UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 333-111486
DAIRY FRESH FARMS INC.
(Name of small business issuer in its charter)
Nevada | 98-0407549 |
(State or other jurisdiction of incorporation) | (I.R.S.Employer identification No.) |
413 Churchill Avenue N. Ottawa, Ontario, Canada K1Z 5C7
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(Address of principal executive offices)
Tel: 613-724-2484
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
(Title of Class)
Check whether the issuer: (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes x No ¨
As of November 15, 2006, there were 19,378,049shares of the registrant's common stock outstanding.
Transitional Small Business Disclosure Format (check one) Yes ¨ No x
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o; No x
DAIRY FRESH FARMS INC.
Part I. Financial Information | Page |
Item 1. Financial Statements: | |
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005 | 4 |
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 | 5 |
Unaudited Condensed Consolidated Balance Sheets as at September 30, 2006 and December 31, 2005 | 6 |
Unaudited Notes to Condensed Consolidated Financial Statements | 7 |
Item 2. Management's Discussion and Analysis or Plan of Operations | 14 |
Item 3. Controls and Procedures | 22 |
Part II. Other Information | |
Item 1. Legal Proceedings | 22 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
Item 3. Defaults upon Senior Securities | 23 |
Item 4. Submission of Matters to a Vote of Security Holders | 23 |
Item 5. Other Information | 23 |
Item 6. Exhibits | 23 |
Signatures | 24 |
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PART I FINANCIAL INFORMATION
General
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flow, and stockholders’ deficit in conformity with generally accepted accounting principles in the United States of America. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2005. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. The December 31, 2005 consolidated condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. Operating results for the quarter ended September 30, 2006 are not necessarily indicative of the results that can be expected for the full year ending December 31, 2006.
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Unaudited Condensed Consolidated Statements of Operations
Expressed in U.S. Dollars
Three months | Three months | Nine months | Nine months | ||||||||||
ended | ended | ended | ended | ||||||||||
September | September | September | September | ||||||||||
30, 2006 | 30, 2005 | 30, 2006 | 30, 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
Revenues | - | 44,900 | - | 118,831 | |||||||||
Operating expenses | |||||||||||||
Freight and product costs | - | 17,266 | 1,234 | 38,359 | |||||||||
Advertising and product support | 834 | 258,217 | 17,617 | 642,316 | |||||||||
Depreciation of property and equipment | 1,029 | 1,119 | 3,058 | 3,275 | |||||||||
Finder’s fee for reverse takeover transaction | - | - | - | 100,000 | |||||||||
Interest and bank charges, net | 1,845 | 4,020 | 7,850 | 4,660 | |||||||||
Management fees | 87,302 | 106,815 | 272,602 | 301,081 | |||||||||
Office | 3,882 | 5,571 | 8,076 | 16,890 | |||||||||
Professional fees | 63,159 | 72,685 | 148,744 | 164,014 | |||||||||
Rent | 4,267 | 2,515 | 12,584 | 9,628 | |||||||||
Telecommunications | 3,044 | 3,528 | 11,213 | 10,679 | |||||||||
Travel | 38,462 | 28,311 | 84,965 | 79,871 | |||||||||
203,824 | 500,047 | 567,943 | 1,370,773 | ||||||||||
Net loss | (203,824 | ) | (455,147 | ) | (567,943 | ) | (1,251,942 | ) | |||||
Basic and diluted loss per share | (0.01 | ) | (0.03 | ) | (0.04 | ) | (0.10 | ) | |||||
Weighted number of shares outstanding | 15,681,792 | 14,127,500 | 15,674,195 | 13,015,717 |
4
Unaudited Condensed Consolidated Statements of Cash Flows
Expressed in U.S. Dollars
Nine months | Nine months | ||||||
ended | ended | ||||||
September | September | ||||||
30, 2006 | 30, 2005 | ||||||
$ | $ | ||||||
OPERATING ACTIVITIES | |||||||
Net loss | (567,943 | ) | (1,251,942 | ) | |||
Non-cash items: | |||||||
