SMKY 10Q out - Quarterly Report (10-Q)
Post# of 29735
Posted On: 11/14/2012 11:15:31 AM
SMKY 10Q out
- Quarterly Report (10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ TO _________________
Commission file number: 000-52158
Smoky Market Foods, Inc.
(Exact name of registrant as specified in its charter)
Nevada 20-4748589
(State or Other Jurisdiction of Incorporation or
Organization) (I.R.S. Employer Identification No.)
1511 E. 2nd St.
Webster City, IA 50595
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (866) 851-7787
Indicate 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 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b02 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
[ ] Yes [X] No
As of November 10, 2012, the registrant had 112,853,563 shares of common stock outstanding.
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II — OTHER INFORMATION
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Mine Safety Disclosures 16
Item 5. Other Information 16
Item 6. Exhibits 16
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SMOKY MARKET FOODS, INC.
Balance Sheets
(unaudited)
September 30, 2012 December 31, 2011
ASSETS:
Current Assets
Cash $ 2,462 $ 17,614
Accounts receivable - -
Inventory 14,868 16,816
Total Current Assets 17,330 34,430
Property and Equipment, net of depreciation 2,577 2,844
Total Assets $ 19,907 $ 37,274
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT):
Liabilities
Current Liabilities
Accounts payable $ 523,917 $ 524,338
Accounts payable - related parties 164,113 145,933
Accrued payroll costs 733,549 602,489
Short-term advances 87,700 94,700
Convertible debt, including accrued interest, less amortized discount 88,205 48,708
Total Current Liabilities 1,597,484 1,416,168
Long-term Liabilities
Convertible debt to a related party, less amortized discount 199,432 196,384
Promissory notes payable to a related party, including accrued interest, less amortized discount 2,686,397 2,452,196
Total Liabilities 4,483,313 4,064,748
Stockholders’ Equity (Deficit)
Preferred Stock, par value $.001, 10,000,000 shares authorized; no shares issued and outstanding - -
Common Stock, par value $.001, 200,000,000 shares authorized: issued and outstanding 112,853,563 and 104,213,527 at September 30, 2012 and December 31, 2011, respectively 112,854 104,214
Deferred Stock-Based Compensation (8,579 ) (28,571 )
Other paid-in capital 7,664,516 7,335,079
Accumulated deficit (12,232,197 ) (11,438,196 )
Total Stockholders’ Equity (Deficit) (4,463,406 ) (4,027,474 )
Total Liabilities and Stockholders’ Equity (Deficit) $ 19,907 $ 37,27 4
The accompanying notes are an integral part of these financial statements.
F- 1
SMOKY MARKET FOODS, INC.
Statements of Operations
(unaudited)
For the Three Months Ended September 30: For the Nine Months Ended September 30:
2012 2011 2012 2011
Sales
Wholesale $ 3,204 $ - $ 10,582 $ -
Internet 270 - 979 -
Total Sales 3,474 - 11,561 -
Cost of Sales
Wholesale and internet 1,031 - 2,591 -
Total Cost of Sales 1,031 - 2,591 -
Gross Profit (loss) 2,443 - 8,970 -
General & Administrative Expenses
Salaries, wages & benefits 68,058 51,882 190,806 150,222
Professional fees 25,965 52,821 116,766 55,213
Marketing 9,902 55,312 16,388 60,871
Depreciation and amortization 48,875 14,949 128,073 42,638
Rent 2,223 1,440 7,266 4,260
Stock based compensation
Salaries, wages & benefits - related parties 6,664 150,671 19,992 181,212
Professional 2,257 179,992 2,257 179,992
Financing 10,462 72,286 58,259 411,444
Other 27,042 39,385 64,454 56,978
Total General and Administrative Expenses 201,448 618,738 604,261 1,142,830
Operating Loss (199,005 ) (618,738 ) (595,291 ) (1,142,830 )
Other Income (Expense)
Other income (loss) - 3,509 - 5,206
Loss on conversion of related party debt - (5,665 ) - (85,490 )
Interest expense to related parties (64,767 ) (64,846 ) (192,668 ) (194,641 )
Interest expense to non-related parties (1,167 ) - (6,042 ) -
Other Expense - Net (65,934 ) (67,002 ) (198,710 ) (274,925 )
Loss before Income Taxes (264,939 ) (685,740 ) (794,001 ) (1,417,755 )
Income Taxes - - - -
Net (Loss) $ (264,939 ) $ (685,740 ) $ (794,001 ) $ (1,417,755 )
(Loss) per Share:
Basic and Diluted $ (0.00 ) $ (0.01 ) $ (0.01 ) $ (0.01 )
Weighted Average Number of Shares
111,803,436
103,651,191
107,811,242
100,646,339
The accompanying notes are an integral part of these financial statements.
F- 2
SMOKY MARKET FOODS, INC.
Statement of Stockholder’s Equity (Deficit)
(unaudited)
Deferred Other
Common Stock Stock-Based Paid-in Accumulated Total
Shares Amount Compensation Capital Deficit (Deficit)
Balance, January 1, 2011 93,977,246 $ 93,978 $ (55,228 ) $ 6,232,009 $ (9,523,300 ) $ (3,252,541 )
Common stock issued for:
Cash 3,000,000 3,000 139,300 142,300
Settlement of advances 4,650,000 4,650 98,425 103,075
Employee compensation 1,750,000 1,750 12,250 14,000
Professional services 560,000 560 108,940 109,500
Financing 255,000 255 21,995 22,250
Settlement of accounts payable balances 21,281 21 7,427 7,448
Convertible debt financing 38,750 38,750
Warrants issued for:
Employee compensation 147,218 147,218
Professional services 214,723 214,723
Financing 273,394 273,394
Convertible debt financing 40,648 40,648
Amortization of stock-based compensation 26,657 26,657
Net (Loss) for the Year Ended December 31, 2011 (1,914,896 ) (1,914,896 )
Balance, December 31, 2011 104,213,527 $ 104,214 $ (28,571 ) $ 7,335,079 $ (11,438,196 ) $ (4,027,474 )
Common stock issued for:
Settlement of accounts payable balances 280,084 280 18,112 18,392
Conversion of debt to common stock 7,321,602 7,322 112,552 119,874
Cash 1,038,350 1,038 34,062 35,100
Convertible debt financing 104,895 104,895
Warrants issued for financing and professional services 59,816 59,816
Amortization of stock-based compensation 19,992 19,992
Net (Loss) for the Nine Months Ended September 30, 2012 (794,001 ) (794,001 )
Balance, September 30, 2012 112,853,563 $ 112,854 $ (8,579 ) $ 7,664,516 $ (12,232,197 ) $ (4,463,406 )
The accompanying notes are an integral part of these financial statements.
F- 3
SMOKY MARKET FOODS, INC.
Statements of Cash Flows
(unaudited)
For the Nine Months Ended September 30:
2012 2011
Cash Flows from Operating Activities
Net Income (Loss) $ (794,001 ) $ (1,417,755 )
Loss on conversion of related party debt - 85,490
Stock-based financing and compensation costs 79,808 772,648
Depreciation and amortization 128,073 42,638
Current year interest capitalized as debt 198,710 194,250
Adjustments to reconcile net loss to cash used in operating activities:
(Increase) decrease in inventory 1,948 (95,674 )
Increase (decrease) in accounts payable 36,151 13,240
Increase (decrease) in due to employees 131,060 149,942
Net Cash Provided (Used) by Operating Activities (218,251 ) (255,221 )
Cash Flows from Investing Activities
Purchase of property and equipment - (3,200 )
(Deposits) refunds - 183
Net Cash Provided (Used) by Investing Activities - (3,017 )
Cash Flows from Financing Activities
Proceeds from issuance of convertible debt 175,000 210,000
Proceeds from issuance of common stock 35,099 26,500
Proceeds from (payments on) short term advances - net (7,000 ) 89,450
Net Cash Provided (Used) by Financing Activities 203,099 325,950
Net Increase (Decrease) in Cash (15,152 ) 67,712
Cash, Beginning of Period 17,614 10
Cash, End of Period $ 2,462 $ 67,722
The interest disclosed in the cash flow from operating activities section above was interest accrued but unpaid on promissory notes as more fully disclosed in the notes to the financial statements. The accrued but unpaid interest is added to the principal balance of the promissory notes. This non-cash expense is added back in the cash flows from operating activities section above in order to arrive at cash flows from operating activities.
The accompanying notes are an integral part of these financial statements.
F- 4
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Smoky Market Foods, Inc, (the “Company”) was incorporated on April 18, 2006 under the laws of the State of Nevada.
The Company engages in the manufacture and sale of smoked meat products using a proprietary cooking technology which enables preservative-free production. Sales and distribution are presently accommodated through retail(internet) and whole sale distribution strategies intended to exploit the Smoky Market brand. The Company also intends to create a chain of franchised restaurants that also utilize the branded Smoky Market products.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews those estimates, including those related to allowances for loss contingencies for litigation, income taxes, and projection of future cash flows used to assess the recoverability of long-lived assets
Cash and Cash Equivalents
For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Management monitors the liquidity and creditworthiness of accounts receivable due from customers on an ongoing basis, considering industry and economic conditions and other factors. These factors form the basis for calculating and recording an allowance for doubtful accounts, which is an estimate of future credit losses. The Company writes off individual accounts receivable against the bad debt allowance when the Company determines a balance is uncollectible. Management has determined that the bad debt allowance is appropriately established at $-0- as of both September 30, 2012 and December 31, 2011.
Inventory
Inventory consists of Smoky Market food items and branded packaging. It is valued at the lower of cost or market using the average cost method. Inventory was as follows at:
September 30, 2012 December 31, 2011
Raw materials $ - $ -
Finished goods 14,868 16,816
$ 14,868 $ 16,816
F- 5
Property and Equipment
Property and equipment are stated at cost and are being depreciated using the straight-line method over the assets’ estimated economic lives, which range from 3 to 25 years. Property and equipment were as follows as of:
September 30, 2012 December 31, 2011
Transportation Equipment $ 3,200 $ 3,200
Accumulated depreciation 623 356
$ 2,577 $ 2,844
Leasehold improvements are capitalized and amortized over the remaining term of the leased facility. The Company recorded $89 and $89 in depreciation expense relating to the assets above for the three months ended September 30, 2012 and 2011, respectively. The Company recorded $267 and $89 in depreciation expense relating to the assets above for the nine months ended September 30, 2012 and 2011, respectively.
