliate, Drug Action and other activists and lobbyists.

Potential future target markets include Alaska, Arizona, California, Colorado, Connecticut, Florida, Illinois, Michigan, Nevada, New Jersey, New York, Ohio, Pennsylvania, Texas, Vermont, Washington D.C., Washington State and others.

We cannot assure that we will be successful in raising additional capital to implement our business plan. Further, we cannot assure, assuming that we raise additional funds, that we will achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability and positive cash flow, our operating business, financial condition, cash flows and results of operations may be materially and adversely affected.

Critical Accounting Estimates

The following are deemed to be the most significant accounting estimates affecting us and our results of operations:

Fair value of financial instruments

The Company follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements. We apply these provisions to estimate the fair value of our financial instruments including cash, accounts payable and accrued expenses, and notes payable.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Our deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.

Table of Contents 23ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Recently Issued Accounting PronouncementsThere are no recent accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”), and the Securities and Exchange Commission (“SEC”) believed by management to have a material impact on the Company’s present or future financial statements.

Results of Operations

Three months ended March 31, 2015 compared to three months ended March 31, 2014.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $37,598 to $99,646 in first three months of 2015 compared to the same period in 2014. The increase results from the Company’s entrance into the Medical Marijuana market and expenses associated with launching operations at their first licensed MMD in Portland, Oregon.

Professional fee expense

Professional fees increased by $447,340 to $547,010 in the first three months of 2015 compared to the same period in 2014 due to stock awards for services provided to Professionals and Consultants that assisted with the Company’s endeavors.

Inventory

Inventory Values increased to $44,335 in the first three months of 2015 compared to the same period in 2014. The increase in value for the 3 month period ending March 31, 2015 versus the same period 2014 resulted from the Company’s entrance into the Medical Marijuana market and expenses associated with launching operations at their first licensed MMD in Portland, Oregon.

Additionally, Inventory Values increased by $39,068 to $44,335 in the first three months of 2015 compared to the year ending December 31, 2014. The increase in value for the 3 month period ending March 31, 2015 versus the year ending December 31, 2014 was a result of two separate circumstances:

a. At the end of November we elected to make a change in management at the Kaya Shack store. The state mandates that any time that you make a change in the designated PRF (person responsible for facility) that the facility must be temporarily shut down at such time and a new license reissued once the new proposed PRF has passed their background check; and

b. During this same time period the industry was awash in cannabis as a result of the outdoor harvest from Southern Oregon, as well as that from the Emerald Triangle region in California.

So we had a sharp increase in supply and were not sure what the demand would be relative to the prices and varieties that we had in our inventory. Accordingly, we were unsure as to the continued value of the inventory at that time and moved it to a “Contra Inventory” account and took minimal vale for it on our balance sheet.

In late December we re-certified the inventory with the State of Oregon and began commencing sales when new PRF was approved. Thereafter, we did trial marketing through the end of the year to establish value of inventory. After January 2 our new inventory manager and accountants established that the inventory systems were reliable and that the value was largely unchanged, so we moved the inventory back from the contra-inventory account.

Table of Contents 24Finally, with the ramp up of our grow we have been able to intentionally increase existing inventory on hand due to the possibility of our existing MMD potentially being able to start early recreational sales this year pursuant to a proposed program currently in debate in the Oregon Legislature. Also, we needed to stockpile the inventory to develop the line of strain-specific concentrates and other unique products for sale through our retail network as well as potential distribution lines to other dispensaries as discussed below.

Revenues

With the continued operation of the Company’s first MMD in Portland Oregon, we had revenues of just $30,339 for the three months ended March 31, 2015 versus no revenues for the same period in 2014.

The Company is attempting to increase revenues substantially this year and beyond through the potential addition of planned Kaya Shack(s), the introduction of the Kaya Farms Every Day Value Brand of Cannabis, proprietary strain-specific concentrates and other unique products for sale through both its retail network as well as potential distribution lines to other dispensaries. Additionally, we are hopeful that legalization will afford us a much larger market share in Oregon, (as it did for the first MMD operators in Colorado who were given the first recreational licenses as that state evolved their medical marijuana dispensary system), and that we can leverage this revenue stream, medical marijuana dispensary operational experience and public company status to develop significant shareholder value.

However, there can be no assurance that our early entrance into the Oregon Market will allow us these opportunities and/or advantages and that we will be successful in our endeavors, or if we are successful, that it will result in KAYS gaining a worthwhile market share that will allow us to achieve substantial revenues, as well as corresponding operating margins that will allow us to achieve eventual profits.

Liquidity and Capital Resources

During the first quarter of 2015 we issued $135,000 convertible debt the debt is convertible into the Company’s common stock at a conversion rate of $0.04 per share. The stated interest rate on the debt is 10%. The debt issued is a result of a financing transaction and contain a beneficial conversion feature.

During the first quarter of 2015 we issued $10,000 of debt with a stated interest rate of 10%. The Note is payable on May 25, 2015

For the three months ended March 31, 2015 we invested $25,000 in equipment at our grow location.

Accordingly, with increased capital improvements and increased expenses associated with the launch of the Medical Marijuana business plan the Company’s cash reserves as of March 31, 2015 were $40,673 versus $111,954 for the same period in 2014. While the Company believes that they will continue to have increased access to investment capital to develop its Medical Marijuana and Legal Recreational Marijuana business plan, there can be no assurance that this will be so.

Although the Company has consistently achieved revenues since the opening of their first Kaya Shack MMD last July, the Company acknowledges that its Plan of Operations may not result in generating positive working capital in the near future. Although management believes that it will be able to successfully execute its business plan, which includes third-party financing and the raising of capital to meet the Company’s future liquidity needs, there can be no assurances in that regard. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this material uncertainty.

Table of Contents 25Going Concern

The Company’s financial statements as of and for the three months ended March 31, 2015 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a total net loss of $6,303,543 from inception through the period ended March 31, 2015. The Company had a net loss of $784,074 for the three months ended March 31, 2015. At March 31, 2015 the Company had a working capital deficiency of $710,612 an accumulated deficit of $6,303,543 and a net capital deficiency of $1,241,247. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this material uncertainty.

No assurances can be given that the Company will be successful in raising additional capital as discussed above. Further, there can be no assurance, assuming the Company successfully raises additional funds, that the Company will achieve profitability or positive cash flow. If the Company is not able to timely and successfully raise additional capital and/or achieve positive cash flow, its business, financial condition, cash flows and results of operations will be materially and adversely affected.

Recently Issued Accounting Pronouncements

Recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants (“AICPA”), and the Securities and Exchange Commission (“SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.