Depreciation of property and equipment | 3,058 | 3,275 | |||||
Finders fee for reverse takeover transaction | - | 100,000 | |||||
Issuance of shares in exchange for services | 26,250 | - | |||||
Changes in working capital items: | |||||||
Accounts receivable | (17,955 | ) | (39,238 | ) | |||
Prepaid expenses | (58,616 | ) | (25,278 | ) | |||
Accounts payable and accrued liabilities | (48,399 | ) | 281,131 | ||||
Management contracts payable | 226,484 | 104,457 | |||||
Cash flows used in operating activities | (437,121 | ) | (827,595 | ) | |||
INVESTING ACTIVITIES | |||||||
Purchase of property and equipment and cash flows | |||||||
used in investing activities | - | (10,529 | ) | ||||
FINANCING ACTIVITIES | |||||||
Issuance of convertible debt | 923,356 | 788,663 | |||||
Proceeds from notes payable | 88,637 | - | |||||
Cash flows provided by financing activities | 1,011,993 | 788,663 | |||||
Effect of changes in exchange rates on cash | 5,866 | 701 | |||||
Net increase (decrease) in cash | 580,738 | (48,760 | ) | ||||
Cash, beginning of period | 12,976 | 90,578 | |||||
Cash, end of period | 593,714 | 41,818 | |||||
Non-cash financing transactions: | |||||||
Issuance of shares to settle accounts payable | 13,010 | - | |||||
Issuance of convertible debt to settle management fees payable | 48,750 | - |
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Unaudited Condensed Consolidated Balance Sheets
Expressed in U.S. Dollars
September | December | ||||||
30, 2006 | 31, 2005 | ||||||
ASSETS | $ | $ | |||||
Current assets | |||||||
Cash | 593,714 | 12,976 | |||||
Accounts receivable, net | 83,441 | 61,675 | |||||
Prepaid expenses | 59,618 | 387 | |||||
736,773 | 75,038 | ||||||
Property and equipment, net | 11,042 | 13,571 | |||||
747,815 | 88,609 | ||||||
LIABILITIES | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | 312,914 | 360,903 | |||||
Management contracts payable | 700,966 | 500,704 | |||||
Convertible debenture loans | 982,029 | - | |||||
Notes payable | 89,542 | - | |||||
2,085,451 | 861,607 | ||||||
SHAREHOLDERS' DEFICIENCY | |||||||
Common shares, $0.001 par value, voting, 75,000,000 authorized shares, 15,681,792 shares issued and outstanding as of September 30, 2006 and 15,620,792 shares as of December 31, 2005 | 2,377 | 2,316 | |||||
Contributed surplus | 1,581,094 | 1,541,895 | |||||
Accumulated comprehensive loss | (143,577 | ) | (107,622 | ) | |||
Deficit | (2,777,530 | ) | (2,209,587 | ) | |||
(1,337,636 | ) | (772,998 | ) | ||||
747,815 | 88,609 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Dairy Fresh Farms Inc. (“Dairy Fresh” or the “Company”) and its subsidiaries have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the latest annual report on Form 10-KSB. These statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2005 and, in the opinion of management, include all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company. The December 31, 2005 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.
2 - COMPANY BACKGROUND AND LIQUIDITY
COMPANY BACKGROUND
The Company was incorporated under the name of Northwest Horizon Corporation in the State of Nevada, United States of America on February 5, 2003. The name was changed to Dairy Fresh Farms Inc. on August 11, 2005.
The Company was in the development stage until January 1, 2005. The Company originally intended to establish itself as a transportation broker specializing in trucking as the efficient mode of transporting both raw materials and finished products to their destination. On December 17, 2004 the Board of Directors passed a resolution indicating that the Company would be unable to raise the necessary funds to proceed with this original plan.
On March 3, 2005, the Company merged via a reverse takeover with Dairy Fresh Technologies Ltd. Dairy Fresh Technologies Ltd. was incorporated under the Canada Business Corporations Act on May 14, 2002 to develop and exploit a unique patented dairy process in Canada. This patent, "Dairy Fresh Farms ™" produces monounsaturated-enhanced dairy products. Dairy Fresh Technologies Ltd. was also in the development stage until January 1, 2005.