Advances
As of September 30, 2012 and December 31, 2011, the Company was indebted to several individuals for non-interest bearing, unsecured advances in the amounts of $87,700 and $94,700, respectively. $82,500 of the advances was past due and in default as of September 30, 2012 and December 31, 2011, respectively. 2,035,000 shares of common stock and 150,000 warrants to purchase common stock were issued to the individuals as part of the advances still outstanding at September 30, 2012. Management intends to repay the advances upon the realization of future debt/equity financing. Accordingly, the advances have been classified as current obligations.
Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2012 and December 31, 2011. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable and accounts payable. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature, or are receivable or payable on demand, and their carrying amounts approximate fair value.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amount of property and equipment and its identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.
Revenue Recognition
Sales are recognized upon shipment and indication of collectability such as a purchase order or other evidence which establishes the validity of the transaction.
Shipping and Handling (Internet Sales)
Shipping and handling charged to customers can vary depending on pricing strategies, market conditions, etc., and is not necessarily based on the recovery of cost. Accordingly, shipping and handling charges are recorded as a component of sales while the corresponding shipping and handling costs are reflected as a component of cost of goods sold.
Advertising Costs
All advertising costs are charged to expense as incurred or the first time the advertising takes place, unless it is direct-response advertising that results in probable future economic benefits. Advertising expenses were $-0- and $-0- for the three months ended September 30, 2012 and 2011. Advertising expenses were $159 and $200 for the nine months ended September 30, 2012 and 2011.
F- 6
Segment Information
Certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. The Company currently operates in one business segment and will evaluate additional segment disclosure requirements if it expands operations.
NET (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares, outstanding stock options, and the equivalent number of common shares that would have been outstanding had the convertible debt holders converted their debt instruments to common stock. All potential dilutive securities have been excluded from the computation, as their effect is anti-dilutive.
Stock-Based Compensation
The Company has issued its common shares as compensation to directors, officers, and non-employees (“recipients”). The Company measures the amount of stock-based compensation based on the fair value of the equity instrument issued or the services or goods provided as of the earlier of (1) the date at which an agreement is reached with the recipient as to the number of shares to be issued for performance, or (2) the date at which the recipient’s performance is complete.
Occasionally, the Company sells shares below market value to raise cash to fund operations. The discounts from market are treated as compensation for officers and directors. For non-officers and directors, the discounts are netted against proceeds as a “cost of issue.”
Income Taxes
Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Uncertainty in income taxes is recognized in the Company’s financial statements. Specifically, the accounting policy determines (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations. The Company has evaluated the presence of any such tax uncertainties and determined that they do not have a material impact on the financial statements.
Recent 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.
F- 7
NOTE 2. GOING CONCERN
Management believes that there is substantial doubt about the company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon its ability to commence profitable operations and/or obtain additional debt and/or capital financing. Management is attempting to obtain additional financing with various parties, but the eventual success of such efforts cannot be assured.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.
The Company has experienced $12,232,197 in losses since inception. The Company has had minimal revenue generating operations since inception.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3. NOTE PAYABLE TO RELATED PARTY
The Company is obligated under a promissory note payable to an LLC. The LLC has acquired over 10% of the common stock of the Company, and is therefore now deemed a related party. However, the LLC does not have management control of the Company. The note accrues interest at a 10% annual rate until repaid on or before its maturity date of August 18, 2020.
The net promissory note obligation was as follows as of:
September 30, 2012 December 31, 2011
Face amount of note $ 2,568,900 $ 2,568,900
Accrued interest 546,671 354,003
Less unamortized loan discount (429,174 ) (470,707 )
$ 2,686,397 $ 2,452,196
As discussed above, the LLC is considered a related party. Related party expenses relative to this loan were as follows for the:
Nine Months Ended September 30:
2012 2011
Interest expense $ 192,668 $ 354,003
Amortization of loan discount $ 41,533 $ (470,707 )
Three Months Ended September 30:
2012 2011
Interest expense $ 64,223 $ 64,750
Amortization of loan discount $ 13,844 $ 13,844
NOTE 4. CONVERTIBLE DEBT – RELATED PARTY
The Company entered into a Purchase and Lease Agreement in June 2011 with SMKY Asset Fund LLC (the “Lender,” a related party) relating to the Company’s smoker-oven system. The substance of the transaction more closely resembles a convertible debt instrument and for that reason the Company has recorded this transaction as a convertible debt borrowing. Pursuant to the agreement, the Company received $210,000 in the third quarter of 2011, subject to increase prior to January 25, 2012, with a maximum borrowing of $500,000. The final purchase amount for the smoker oven system was $235,000.
F- 8
In addition, Smoky Market was required to issue warrants to the Lender to purchase a share of common stock for each $1.00 in debt provided. The warrants have an exercise price of $0.50 per share, a five-year term and include net exercise provisions. The warrants were valued using the Black-Scholes method assuming a risk-free annual rate of return of .02%, volatility of 317%, an exercise price of $.50 and a current stock price of $.24. The resulting value is reflected in the financial statements as a discount on the convertible debt and is being amortized over the ten-year life of the debt. Payments due on the debt are equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000.
The Purchase and Lease Agreement has a 10-year term, provided that the Company must repay the debt at any time after July 25, 2014 that the market price for the Company’s common stock has exceeded $0.50 for thirty trading days. The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000. The conversion feature of the note was valued based on the same criteria as the warrant described above, and resulted in a calculation of $2,063,114. Since the conversion is contingent, the conversion feature was not recognized in the calculation of the debt discount.
The debt was as follows at:
September 30, 2012 December 31, 2011
Face amount of debt $ 235,000 $ 235,000
Less unamortized loan discount (35,568 ) (38,616 )
$ 199,432 $ 196,384
As discussed above, the Lender is considered a related party. Related party expenses relative to this loan were as follows for the:
Nine Months Ended September 30:
2012 2011
Amortization of loan discount $ 3,049 $ 1,016
Three Months Ended September 30:
2012 2011
Amortization of loan discount $ 1,016 $ 1,016
NOTE 5. CONVERTIBLE DEBT – UNRELATED PARTY
The Company has entered a series of convertible debt arrangements with an unrelated financier (“Financier”). The promissory notes carry interest at an 8% annual rate and are due nine months from the transaction date. All notes have a conversion option which allows the Financier to convert the principal and accrued interest into common shares based on the average of the lowest three closing prices of the Companies stock over the prior ten to fifteen days. That price is then reduced by discounts ranging from 42% to 45% to arrive at the conversion price. The Company has the right to repurchase the notes during the first 180 days at a price which includes accrued interest plus the original principal amount multiplied by 150%. The first three notes have been converted into Company common shares. The fourth note is in the principal amount of $32,500 and is due on February 4, 2013. The fifth note is in the principal amount of $32,500 and is due April 12, 2013. The sixth note is in the principal amount of $32,500 and is due on May 14, 2013. The seventh note is in the principal amount of $40,000 and is due on June 8, 2013.
The Company has recorded the conversion options as loan discounts. Since the number of shares is variable, the calculation of the discount assumed the conversion stock price as of the transaction date as the base for calculations.
F- 9
The outstanding combined debt was as follows at:
September 30, 2012 December 31, 2011
Face amount of debt $ 137,500 $ 77,500
Accrued interest 2,097 930
Less unamortized loan discount (51,392 ) (29,722 )
$ 88,205 $ 48,708
Based on the average of the lowest three closing prices for the Company’s common stock over the last ten trading days of the period ended September 30, 2012, the convertible debt holder would have been able to convert the above described loan principal in exchange for 5,438,724 shares of common stock. The Company had sufficient shares of common stock available to satisfy such a conversion as of September 30, 2012.
NOTE 6. CAPITAL STOCK
Common Stock
On April 18, 2006, the State of Nevada authorized the Company to issue a maximum of 200,000,000 shares of the Company’s common stock. The assigned par value was $.001. On the same day, the Company issued 40,000,000 common shares to Smoky Systems, LLC, a Nevada LLC and related party, in exchange for certain assets.
Preferred Stock
In June 2006, the State of Nevada authorized the Company to issue a maximum of 10,000,000 shares of the Company’s preferred stock with a $.001 par value. Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated .All shares of anyone series of the Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each such series, and the qualifications ,limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. No preferred shares had been issued as of September 30, 2012.
Stock Transactions:
The Company has engaged in numerous transactions whereby shares of common stock (description above) were issued in exchange for cash and/or services. The Statement of Stockholders’ Equity provides a summary of such transactions.
NOTE 7. RELATED PARTY TRANSACTIONS
As of September 30, 2012 the Company owed $164,113 to the Company’s Chief Financial Officer, a related party, for professional services. As of December 31, 2011, the Company owed $133,244 to the Company’s Chief Financial Officer for professional services and $12,689 to a supplier who is also a shareholder and related party, for a total balance of $145,933 in related party liabilities. Such debt was reflected as related party trade payables on the balance sheets, bears no interest and has no formal repayment terms.
F- 10
NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitment
The Company has defaulted on a long-term operating lease of real property previously used as a restaurant operation in Los Gatos, California. All amounts due under the lease have been recognized as a liability and included in accounts payable. The liability is reflected at $187,307 as of both September 30, 2012 and December 31, 2011.
Employment Contracts
Chief Executive Officer
Effective May 1, 2007, the Company entered into a three-year employment contract with the Chief Executive Officer (“CEO”). Terms of the agreement included annual compensation of $175,000, a potential 80% bonus, a stock award of 1,500,000 common shares, 425,000 options to purchase common stock at $.10 per share, and an additional contingent 1,000,000 shares assuming that certain operating performance metrics are achieved. The employment contract expired and has not yet been renewed as of the date of these financial statements. The CEO and the Company have continued the same compensation structure subsequent to the expiration of the employment contract.
Real Estate Option and Consulting Agreement
The Company entered into an agreement with Mary Anne’s Specialty Foods, Inc. (“Supplier”) in October 2009. Under the terms of the agreement, the Company issued the Supplier 1,500,000 warrants to purchase the Company’s common stock at a $.15 exercise price, expiring in five years, in exchange for certain real property rights to purchase and build production facilities located on property presently owned by the Supplier. The transaction was valued at $75,000 using the Black-Scholes Method. The Company also issued 1,000,000 common shares to the Supplier in exchange for a three-year real estate related consulting contract that the Company may require in subsequent years in order to build the new facility described above. The transaction was valued at $50,000, based on the $.05 per share fair value of the Company’s common shares on the date of the agreement. The values of the assets were considered impaired by Management and written off as an impairment loss at December 31, 2010.