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
2 - COMPANY BACKGROUND AND LIQUIDITY (continued)
LIQUIDITY
The Company has incurred a net loss of $203,824 and $567,943 during the three and nine months ended September 30, 2006. In addition, the Company generated negative cash flows from operations of $437,121 for the nine months ended September 30, 2006 and has generated negative cash flows from operations since inception. As at September 30, 2006, the Company had a working capital deficiency of $1,348,678 ($786,569 - December 31, 2005) and a shareholders’ deficiency of $1,337,636 ($772,998 - December 31, 2005).
The auditors’ report on the Company’s consolidated financial statements as of December 31, 2005 states that the net loss incurred during the year ended December 31, 2005, the accumulated deficit as of that date and the other factors described in Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005 raise substantial doubt about the Company’s ability to continue as a going concern. The auditors’ report on the Company’s financial statements for the year ended December 31, 2004 contained a similar statement. The consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Management plans to address these issues by continuing to seek new financing, reducing expenses and renegotiating the repayment terms of its accounts payable and accrued liabilities. The Company’s ability to continue as a going concern is subject to management’s ability to successfully implement the above plans. Failure to implement these plans could have a material adverse effect on the Company’s position and/or results of operation and may necessitate a reduction in operating activities. These condensed consolidated financial statements do not include adjustments that may be required if the assets are not realized and the liabilities settled in the normal course of operations.
In the longer term, the Company has to generate the levels of revenue which would result in cash sufficiency and it may need to continue to raise capital by selling additional equity or by obtaining credit facilities. No assurance can be given that any such financing will be available or that, if available, it can be obtained on terms favorable to the Company.
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
3 - RELATED PARTY TRANSACTIONS
The Company entered into the following related party transactions. These transactions were concluded in the normal course of operations at the exchange amount, which is the amount established and accepted by the parties.
Three months ended September 30, 2006 | Three months ended September 30, 2005 | Nine months ended September 30, 2006 | Nine months ended September 30, 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
Expenses: | |||||||||||||
Management fees (a) | 87,302 | 106,815 | 272,602 | 301,081 | |||||||||
Bookkeeping fees (b) | 2,278 | 2,278 | 4,778 | 11,474 |
Amounts due to and due from related parties: | September 30, 2006 | December 31, 2005 | |||||
$ | $ | ||||||
Management fees payable (a) | 700,966 | 500,704 | |||||
Bookkeeping fees payable (b) | 2,278 | 2,175 | |||||
Amount due from companies under common control (c) | 11,186 | 8,827 | |||||
Notes payable to related parties (d) | 26,862 | - | |||||
Amount due to a company under common control (e) | 6,982 | 6,705 | |||||
Convertible debt (f) | 49,248 | - |
(a) During the three and nine months periods ended September 30, 2006 and September 30, 2005, the Company engaged the management services of four companies controlled by officers of the Company.
(b) During the three and nine months periods ended September 30, 2006 and September 30, 2005, the Company engaged the bookkeeping services of a firm controlled by an officer of the Company.
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
3 - RELATED PARTY TRANSACTIONS (continued)
(c) The Company paid legal expenses for Dairy One Technologies Limited and Purple Cow Investments Inc., companies under common control, during the year ended December 31, 2005 and nine months ended September 30, 2006 resulting in the above amount receivable from companies under common control. The legal fees paid during the three and nine months ended September 30, 2006 are $Nil and $1,907, respectively. There were no legal fees paid during the three and nine months ended September 30, 2005.
(d ) The Company issued $26,862 of 5% promissory notes to an officer of the Company during the nine month period ended September 30, 2006. The notes are repayable when a major financing is completed.
(e) The Company incurred royalty expense to Dairy One Technologies Limited, a company under common control, in the amount of $6,705 during the year ended December 31, 2005. The amount payable as at September 30, 2006 is $6,982 (December 31, 2005 - $6,705). The Company expensed $nil in the three and nine months ended September 30, 2006 and $3,332 and $7,829 in the three and nine months ended September 30, 2005, respectively.
(f) In August 2006, the Company issued convertible debt to its Chief Executive Officer as payment of management fees payable.