Dispute with Contractor
Smoky Market previously retained the services of an independent financial consultant contractor (the “Contractor”). The Contractor was terminated in 2009 and Company Management believes that a settlement was agreed to between the parties. The Contractor now disputes the agreement, claiming additional amounts are owed. The Company plans to contest the Contractor’s claim, but has recognized and recorded a liability in these financial statements equal to the full amount claimed by the Contractor. The amount in dispute is $123,720 as of both September 30, 2012 and December 31, 2011.
F- 11
NOTE 9. COMMON STOCK OPTIONS AND WARRANTS
Common Stock Option Plan
The Company has reserved 6,500,000 common shares for the exercise of stock options to be issued pursuant to the 2006 Stock Option Plan. Information relating to options issued under this plan is as follows:
Options and
Stock Awards
Available
for Grant Number of
Shares Weighted
Average
Option
Exercise
Price
Outstanding as of January 1, 2012 742,500 5,757,500 $ 0.10
Shares reserved - - -
Options granted - - -
Stock awards granted - - n/a
Options exercised - - -
Options canceled - - -
Outstanding as of September 30, 2012 742,500 5,757,500 $ 0.10
The following table summarizes information about stock options outstanding and exercisable at September 30, 2012:
Stock Options Outstanding
Number of
Options
Outstanding Weighted-
Average
Remaining
Contractual
Life in Years Weighted-
Average
Exercise
Price
1,887,500 0.82 $ 0.10
Stock Options Exercisable
Number of
Options
Exercisable Weighted-
Average
Remaining
Contractual
Life in Years Weighted-
Average
Exercise
Price
1,887,500 0.82 $ 0.10
The assumptions used in computing fair value of options is as follows:
Expected stock price volatility 186.0 %
Risk-free interest rate 4.7 %
Expected term (years) 7.00
Weighted-average fair value of stock options granted $ 0.099
F- 12
Common Stock Warrants
The following is a summary of the status of all the Company’s stock warrants as of September 30, 2012:
Number
of
Warrants Weighted
Average
Exercise
Price
Outstanding, January 1, 2012 18,949,334 $ 0.10
Granted 1,937,500 0.15
Exercised - -
Cancelled - -
Outstanding, September 30, 2012 20,886,834 $ 0.10
The following table summarizes information about stock warrants outstanding and exercisable at September 30, 2012:
Stock Warrants Outstanding
Number of
Warrants
Outstanding Weighted-
Average
Remaining
Contractual
Life in Years Exercise Price
210,000 4.00 $ 0.50
1,771,834 3.59 $ 0.25
5,452,500 1.17 $ 0.15
13,452,500 3.69 $ 0.05
20,886,834
Stock Warrants Exercisable
Number of
Warrants
Exercisable Weighted-
Average
Remaining
Contractual
Life in Years Exercise Price
210,000 4.00 $ 0.50
1,771,834 3.59 $ 0.25
5,452,500 1.17 $ 0.15
13,452,500 3.69 $ 0.05
20,886,834
Warrants were valued and recorded pursuant to the Black-Scholes Method. Assumptions used were an average risk-free rate of return of .12% to .15%, average expected stock price volatility of 347%, weighted average expected term of 6.01 years, and a weighted average fair value of $.01 per warrant.
NOTE 10. SUBSEQUENT EVENTS
Management has evaluated the period subsequent to September 30, 2012 up to and including the date of the issuance of the financial statements for material subsequent events to disclose, and has determined that no such subsequent events exist
F- 13
I tem 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operation
This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend,” “expect,” “will” or similar words. These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information. When considering such forward-looking statements, you should keep in mind the risk factors noted in Part II – Other Information, “Item 1A. Risk Factors” and other cautionary statements throughout this Report and our other filings with the Securities and Exchange Commission. You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report or any other applicable filings materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.
Overview
We use proprietary, custom-engineered, USDA-approved wood-burning oven technology to produce a complete line of fully-cooked Smoke-Baked TM meat and fish, and special recipe dishes. From a 15-acre food production campus located in central Iowa and owned by our sole meat processor, Mary Ann’s Specialty Foods, Inc. (“Specialty Foods”), we are presently producing a very limited amount of our smoked food (specifically our smoked salmon) for distribution through SYSCO-Iowa and over the Internet, but intend to expand our production of additional items and grow sales into multiple channels of foodservice and retail grocery distribution principally under the Smoky Market brand. Additionally, we intend to produce certified kosher smoked foods and to distribute this line of products under the “Smoky Kosher” brand through the same marketing channels. In the future, we intend to develop a national chain of fast-casual barbecue restaurants under the name “BarBQ Diner” that would operate without having to handle and cook raw product on site.
Our focus of operations at this time is the expansion of our wholesale food service distribution through SYSCO and other large and specialty food service distributors, and to develop initial retail distribution through selected grocery chains in a limited number of regional markets. Once revenues from our primary distribution channels have gained traction, we intend to pursue development of the BarBQ Diner restaurant concept. We expect that operating dual distribution channels for our smoked foods will enable us to maximize the operating and financial efficiencies of our production capacity.
We produce our smoked foods under an agreement with Specialty Foods, a commercial meat processor in whose USDA facility we placed our first wood-burning oven system, which is capable of producing a minimum of approximately 100,000 pounds of smoked meat and fish per month. It is our intention to acquire the business and property of our processor affiliate so that we can create certain economies-of-scale relative to raw product supply cost and operating efficiencies that would result in lowering our product cost, and to create additional production space to develop our kosher food production.
We have generated net losses in each fiscal year since our inception in the development and refinements of our business model. As discussed in “Liquidity and Capital Resources” below, in June 2009 we received $1.5 million in capital financing, which we used toward debt repayment, the opening of a restaurant concept to test our food service system, and for our website to establish capability for Internet business. We are presently seeking private equity financing in the amount of $3.5 million to expand Smoky Market food service distribution and to begin sales in retail grocery sales in selected market venues. Additionally, we hope to raise up to $25 million from private financing sources of equity and debt to finance (i) the acquisition of our Iowa processor’s campus property to make the required building additions on the property for expanded production of regular and kosher food processing, (ii) to finance a national expansion of market openings for our retail brand grocery distribution, and (iii) to finance one or more acquisitions of strategic food companies for revenue growth and distribution of our products.
Liquidity and Capital Resources
As of September 30, 2012, we had cash and cash equivalents of $2,462 and a working capital deficit of $1,580,154, as compared to cash and cash equivalents of $17,614 and a working capital deficit of $1,381,738 as of December 31, 2011.
3
Given that we are not yet in a positive cash flow or earnings position, the options available to us in our efforts to secure the financing structures we propose are fewer than to a positive cash flow company and generally do not include bank financing. To raise additional capital, we expect to issue equity securities, including preferred stock, common stock, warrants and/or convertible securities. We do not have any commitments from any party to provide required capital and may or may not be able to obtain such capital on reasonable terms or at all.
In a March 2010 transaction with 70 Limited LLC, we received $150,000 in cash for a promissory note in the amount of $150,000 together with a warrant to purchase up to 450,000 shares of our common stock. Under the terms of the promissory note, we were obligated to make payment on the full principal amount, plus interest accruing at 10% per year, by March 5, 2011, and we could prepay any amount of principal or interest at any time without penalty.
In August 2010, the Company and 70 Limited LLC agreed to refinance the note. Pursuant to the agreement, both loans were combined, along with accrued interest, forming a new loan with a maturity date of August 18, 2020. The note will accrue interest at a 10% annual rate until repaid. Prior warrants were revised to allow for exercise at $.05 per warrant as opposed to the previous $.15. The term for exercising the warrants was adjusted to ten years as opposed to five years on the cancelled warrants. The new warrants were valued based on the Black-Scholes method using a risk-free rate of return of .15% and volatility of 347%.
In July 2011, we entered into a Purchase and Lease Agreement (the “Sale/Lease Agreement”) with SMKY Asset Fund LLC (the “Lessor”) related to our smoker-oven system. Pursuant to the Sale/Lease Agreement, we sold the smoker-oven system to the Lessor for a purchase price equal of $240,000. In addition, we are required to issue to Lessor a warrant to purchase a share of common stock for each $1.00 in purchase price paid. The warrant has an exercise price of $0.50 per share, a five-year term and includes net exercise provisions. We leased back the smoker-oven system for rent equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000. The Sale/Lease Agreement has a 10-year term, provided that we may repurchase the smoker-oven system at any time after July 25, 2014 that the market price for our common stock has exceeded $0.50 for thirty trading days. The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000.
In October and December 2011, the Company received an aggregate of $77,500 in cash from Asher Enterprises, Inc. in return for two promissory notes in the amounts of $42,500 and $35,000, respectively. The notes accrued interest at an annual rate of 8% until repaid and carried a maturity date of July 11, 2012 and September 15, 2012, respectively. The notes were converted into shares of our common stock in July and September 2012 at conversion prices equal to a discount of 45% to the then current market price. In 2012 the Company has further received an aggregate of $175,000 in cash from Asher in return for five promissory notes in various amounts. The first of these was converted into shares of our common stock in September 2012 at a conversion price equal to a discount of 45% to the then current market price. The remaining notes are in the principal amounts of $32,500, $32,500, $32,500, and $40,000 and are due February 4, 2013, April 12, 2013, May 14, 2013, and June 8, 2013, respectively. These notes accrue interest at an annual rate of 8% until repaid and are also convertible into shares of our common stock.
During the first nine months of 2012, principal uses of cash were approximately $220,000 to finance operating losses.
There are no expected capital expenditures during the last quarter of 2012.
Assuming the success of our wholesale food service and retail grocery distribution operations, which are expected to fully utilize our existing production capacity, we anticipate the need to invest as much as $5 million to create additional production capacity, which would be accomplished through our acquisition of Specialty Foods as intended. This will require the construction of an additional building adjacent to Specialty Food’s existing production space for more ovens and packaging equipment, as well as the remodeling of a second building on site to create space for kosher food production. We currently have an agreement with Specialty Foods under which we are granted the option to acquire its 15-acre campus property and make the required building additions (subject to an obligation to lease back to Specialty Foods its processing facility). We anticipate that the financing to pay for the proposed acquisition and property improvements will be generated from a combination of financing transactions involving equity and debt securities. If we are unable to obtain financing to construct the building addition as planned, we will be forced to significantly curtail our proposed expansion, and our ability to grow revenue will be halted until increased capacity can be created.
4
Results of Operations
We experienced decreases in general and administrative expenses during the three-month period ending September 30, 2012 as compared to the comparable period ending September 30, 2011. We experienced sales and operating costs during the three-month period ending September 30, 2012, whereas we experienced no sales and operating costs during the same period in 2011. Additionally, we experienced decreases in general and administrative expenses during the nine-month period ending September 30, 2012 as compared to the same period in 2011. We experienced sales and operating costs during the nine-month period ending September 30, 2012, whereas we experienced no sales and operating costs during the same period in 2011. The changes in revenues and expenses are summarized and discussed in the table below and in the discussion that follows.
Revenues and Expenses . Our operating results for the three-month and nine-month periods ended September 30, 2012 and the comparable periods in 2011 are summarized as follows:
For the three-month period ended For the nine-month period ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
Sales $ 3,474 - $ 11,561 -
Cost of Sales $ 1,031 - $ 2,591 -
Gross Profit (Loss) $ 2,443 - $ 8,970 -
General & Administrative Expenses
Salaries, Wages & Benefits $ 68,058 $ 51,882 $ 190,806 $ 150,222
Professional Fees $ 25,965 $ 52,821 $ 116,766 $ 55,213
Marketing $ 9,902 $ 55,312 $ 16,388 $ 60,871
Depreciation/amortization $ 48,875 $ 14,949 $ 128,073 $ 42,638
Rent $ 2,223 $ 1,440 $ 7,266 $ 4,260
Stock based compensation
Salaries, Wages & Benefits – related parties $ 6,664 $ 150,671 $ 19,992 $ 181,212
Professional $ 2,257 $ 179,992 $ 2,257 $ 179,992
Financing $ 10,462 $ 72,286 $ 58,259 $ 411,444
Other $ 27,042 $ 39,385 $ 64,454 $ 56,978
Operating Loss $ (199,005 ) $ (618,739 ) $ (595,291 ) $ (1,142,830 )
Other (Expense) $ (65,934 ) $ (67,002 ) $ (198,710 ) $ (274,925 )
Net (Loss) $ (264,939 ) $ (685,740 ) $ (794,001 ) $ (1,417,755 )
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011
We had no sales or costs or sales for the three-month periods ended September 30, 2011. Consequently, we had no operating loss during these periods. We had sales of $3,474 and cost of sales of $1,031 during the quarterly period ended September 30, 2012. Consequently, we had gross profit of $2,443 during that period.
Our total general and administrative expenses decreased by $417,290, from $618,738 in the three-month period ended September 30, 2011 to $201,448 in the same period in 2012. The decrease in general and administrative expenses was due primarily to decreases in professional fees, marketing expenses, stock-based compensation, and other expenses, as described below.
Professional fees decreased by $26,856, from $52,821 in the three-month period ended September 30, 2011 to $25,965 in the same period in 2012, due primarily to higher costs incurred in the 2011 period to become current in government reporting and compliance obligations, with no corresponding costs required in 2012. Marketing expenses decreased by $45,410, from $55,312 in the three-month period ended September 30, 2011 to $9,902 in the same period in 2012, due primarily to higher costs in the 2011 period for a new website as compared to the 2012 website costs. Stock-based compensation related to salaries, wages and benefits decreased by $144,007, from $150,671 in the three-month period ended September 30, 2011 to $6,664 in the same period in 2012, due primarily to warrants provided to corporate officers in the 2011 period in lieu of cash compensation with no corresponding warrants in the 2012 period. Stock-based compensation related to professional fees decreased by $177,735, from
5
$179,992 in the three-month period ended September 30, 2011 to $2,257 in the same period in 2012, due primarily to warrants provided to contract corporate officers in lieu of cash compensation in the 2011 period with no corresponding warrants in the 2012 period. Stock-based compensation related to financing activities decreased by $61,824, from $72,286 in the three-month period ended September 30, 2011 to $10,462 in the same period in 2012, due primarily to warrants given to individuals who advanced funds to the Company during the 2011 period with no corresponding warrants in the 2012 period. Other expenses decreased by $12,343, from $39,385 in the three-month period ended September 30, 2011 to $27,042 in the same period in 2012, due primarily to lower travel costs in the 2011 period as compared to the 2012 period.
The decreases in expenses described in the previous paragraph were partially offset by increases in expenses relating to salaries, wages and benefits, and in depreciation and amortization expenses. Expenses relating to salaries, wages and benefits increased by $16,176, from $51,882 in the three-month period ended September 30, 2011 to $68,058 in the same period in 2012, due primarily to an increase in plant workers in Iowa in the 2012 period employed for food production . Depreciation and amortization expenses increased by $33,926, from $14,949 in the three-month period ended September 30, 2011 to $48,875 in the same period in 2012, due primarily to additional amortization on new loan discounts in the 2012 period. Overall, the increases in expenses relating to salaries, wages and benefits, and depreciation and amortization expenses were not as great as the decreases in the expenses described in the previous paragraph.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011
We had no sales or costs of sales for the nine-month period ended September 30, 2011. Consequently, we had no operating loss during that period. For the nine-month period ended September 30, 2012, we had $11,561 in sales and $2,591 in costs of sales. Consequently, our gross profit for the nine-month period ended September 30, 2012 was $8,970.
Our total general and administrative expenses decreased by $538,569, from $1,142,830 in the nine-month period ended September 30, 2011 to $604,261 in the same period in 2012. The decrease in general and administrative expenses was due primarily to decreases in marketing expenses and stock-based compensation, as described below.
Marketing expenses decreased by $44,483, from $60,871 in the nine-month period ended September 30, 2011 to $16,388 in the same period 2012, due primarily to website costs incurred in the 2011 period with no corresponding costs in the 2012 period. Stock-based compensation related to salaries, wages and benefits decreased by $161,220, from $181,212 in the nine-month period ended September 30, 2011 to $19,992 in the same period in 2012, due primarily to the issuance of 1,750,000 shares of common stock to the CEO in the 2011 period with no corresponding issuance in the 2012 period. Stock-based compensation related to professional fees decreased by $177,735, from $179,992 in the nine-month period ended September 30, 2011 to $2,257 in the same period in 2012, due primarily to stock warrants given to professional service provides in the 2011 period with no concurrent warrants being given in the 2012 period. Stock-based compensation related to financing activities decreased by $353,185, from $411,444 in the nine-month period ended September 30, 2011 to $48,259 in the same period in 2012, due primarily to fewer warrants being issued as compensation for advances in the 2012 period.
The decreases in general and administrative expenses described in the previous paragraph were partially offset by increases in expenses related to salaries, wages and benefits, professional fees, and depreciation and amortization expenses. Expenses relating to salaries, wages and benefits increased by $40,584, from $150,222 in the nine-month period ended September 30, 2011 to $190,806 in the same period in 2012, due primarily to the Company resuming operations and paying production staff. Professional fees increased by $61,553, from $55,213 in the nine-month period ended September 30, 2011 to $116,766 in the same period in 2012, due primarily to the Company incurring increased costs in the 2012 period to stay current on government reporting and compliance obligations whereas such costs were lower in the 2011 period. Depreciation and amortization expenses increased by $85,435, from $42,638 in the nine-month period ended September 30, 2012 to $128,073 in the same period in 2012, due primarily to the amortization of loan discounts on loans incurred in late 2011 and in the first half of 2012. Overall, these increases were not as great as the decreases in the general and administrative expenses described in the previous paragraph.
6
Working Capital . Our working capital as of September 30, 2012 and as of December 31, 2011 are summarized in the table below.
As of
September 30, 2012 December 31, 2011
Current Assets
Cash $ 2,462 $ 17,614
Inventory $ 14,868 $ 16,816
Total Current Assets $ 17,330 $ 34,430
Current Liabilities
Accounts payable $ 523,917 $ 524,338
Accounts payable – related parties $ 164,113 $ 145,933
Due to employees $ 733,549 $ 602,489
Short-term advances $ 87,700 $ 94,700
Convertible debt $ 88,205 $ 48,708
Total Current Liabilities $ 1,597,484 $ 1,416,168
Working Capital (Deficit) $ (1,508,154 ) $ (1,381,738 )
Our working capital deficiency increased by $198,416, from $1,381,738 at fiscal-year end 2011 to $1,580,154 as of September 30, 2012. The increase in our working capital deficiency was primarily due to an increase of $18,180 in accounts payable to related parties, an increase of $131,060 in amounts due to employees, and an increase of $39,497 in convertible debt.
Cash Flows . Our cash flows for the nine-month periods ended September 30, 2012 and the comparable period in 2011 are summarized as follows:
For the nine-Month
Periods Ended
September 30, 2012 September 30, 2011
Net Cash Provided (Used) by Operating Activities $ (218,251 ) $ (255,221 )
Net Cash Provided (Used) by Investing Activities - $ (3,017 )
Net Cash Provided (Used) by Financing Activities $ 203,099 $ 325,950
Net Increase (Decrease) in Cash $ (15,152 ) $ 67,712
Cash, Beginning of Period $ 17,614 $ 10
Cash, End of Period $ 2,462 $ 67,722
We utilized less cash in our operating activities in the nine-month period ended September 30, 2012, from $255,221 in the nine-month period ended September 30, 2011 to $218,251 in the same period in 2012, primarily due to a larger loss from operations (after adding back non-cash expenses such as accrued interest and stock based compensation) in the 2011 period. Our investing activities utilized $3,017 in cash during the nine-month period ended September 30, 2011, compared to $0 in cash in the same period in 2012, primarily due to the refund of previous deposits in the nine-month period ended September 30, 2011 with no corresponding activity in 2012. We generated less cash from financing activities, from $325,950 provided during the nine-month period ended September 30, 2011 to $203,099 cash provided during the same period in 2012, primarily due to less cash advances received during the 2012 period.
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. In addition to historical information, the information in this prospectus contains forward looking statements about our future business and performance. Our actual operating results and financial performance may be different from what we expect as of the date of this prospectus. The risks described in this prospectus represent the risks that management has identified and determined to be material to our company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially harm our business operations and financial condition
- Quarterly Report (10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ TO _________________
Commission file number: 000-52158
Smoky Market Foods, Inc.
(Exact name of registrant as specified in its charter)
Nevada 20-4748589
(State or Other Jurisdiction of Incorporation or
Organization) (I.R.S. Employer Identification No.)
1511 E. 2nd St.
Webster City, IA 50595
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (866) 851-7787
Indicate 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 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b02 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
[ ] Yes [X] No
As of November 10, 2012, the registrant had 112,853,563 shares of common stock outstanding.
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II — OTHER INFORMATION
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Mine Safety Disclosures 16
Item 5. Other Information 16
Item 6. Exhibits 16
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SMOKY MARKET FOODS, INC.
Balance Sheets
(unaudited)
September 30, 2012 December 31, 2011
ASSETS:
Current Assets
Cash $ 2,462 $ 17,614
Accounts receivable - -
Inventory 14,868 16,816
Total Current Assets 17,330 34,430
Property and Equipment, net of depreciation 2,577 2,844
Total Assets $ 19,907 $ 37,274
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT):
Liabilities
Current Liabilities
Accounts payable $ 523,917 $ 524,338
Accounts payable - related parties 164,113 145,933
Accrued payroll costs 733,549 602,489
Short-term advances 87,700 94,700
Convertible debt, including accrued interest, less amortized discount 88,205 48,708
Total Current Liabilities 1,597,484 1,416,168
Long-term Liabilities
Convertible debt to a related party, less amortized discount 199,432 196,384
Promissory notes payable to a related party, including accrued interest, less amortized discount 2,686,397 2,452,196
Total Liabilities 4,483,313 4,064,748
Stockholders’ Equity (Deficit)
Preferred Stock, par value $.001, 10,000,000 shares authorized; no shares issued and outstanding - -
Common Stock, par value $.001, 200,000,000 shares authorized: issued and outstanding 112,853,563 and 104,213,527 at September 30, 2012 and December 31, 2011, respectively 112,854 104,214
Deferred Stock-Based Compensation (8,579 ) (28,571 )
Other paid-in capital 7,664,516 7,335,079
Accumulated deficit (12,232,197 ) (11,438,196 )
Total Stockholders’ Equity (Deficit) (4,463,406 ) (4,027,474 )
Total Liabilities and Stockholders’ Equity (Deficit) $ 19,907 $ 37,27 4
The accompanying notes are an integral part of these financial statements.
F- 1
SMOKY MARKET FOODS, INC.
Statements of Operations
(unaudited)
For the Three Months Ended September 30: For the Nine Months Ended September 30:
2012 2011 2012 2011
Sales
Wholesale $ 3,204 $ - $ 10,582 $ -
Internet 270 - 979 -
Total Sales 3,474 - 11,561 -
Cost of Sales
Wholesale and internet 1,031 - 2,591 -
Total Cost of Sales 1,031 - 2,591 -
Gross Profit (loss) 2,443 - 8,970 -
General & Administrative Expenses
Salaries, wages & benefits 68,058 51,882 190,806 150,222
Professional fees 25,965 52,821 116,766 55,213
Marketing 9,902 55,312 16,388 60,871
Depreciation and amortization 48,875 14,949 128,073 42,638
Rent 2,223 1,440 7,266 4,260
Stock based compensation
Salaries, wages & benefits - related parties 6,664 150,671 19,992 181,212
Professional 2,257 179,992 2,257 179,992
Financing 10,462 72,286 58,259 411,444
Other 27,042 39,385 64,454 56,978
Total General and Administrative Expenses 201,448 618,738 604,261 1,142,830
Operating Loss (199,005 ) (618,738 ) (595,291 ) (1,142,830 )
Other Income (Expense)
Other income (loss) - 3,509 - 5,206
Loss on conversion of related party debt - (5,665 ) - (85,490 )
Interest expense to related parties (64,767 ) (64,846 ) (192,668 ) (194,641 )
Interest expense to non-related parties (1,167 ) - (6,042 ) -
Other Expense - Net (65,934 ) (67,002 ) (198,710 ) (274,925 )
Loss before Income Taxes (264,939 ) (685,740 ) (794,001 ) (1,417,755 )
Income Taxes - - - -
Net (Loss) $ (264,939 ) $ (685,740 ) $ (794,001 ) $ (1,417,755 )
(Loss) per Share:
Basic and Diluted $ (0.00 ) $ (0.01 ) $ (0.01 ) $ (0.01 )
Weighted Average Number of Shares
111,803,436
103,651,191
107,811,242
100,646,339
The accompanying notes are an integral part of these financial statements.
F- 2
SMOKY MARKET FOODS, INC.
Statement of Stockholder’s Equity (Deficit)
(unaudited)
Deferred Other
Common Stock Stock-Based Paid-in Accumulated Total
Shares Amount Compensation Capital Deficit (Deficit)
Balance, January 1, 2011 93,977,246 $ 93,978 $ (55,228 ) $ 6,232,009 $ (9,523,300 ) $ (3,252,541 )
Common stock issued for:
Cash 3,000,000 3,000 139,300 142,300
Settlement of advances 4,650,000 4,650 98,425 103,075
Employee compensation 1,750,000 1,750 12,250 14,000
Professional services 560,000 560 108,940 109,500
Financing 255,000 255 21,995 22,250
Settlement of accounts payable balances 21,281 21 7,427 7,448
Convertible debt financing 38,750 38,750
Warrants issued for:
Employee compensation 147,218 147,218
Professional services 214,723 214,723
Financing 273,394 273,394
Convertible debt financing 40,648 40,648
Amortization of stock-based compensation 26,657 26,657
Net (Loss) for the Year Ended December 31, 2011 (1,914,896 ) (1,914,896 )
Balance, December 31, 2011 104,213,527 $ 104,214 $ (28,571 ) $ 7,335,079 $ (11,438,196 ) $ (4,027,474 )
Common stock issued for:
Settlement of accounts payable balances 280,084 280 18,112 18,392
Conversion of debt to common stock 7,321,602 7,322 112,552 119,874
Cash 1,038,350 1,038 34,062 35,100
Convertible debt financing 104,895 104,895
Warrants issued for financing and professional services 59,816 59,816
Amortization of stock-based compensation 19,992 19,992
Net (Loss) for the Nine Months Ended September 30, 2012 (794,001 ) (794,001 )
Balance, September 30, 2012 112,853,563 $ 112,854 $ (8,579 ) $ 7,664,516 $ (12,232,197 ) $ (4,463,406 )
The accompanying notes are an integral part of these financial statements.
F- 3
SMOKY MARKET FOODS, INC.
Statements of Cash Flows
(unaudited)
For the Nine Months Ended September 30:
2012 2011
Cash Flows from Operating Activities
Net Income (Loss) $ (794,001 ) $ (1,417,755 )
Loss on conversion of related party debt - 85,490
Stock-based financing and compensation costs 79,808 772,648
Depreciation and amortization 128,073 42,638
Current year interest capitalized as debt 198,710 194,250
Adjustments to reconcile net loss to cash used in operating activities:
(Increase) decrease in inventory 1,948 (95,674 )
Increase (decrease) in accounts payable 36,151 13,240
Increase (decrease) in due to employees 131,060 149,942
Net Cash Provided (Used) by Operating Activities (218,251 ) (255,221 )
Cash Flows from Investing Activities
Purchase of property and equipment - (3,200 )
(Deposits) refunds - 183
Net Cash Provided (Used) by Investing Activities - (3,017 )
Cash Flows from Financing Activities
Proceeds from issuance of convertible debt 175,000 210,000
Proceeds from issuance of common stock 35,099 26,500
Proceeds from (payments on) short term advances - net (7,000 ) 89,450
Net Cash Provided (Used) by Financing Activities 203,099 325,950
Net Increase (Decrease) in Cash (15,152 ) 67,712
Cash, Beginning of Period 17,614 10
Cash, End of Period $ 2,462 $ 67,722
The interest disclosed in the cash flow from operating activities section above was interest accrued but unpaid on promissory notes as more fully disclosed in the notes to the financial statements. The accrued but unpaid interest is added to the principal balance of the promissory notes. This non-cash expense is added back in the cash flows from operating activities section above in order to arrive at cash flows from operating activities.
The accompanying notes are an integral part of these financial statements.
F- 4
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Smoky Market Foods, Inc, (the “Company”) was incorporated on April 18, 2006 under the laws of the State of Nevada.
The Company engages in the manufacture and sale of smoked meat products using a proprietary cooking technology which enables preservative-free production. Sales and distribution are presently accommodated through retail(internet) and whole sale distribution strategies intended to exploit the Smoky Market brand. The Company also intends to create a chain of franchised restaurants that also utilize the branded Smoky Market products.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews those estimates, including those related to allowances for loss contingencies for litigation, income taxes, and projection of future cash flows used to assess the recoverability of long-lived assets
Cash and Cash Equivalents
For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Management monitors the liquidity and creditworthiness of accounts receivable due from customers on an ongoing basis, considering industry and economic conditions and other factors. These factors form the basis for calculating and recording an allowance for doubtful accounts, which is an estimate of future credit losses. The Company writes off individual accounts receivable against the bad debt allowance when the Company determines a balance is uncollectible. Management has determined that the bad debt allowance is appropriately established at $-0- as of both September 30, 2012 and December 31, 2011.
Inventory
Inventory consists of Smoky Market food items and branded packaging. It is valued at the lower of cost or market using the average cost method. Inventory was as follows at:
September 30, 2012 December 31, 2011
Raw materials $ - $ -
Finished goods 14,868 16,816
$ 14,868 $ 16,816
F- 5
Property and Equipment
Property and equipment are stated at cost and are being depreciated using the straight-line method over the assets’ estimated economic lives, which range from 3 to 25 years. Property and equipment were as follows as of:
September 30, 2012 December 31, 2011
Transportation Equipment $ 3,200 $ 3,200
Accumulated depreciation 623 356
$ 2,577 $ 2,844
Leasehold improvements are capitalized and amortized over the remaining term of the leased facility. The Company recorded $89 and $89 in depreciation expense relating to the assets above for the three months ended September 30, 2012 and 2011, respectively. The Company recorded $267 and $89 in depreciation expense relating to the assets above for the nine months ended September 30, 2012 and 2011, respectively.
Advances
As of September 30, 2012 and December 31, 2011, the Company was indebted to several individuals for non-interest bearing, unsecured advances in the amounts of $87,700 and $94,700, respectively. $82,500 of the advances was past due and in default as of September 30, 2012 and December 31, 2011, respectively. 2,035,000 shares of common stock and 150,000 warrants to purchase common stock were issued to the individuals as part of the advances still outstanding at September 30, 2012. Management intends to repay the advances upon the realization of future debt/equity financing. Accordingly, the advances have been classified as current obligations.
Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2012 and December 31, 2011. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable and accounts payable. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature, or are receivable or payable on demand, and their carrying amounts approximate fair value.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amount of property and equipment and its identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.
Revenue Recognition
Sales are recognized upon shipment and indication of collectability such as a purchase order or other evidence which establishes the validity of the transaction.
Shipping and Handling (Internet Sales)
Shipping and handling charged to customers can vary depending on pricing strategies, market conditions, etc., and is not necessarily based on the recovery of cost. Accordingly, shipping and handling charges are recorded as a component of sales while the corresponding shipping and handling costs are reflected as a component of cost of goods sold.
Advertising Costs
All advertising costs are charged to expense as incurred or the first time the advertising takes place, unless it is direct-response advertising that results in probable future economic benefits. Advertising expenses were $-0- and $-0- for the three months ended September 30, 2012 and 2011. Advertising expenses were $159 and $200 for the nine months ended September 30, 2012 and 2011.
F- 6
Segment Information
Certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. The Company currently operates in one business segment and will evaluate additional segment disclosure requirements if it expands operations.
NET (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares, outstanding stock options, and the equivalent number of common shares that would have been outstanding had the convertible debt holders converted their debt instruments to common stock. All potential dilutive securities have been excluded from the computation, as their effect is anti-dilutive.
Stock-Based Compensation
The Company has issued its common shares as compensation to directors, officers, and non-employees (“recipients”). The Company measures the amount of stock-based compensation based on the fair value of the equity instrument issued or the services or goods provided as of the earlier of (1) the date at which an agreement is reached with the recipient as to the number of shares to be issued for performance, or (2) the date at which the recipient’s performance is complete.
Occasionally, the Company sells shares below market value to raise cash to fund operations. The discounts from market are treated as compensation for officers and directors. For non-officers and directors, the discounts are netted against proceeds as a “cost of issue.”
Income Taxes
Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Uncertainty in income taxes is recognized in the Company’s financial statements. Specifically, the accounting policy determines (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations. The Company has evaluated the presence of any such tax uncertainties and determined that they do not have a material impact on the financial statements.
Recent 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.
F- 7
NOTE 2. GOING CONCERN
Management believes that there is substantial doubt about the company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon its ability to commence profitable operations and/or obtain additional debt and/or capital financing. Management is attempting to obtain additional financing with various parties, but the eventual success of such efforts cannot be assured.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.
The Company has experienced $12,232,197 in losses since inception. The Company has had minimal revenue generating operations since inception.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3. NOTE PAYABLE TO RELATED PARTY
The Company is obligated under a promissory note payable to an LLC. The LLC has acquired over 10% of the common stock of the Company, and is therefore now deemed a related party. However, the LLC does not have management control of the Company. The note accrues interest at a 10% annual rate until repaid on or before its maturity date of August 18, 2020.
The net promissory note obligation was as follows as of:
September 30, 2012 December 31, 2011
Face amount of note $ 2,568,900 $ 2,568,900
Accrued interest 546,671 354,003
Less unamortized loan discount (429,174 ) (470,707 )
$ 2,686,397 $ 2,452,196
As discussed above, the LLC is considered a related party. Related party expenses relative to this loan were as follows for the:
Nine Months Ended September 30:
2012 2011
Interest expense $ 192,668 $ 354,003
Amortization of loan discount $ 41,533 $ (470,707 )
Three Months Ended September 30:
2012 2011
Interest expense $ 64,223 $ 64,750
Amortization of loan discount $ 13,844 $ 13,844
NOTE 4. CONVERTIBLE DEBT – RELATED PARTY
The Company entered into a Purchase and Lease Agreement in June 2011 with SMKY Asset Fund LLC (the “Lender,” a related party) relating to the Company’s smoker-oven system. The substance of the transaction more closely resembles a convertible debt instrument and for that reason the Company has recorded this transaction as a convertible debt borrowing. Pursuant to the agreement, the Company received $210,000 in the third quarter of 2011, subject to increase prior to January 25, 2012, with a maximum borrowing of $500,000. The final purchase amount for the smoker oven system was $235,000.
F- 8
In addition, Smoky Market was required to issue warrants to the Lender to purchase a share of common stock for each $1.00 in debt provided. The warrants have an exercise price of $0.50 per share, a five-year term and include net exercise provisions. The warrants were valued using the Black-Scholes method assuming a risk-free annual rate of return of .02%, volatility of 317%, an exercise price of $.50 and a current stock price of $.24. The resulting value is reflected in the financial statements as a discount on the convertible debt and is being amortized over the ten-year life of the debt. Payments due on the debt are equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000.
The Purchase and Lease Agreement has a 10-year term, provided that the Company must repay the debt at any time after July 25, 2014 that the market price for the Company’s common stock has exceeded $0.50 for thirty trading days. The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000. The conversion feature of the note was valued based on the same criteria as the warrant described above, and resulted in a calculation of $2,063,114. Since the conversion is contingent, the conversion feature was not recognized in the calculation of the debt discount.
The debt was as follows at:
September 30, 2012 December 31, 2011
Face amount of debt $ 235,000 $ 235,000
Less unamortized loan discount (35,568 ) (38,616 )
$ 199,432 $ 196,384
As discussed above, the Lender is considered a related party. Related party expenses relative to this loan were as follows for the:
Nine Months Ended September 30:
2012 2011
Amortization of loan discount $ 3,049 $ 1,016
Three Months Ended September 30:
2012 2011
Amortization of loan discount $ 1,016 $ 1,016
NOTE 5. CONVERTIBLE DEBT – UNRELATED PARTY
The Company has entered a series of convertible debt arrangements with an unrelated financier (“Financier”). The promissory notes carry interest at an 8% annual rate and are due nine months from the transaction date. All notes have a conversion option which allows the Financier to convert the principal and accrued interest into common shares based on the average of the lowest three closing prices of the Companies stock over the prior ten to fifteen days. That price is then reduced by discounts ranging from 42% to 45% to arrive at the conversion price. The Company has the right to repurchase the notes during the first 180 days at a price which includes accrued interest plus the original principal amount multiplied by 150%. The first three notes have been converted into Company common shares. The fourth note is in the principal amount of $32,500 and is due on February 4, 2013. The fifth note is in the principal amount of $32,500 and is due April 12, 2013. The sixth note is in the principal amount of $32,500 and is due on May 14, 2013. The seventh note is in the principal amount of $40,000 and is due on June 8, 2013.
The Company has recorded the conversion options as loan discounts. Since the number of shares is variable, the calculation of the discount assumed the conversion stock price as of the transaction date as the base for calculations.
F- 9
The outstanding combined debt was as follows at:
September 30, 2012 December 31, 2011
Face amount of debt $ 137,500 $ 77,500
Accrued interest 2,097 930
Less unamortized loan discount (51,392 ) (29,722 )
$ 88,205 $ 48,708
Based on the average of the lowest three closing prices for the Company’s common stock over the last ten trading days of the period ended September 30, 2012, the convertible debt holder would have been able to convert the above described loan principal in exchange for 5,438,724 shares of common stock. The Company had sufficient shares of common stock available to satisfy such a conversion as of September 30, 2012.
NOTE 6. CAPITAL STOCK
Common Stock
On April 18, 2006, the State of Nevada authorized the Company to issue a maximum of 200,000,000 shares of the Company’s common stock. The assigned par value was $.001. On the same day, the Company issued 40,000,000 common shares to Smoky Systems, LLC, a Nevada LLC and related party, in exchange for certain assets.
Preferred Stock
In June 2006, the State of Nevada authorized the Company to issue a maximum of 10,000,000 shares of the Company’s preferred stock with a $.001 par value. Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated .All shares of anyone series of the Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each such series, and the qualifications ,limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. No preferred shares had been issued as of September 30, 2012.
Stock Transactions:
The Company has engaged in numerous transactions whereby shares of common stock (description above) were issued in exchange for cash and/or services. The Statement of Stockholders’ Equity provides a summary of such transactions.
NOTE 7. RELATED PARTY TRANSACTIONS
As of September 30, 2012 the Company owed $164,113 to the Company’s Chief Financial Officer, a related party, for professional services. As of December 31, 2011, the Company owed $133,244 to the Company’s Chief Financial Officer for professional services and $12,689 to a supplier who is also a shareholder and related party, for a total balance of $145,933 in related party liabilities. Such debt was reflected as related party trade payables on the balance sheets, bears no interest and has no formal repayment terms.
F- 10
NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitment
The Company has defaulted on a long-term operating lease of real property previously used as a restaurant operation in Los Gatos, California. All amounts due under the lease have been recognized as a liability and included in accounts payable. The liability is reflected at $187,307 as of both September 30, 2012 and December 31, 2011.
Employment Contracts
Chief Executive Officer
Effective May 1, 2007, the Company entered into a three-year employment contract with the Chief Executive Officer (“CEO”). Terms of the agreement included annual compensation of $175,000, a potential 80% bonus, a stock award of 1,500,000 common shares, 425,000 options to purchase common stock at $.10 per share, and an additional contingent 1,000,000 shares assuming that certain operating performance metrics are achieved. The employment contract expired and has not yet been renewed as of the date of these financial statements. The CEO and the Company have continued the same compensation structure subsequent to the expiration of the employment contract.
Real Estate Option and Consulting Agreement
The Company entered into an agreement with Mary Anne’s Specialty Foods, Inc. (“Supplier”) in October 2009. Under the terms of the agreement, the Company issued the Supplier 1,500,000 warrants to purchase the Company’s common stock at a $.15 exercise price, expiring in five years, in exchange for certain real property rights to purchase and build production facilities located on property presently owned by the Supplier. The transaction was valued at $75,000 using the Black-Scholes Method. The Company also issued 1,000,000 common shares to the Supplier in exchange for a three-year real estate related consulting contract that the Company may require in subsequent years in order to build the new facility described above. The transaction was valued at $50,000, based on the $.05 per share fair value of the Company’s common shares on the date of the agreement. The values of the assets were considered impaired by Management and written off as an impairment loss at December 31, 2010.
Dispute with Contractor
Smoky Market previously retained the services of an independent financial consultant contractor (the “Contractor”). The Contractor was terminated in 2009 and Company Management believes that a settlement was agreed to between the parties. The Contractor now disputes the agreement, claiming additional amounts are owed. The Company plans to contest the Contractor’s claim, but has recognized and recorded a liability in these financial statements equal to the full amount claimed by the Contractor. The amount in dispute is $123,720 as of both September 30, 2012 and December 31, 2011.
F- 11
NOTE 9. COMMON STOCK OPTIONS AND WARRANTS
Common Stock Option Plan
The Company has reserved 6,500,000 common shares for the exercise of stock options to be issued pursuant to the 2006 Stock Option Plan. Information relating to options issued under this plan is as follows:
Options and
Stock Awards
Available
for Grant Number of
Shares Weighted
Average
Option
Exercise
Price
Outstanding as of January 1, 2012 742,500 5,757,500 $ 0.10
Shares reserved - - -
Options granted - - -
Stock awards granted - - n/a
Options exercised - - -
Options canceled - - -
Outstanding as of September 30, 2012 742,500 5,757,500 $ 0.10
The following table summarizes information about stock options outstanding and exercisable at September 30, 2012:
Stock Options Outstanding
Number of
Options
Outstanding Weighted-
Average
Remaining
Contractual
Life in Years Weighted-
Average
Exercise
Price
1,887,500 0.82 $ 0.10
Stock Options Exercisable
Number of
Options
Exercisable Weighted-
Average
Remaining
Contractual
Life in Years Weighted-
Average
Exercise
Price
1,887,500 0.82 $ 0.10
The assumptions used in computing fair value of options is as follows:
Expected stock price volatility 186.0 %
Risk-free interest rate 4.7 %
Expected term (years) 7.00
Weighted-average fair value of stock options granted $ 0.099
F- 12
Common Stock Warrants
The following is a summary of the status of all the Company’s stock warrants as of September 30, 2012:
Number
of
Warrants Weighted
Average
Exercise
Price
Outstanding, January 1, 2012 18,949,334 $ 0.10
Granted 1,937,500 0.15
Exercised - -
Cancelled - -
Outstanding, September 30, 2012 20,886,834 $ 0.10
The following table summarizes information about stock warrants outstanding and exercisable at September 30, 2012:
Stock Warrants Outstanding
Number of
Warrants
Outstanding Weighted-
Average
Remaining
Contractual
Life in Years Exercise Price
210,000 4.00 $ 0.50
1,771,834 3.59 $ 0.25
5,452,500 1.17 $ 0.15
13,452,500 3.69 $ 0.05
20,886,834
Stock Warrants Exercisable
Number of
Warrants
Exercisable Weighted-
Average
Remaining
Contractual
Life in Years Exercise Price
210,000 4.00 $ 0.50
1,771,834 3.59 $ 0.25
5,452,500 1.17 $ 0.15
13,452,500 3.69 $ 0.05
20,886,834
Warrants were valued and recorded pursuant to the Black-Scholes Method. Assumptions used were an average risk-free rate of return of .12% to .15%, average expected stock price volatility of 347%, weighted average expected term of 6.01 years, and a weighted average fair value of $.01 per warrant.
NOTE 10. SUBSEQUENT EVENTS
Management has evaluated the period subsequent to September 30, 2012 up to and including the date of the issuance of the financial statements for material subsequent events to disclose, and has determined that no such subsequent events exist
F- 13
I tem 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operation
This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend,” “expect,” “will” or similar words. These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information. When considering such forward-looking statements, you should keep in mind the risk factors noted in Part II – Other Information, “Item 1A. Risk Factors” and other cautionary statements throughout this Report and our other filings with the Securities and Exchange Commission. You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report or any other applicable filings materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.
Overview
We use proprietary, custom-engineered, USDA-approved wood-burning oven technology to produce a complete line of fully-cooked Smoke-Baked TM meat and fish, and special recipe dishes. From a 15-acre food production campus located in central Iowa and owned by our sole meat processor, Mary Ann’s Specialty Foods, Inc. (“Specialty Foods”), we are presently producing a very limited amount of our smoked food (specifically our smoked salmon) for distribution through SYSCO-Iowa and over the Internet, but intend to expand our production of additional items and grow sales into multiple channels of foodservice and retail grocery distribution principally under the Smoky Market brand. Additionally, we intend to produce certified kosher smoked foods and to distribute this line of products under the “Smoky Kosher” brand through the same marketing channels. In the future, we intend to develop a national chain of fast-casual barbecue restaurants under the name “BarBQ Diner” that would operate without having to handle and cook raw product on site.
Our focus of operations at this time is the expansion of our wholesale food service distribution through SYSCO and other large and specialty food service distributors, and to develop initial retail distribution through selected grocery chains in a limited number of regional markets. Once revenues from our primary distribution channels have gained traction, we intend to pursue development of the BarBQ Diner restaurant concept. We expect that operating dual distribution channels for our smoked foods will enable us to maximize the operating and financial efficiencies of our production capacity.
We produce our smoked foods under an agreement with Specialty Foods, a commercial meat processor in whose USDA facility we placed our first wood-burning oven system, which is capable of producing a minimum of approximately 100,000 pounds of smoked meat and fish per month. It is our intention to acquire the business and property of our processor affiliate so that we can create certain economies-of-scale relative to raw product supply cost and operating efficiencies that would result in lowering our product cost, and to create additional production space to develop our kosher food production.
We have generated net losses in each fiscal year since our inception in the development and refinements of our business model. As discussed in “Liquidity and Capital Resources” below, in June 2009 we received $1.5 million in capital financing, which we used toward debt repayment, the opening of a restaurant concept to test our food service system, and for our website to establish capability for Internet business. We are presently seeking private equity financing in the amount of $3.5 million to expand Smoky Market food service distribution and to begin sales in retail grocery sales in selected market venues. Additionally, we hope to raise up to $25 million from private financing sources of equity and debt to finance (i) the acquisition of our Iowa processor’s campus property to make the required building additions on the property for expanded production of regular and kosher food processing, (ii) to finance a national expansion of market openings for our retail brand grocery distribution, and (iii) to finance one or more acquisitions of strategic food companies for revenue growth and distribution of our products.
Liquidity and Capital Resources
As of September 30, 2012, we had cash and cash equivalents of $2,462 and a working capital deficit of $1,580,154, as compared to cash and cash equivalents of $17,614 and a working capital deficit of $1,381,738 as of December 31, 2011.
3
Given that we are not yet in a positive cash flow or earnings position, the options available to us in our efforts to secure the financing structures we propose are fewer than to a positive cash flow company and generally do not include bank financing. To raise additional capital, we expect to issue equity securities, including preferred stock, common stock, warrants and/or convertible securities. We do not have any commitments from any party to provide required capital and may or may not be able to obtain such capital on reasonable terms or at all.
In a March 2010 transaction with 70 Limited LLC, we received $150,000 in cash for a promissory note in the amount of $150,000 together with a warrant to purchase up to 450,000 shares of our common stock. Under the terms of the promissory note, we were obligated to make payment on the full principal amount, plus interest accruing at 10% per year, by March 5, 2011, and we could prepay any amount of principal or interest at any time without penalty.
In August 2010, the Company and 70 Limited LLC agreed to refinance the note. Pursuant to the agreement, both loans were combined, along with accrued interest, forming a new loan with a maturity date of August 18, 2020. The note will accrue interest at a 10% annual rate until repaid. Prior warrants were revised to allow for exercise at $.05 per warrant as opposed to the previous $.15. The term for exercising the warrants was adjusted to ten years as opposed to five years on the cancelled warrants. The new warrants were valued based on the Black-Scholes method using a risk-free rate of return of .15% and volatility of 347%.
In July 2011, we entered into a Purchase and Lease Agreement (the “Sale/Lease Agreement”) with SMKY Asset Fund LLC (the “Lessor”) related to our smoker-oven system. Pursuant to the Sale/Lease Agreement, we sold the smoker-oven system to the Lessor for a purchase price equal of $240,000. In addition, we are required to issue to Lessor a warrant to purchase a share of common stock for each $1.00 in purchase price paid. The warrant has an exercise price of $0.50 per share, a five-year term and includes net exercise provisions. We leased back the smoker-oven system for rent equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000. The Sale/Lease Agreement has a 10-year term, provided that we may repurchase the smoker-oven system at any time after July 25, 2014 that the market price for our common stock has exceeded $0.50 for thirty trading days. The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000.
In October and December 2011, the Company received an aggregate of $77,500 in cash from Asher Enterprises, Inc. in return for two promissory notes in the amounts of $42,500 and $35,000, respectively. The notes accrued interest at an annual rate of 8% until repaid and carried a maturity date of July 11, 2012 and September 15, 2012, respectively. The notes were converted into shares of our common stock in July and September 2012 at conversion prices equal to a discount of 45% to the then current market price. In 2012 the Company has further received an aggregate of $175,000 in cash from Asher in return for five promissory notes in various amounts. The first of these was converted into shares of our common stock in September 2012 at a conversion price equal to a discount of 45% to the then current market price. The remaining notes are in the principal amounts of $32,500, $32,500, $32,500, and $40,000 and are due February 4, 2013, April 12, 2013, May 14, 2013, and June 8, 2013, respectively. These notes accrue interest at an annual rate of 8% until repaid and are also convertible into shares of our common stock.
During the first nine months of 2012, principal uses of cash were approximately $220,000 to finance operating losses.
There are no expected capital expenditures during the last quarter of 2012.
Assuming the success of our wholesale food service and retail grocery distribution operations, which are expected to fully utilize our existing production capacity, we anticipate the need to invest as much as $5 million to create additional production capacity, which would be accomplished through our acquisition of Specialty Foods as intended. This will require the construction of an additional building adjacent to Specialty Food’s existing production space for more ovens and packaging equipment, as well as the remodeling of a second building on site to create space for kosher food production. We currently have an agreement with Specialty Foods under which we are granted the option to acquire its 15-acre campus property and make the required building additions (subject to an obligation to lease back to Specialty Foods its processing facility). We anticipate that the financing to pay for the proposed acquisition and property improvements will be generated from a combination of financing transactions involving equity and debt securities. If we are unable to obtain financing to construct the building addition as planned, we will be forced to significantly curtail our proposed expansion, and our ability to grow revenue will be halted until increased capacity can be created.
4
Results of Operations
We experienced decreases in general and administrative expenses during the three-month period ending September 30, 2012 as compared to the comparable period ending September 30, 2011. We experienced sales and operating costs during the three-month period ending September 30, 2012, whereas we experienced no sales and operating costs during the same period in 2011. Additionally, we experienced decreases in general and administrative expenses during the nine-month period ending September 30, 2012 as compared to the same period in 2011. We experienced sales and operating costs during the nine-month period ending September 30, 2012, whereas we experienced no sales and operating costs during the same period in 2011. The changes in revenues and expenses are summarized and discussed in the table below and in the discussion that follows.
Revenues and Expenses . Our operating results for the three-month and nine-month periods ended September 30, 2012 and the comparable periods in 2011 are summarized as follows:
For the three-month period ended For the nine-month period ended
September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011
Sales $ 3,474 - $ 11,561 -
Cost of Sales $ 1,031 - $ 2,591 -
Gross Profit (Loss) $ 2,443 - $ 8,970 -
General & Administrative Expenses
Salaries, Wages & Benefits $ 68,058 $ 51,882 $ 190,806 $ 150,222
Professional Fees $ 25,965 $ 52,821 $ 116,766 $ 55,213
Marketing $ 9,902 $ 55,312 $ 16,388 $ 60,871
Depreciation/amortization $ 48,875 $ 14,949 $ 128,073 $ 42,638
Rent $ 2,223 $ 1,440 $ 7,266 $ 4,260
Stock based compensation
Salaries, Wages & Benefits – related parties $ 6,664 $ 150,671 $ 19,992 $ 181,212
Professional $ 2,257 $ 179,992 $ 2,257 $ 179,992
Financing $ 10,462 $ 72,286 $ 58,259 $ 411,444
Other $ 27,042 $ 39,385 $ 64,454 $ 56,978
Operating Loss $ (199,005 ) $ (618,739 ) $ (595,291 ) $ (1,142,830 )
Other (Expense) $ (65,934 ) $ (67,002 ) $ (198,710 ) $ (274,925 )
Net (Loss) $ (264,939 ) $ (685,740 ) $ (794,001 ) $ (1,417,755 )
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011
We had no sales or costs or sales for the three-month periods ended September 30, 2011. Consequently, we had no operating loss during these periods. We had sales of $3,474 and cost of sales of $1,031 during the quarterly period ended September 30, 2012. Consequently, we had gross profit of $2,443 during that period.
Our total general and administrative expenses decreased by $417,290, from $618,738 in the three-month period ended September 30, 2011 to $201,448 in the same period in 2012. The decrease in general and administrative expenses was due primarily to decreases in professional fees, marketing expenses, stock-based compensation, and other expenses, as described below.
Professional fees decreased by $26,856, from $52,821 in the three-month period ended September 30, 2011 to $25,965 in the same period in 2012, due primarily to higher costs incurred in the 2011 period to become current in government reporting and compliance obligations, with no corresponding costs required in 2012. Marketing expenses decreased by $45,410, from $55,312 in the three-month period ended September 30, 2011 to $9,902 in the same period in 2012, due primarily to higher costs in the 2011 period for a new website as compared to the 2012 website costs. Stock-based compensation related to salaries, wages and benefits decreased by $144,007, from $150,671 in the three-month period ended September 30, 2011 to $6,664 in the same period in 2012, due primarily to warrants provided to corporate officers in the 2011 period in lieu of cash compensation with no corresponding warrants in the 2012 period. Stock-based compensation related to professional fees decreased by $177,735, from
5
$179,992 in the three-month period ended September 30, 2011 to $2,257 in the same period in 2012, due primarily to warrants provided to contract corporate officers in lieu of cash compensation in the 2011 period with no corresponding warrants in the 2012 period. Stock-based compensation related to financing activities decreased by $61,824, from $72,286 in the three-month period ended September 30, 2011 to $10,462 in the same period in 2012, due primarily to warrants given to individuals who advanced funds to the Company during the 2011 period with no corresponding warrants in the 2012 period. Other expenses decreased by $12,343, from $39,385 in the three-month period ended September 30, 2011 to $27,042 in the same period in 2012, due primarily to lower travel costs in the 2011 period as compared to the 2012 period.
The decreases in expenses described in the previous paragraph were partially offset by increases in expenses relating to salaries, wages and benefits, and in depreciation and amortization expenses. Expenses relating to salaries, wages and benefits increased by $16,176, from $51,882 in the three-month period ended September 30, 2011 to $68,058 in the same period in 2012, due primarily to an increase in plant workers in Iowa in the 2012 period employed for food production . Depreciation and amortization expenses increased by $33,926, from $14,949 in the three-month period ended September 30, 2011 to $48,875 in the same period in 2012, due primarily to additional amortization on new loan discounts in the 2012 period. Overall, the increases in expenses relating to salaries, wages and benefits, and depreciation and amortization expenses were not as great as the decreases in the expenses described in the previous paragraph.
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND SEPTEMBER 30, 2011
We had no sales or costs of sales for the nine-month period ended September 30, 2011. Consequently, we had no operating loss during that period. For the nine-month period ended September 30, 2012, we had $11,561 in sales and $2,591 in costs of sales. Consequently, our gross profit for the nine-month period ended September 30, 2012 was $8,970.
Our total general and administrative expenses decreased by $538,569, from $1,142,830 in the nine-month period ended September 30, 2011 to $604,261 in the same period in 2012. The decrease in general and administrative expenses was due primarily to decreases in marketing expenses and stock-based compensation, as described below.
Marketing expenses decreased by $44,483, from $60,871 in the nine-month period ended September 30, 2011 to $16,388 in the same period 2012, due primarily to website costs incurred in the 2011 period with no corresponding costs in the 2012 period. Stock-based compensation related to salaries, wages and benefits decreased by $161,220, from $181,212 in the nine-month period ended September 30, 2011 to $19,992 in the same period in 2012, due primarily to the issuance of 1,750,000 shares of common stock to the CEO in the 2011 period with no corresponding issuance in the 2012 period. Stock-based compensation related to professional fees decreased by $177,735, from $179,992 in the nine-month period ended September 30, 2011 to $2,257 in the same period in 2012, due primarily to stock warrants given to professional service provides in the 2011 period with no concurrent warrants being given in the 2012 period. Stock-based compensation related to financing activities decreased by $353,185, from $411,444 in the nine-month period ended September 30, 2011 to $48,259 in the same period in 2012, due primarily to fewer warrants being issued as compensation for advances in the 2012 period.
The decreases in general and administrative expenses described in the previous paragraph were partially offset by increases in expenses related to salaries, wages and benefits, professional fees, and depreciation and amortization expenses. Expenses relating to salaries, wages and benefits increased by $40,584, from $150,222 in the nine-month period ended September 30, 2011 to $190,806 in the same period in 2012, due primarily to the Company resuming operations and paying production staff. Professional fees increased by $61,553, from $55,213 in the nine-month period ended September 30, 2011 to $116,766 in the same period in 2012, due primarily to the Company incurring increased costs in the 2012 period to stay current on government reporting and compliance obligations whereas such costs were lower in the 2011 period. Depreciation and amortization expenses increased by $85,435, from $42,638 in the nine-month period ended September 30, 2012 to $128,073 in the same period in 2012, due primarily to the amortization of loan discounts on loans incurred in late 2011 and in the first half of 2012. Overall, these increases were not as great as the decreases in the general and administrative expenses described in the previous paragraph.
6
Working Capital . Our working capital as of September 30, 2012 and as of December 31, 2011 are summarized in the table below.
As of
September 30, 2012 December 31, 2011
Current Assets
Cash $ 2,462 $ 17,614
Inventory $ 14,868 $ 16,816
Total Current Assets $ 17,330 $ 34,430
Current Liabilities
Accounts payable $ 523,917 $ 524,338
Accounts payable – related parties $ 164,113 $ 145,933
Due to employees $ 733,549 $ 602,489
Short-term advances $ 87,700 $ 94,700
Convertible debt $ 88,205 $ 48,708
Total Current Liabilities $ 1,597,484 $ 1,416,168
Working Capital (Deficit) $ (1,508,154 ) $ (1,381,738 )
Our working capital deficiency increased by $198,416, from $1,381,738 at fiscal-year end 2011 to $1,580,154 as of September 30, 2012. The increase in our working capital deficiency was primarily due to an increase of $18,180 in accounts payable to related parties, an increase of $131,060 in amounts due to employees, and an increase of $39,497 in convertible debt.
Cash Flows . Our cash flows for the nine-month periods ended September 30, 2012 and the comparable period in 2011 are summarized as follows:
For the nine-Month
Periods Ended
September 30, 2012 September 30, 2011
Net Cash Provided (Used) by Operating Activities $ (218,251 ) $ (255,221 )
Net Cash Provided (Used) by Investing Activities - $ (3,017 )
Net Cash Provided (Used) by Financing Activities $ 203,099 $ 325,950
Net Increase (Decrease) in Cash $ (15,152 ) $ 67,712
Cash, Beginning of Period $ 17,614 $ 10
Cash, End of Period $ 2,462 $ 67,722
We utilized less cash in our operating activities in the nine-month period ended September 30, 2012, from $255,221 in the nine-month period ended September 30, 2011 to $218,251 in the same period in 2012, primarily due to a larger loss from operations (after adding back non-cash expenses such as accrued interest and stock based compensation) in the 2011 period. Our investing activities utilized $3,017 in cash during the nine-month period ended September 30, 2011, compared to $0 in cash in the same period in 2012, primarily due to the refund of previous deposits in the nine-month period ended September 30, 2011 with no corresponding activity in 2012. We generated less cash from financing activities, from $325,950 provided during the nine-month period ended September 30, 2011 to $203,099 cash provided during the same period in 2012, primarily due to less cash advances received during the 2012 period.
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. In addition to historical information, the information in this prospectus contains forward looking statements about our future business and performance. Our actual operating results and financial performance may be different from what we expect as of the date of this prospectus. The risks described in this prospectus represent the risks that management has identified and determined to be material to our company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially harm our business operations and financial condition
(0)
(0)Scroll down for more posts ▼