4 - CONVERTIBLE DEBENTURE LOANS
Convertible debenture loans are unsecured and were repayable on or before September 15, 2006 with 10% interest if the Company did not withdraw its SB-2 registration statement. Loans are automatically converted into units of the Company upon the Company completing or withdrawing its current SB-2 registration statement and raising $1 million. The conversion of the loan will be performed at $0.70 per share into common shares of the Company and warrants exercisable over a period of 24 months at $0.75 per share.
5 - NOTES PAYABLE
Notes payable bear interest at 5%, are unsecured and repayable when a major financing is completed.
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
6 - LOSS PER SHARE
For the purpose of the loss per share computation, the weighted average number of common shares outstanding has been used. Had the treasury stock method been applied to the unexercised share warrants, the effect on the loss per share would be anti-dilutive.
The total warrants outstanding at September 30, 2006 and December 31, 2005 were 2,220,792 and 2,220,792, respectively.
7 - SHAREHOLDERS’ EQUITY
In February 2006, 26,000 common shares were issued as payment for professional fees incurred in the year ended December 31, 2005, valued at $0.50 per share which represents the fair value of the Company’s share when the services were completed. The excess in the par value is recorded in contributed surplus.
In February 2006, the Company issued 35,000 common shares in exchange for professional fees incurred during the first quarter of 2006. The shares were valued at $0.75 per share which represents the fair value of the Company’s share when the services were completed. The excess in the par value is recorded in contributed surplus.
8 -COMPREHENSIVE LOSS
Comprehensive loss includes changes in the balances of items that are reported directly in a separate component of shareholders’ equity in the Company’s unaudited condensed consolidated balance sheets. The components of comprehensive loss are as follows:
Three months ended September 30, 2006 | Three months ended September 30, 2005 | Nine months ended September 30, 2006 | Nine months ended September 30, 2005 | ||||||||||
$ | $ | $ | $ | ||||||||||
Net loss as reported | (203,824 | ) | (455,147 | ) | (567,943 | ) | (1,251,942 | ) | |||||
Foreign currency translation adjustment | (3,208 | ) | (46,342 | ) | (35,955 | ) | (52,465 | ) | |||||
Comprehensive loss | (207,032 | ) | (501,489 | ) | (603,898 | ) | (1,304,407 | ) |
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
9 - SUBSEQUENT EVENTS
Subsequent to September 30, 2006, the Company converted the outstanding debentures to common shares. This resulted in the Company issuing 1,428,573 common shares and 714,286 warrants.
Subsequent to September 30, 2006, the Company issued 1,767,684 common shares to the companies controlled by the officers of the Company as settlement of management fees payable amounting to $470,881.
Subsequent to September 30, 2006, the Company issued 500,000 common shares as payment for investor relations services valued at $0.25 per share.
10 - NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation 48
In June 2006, FASB Interpretation 48 “Accounting for Uncertainty in Income Taxes” was issued which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de−recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
This Interpretation is effective for fiscal years beginning after December 15, 2006, and earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The Company has not yet determined the impact of FASB Interpretation 48 on its financial statements.
SFAS No. 156
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Instruments - an Amendment of SFAS No. 140” (“SFAS 156”). This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS 156 will have a material impact on its consolidated financial position, results of operations or cash flows.
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Dairy Fresh Farms Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Expressed in U.S. Dollars
(Unaudited)
10 - NEW ACCOUNTING PRONOUNCEMENTS (continued)
SFAS 157
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company does not expect the adoption of SFAS 157 will have a material impact on its consolidated financial position, results of operations or cash flows.
SAB 108
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement ("rollover") and balance sheet ("iron curtain") approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company has determined that there will be no impact to the financial statements upon the adoption of this bulletin.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operation contains various "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10−QSB, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates", "believes", "plans", "expects", "future" and similar statements or expressions, identify forward looking statements. Any forward looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those set forth therein.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Company’s consolidated condensed financial statements included herein. Further, this quarterly report on Form 10−QSB should be read in conjunction with the Company’s consolidated financial statements and notes to consolidated financial statements included in its 2005 Annual Report on Form 10−KSB. In addition, you are urged to read this report in conjunction with the risk factors described herein.
BACKGROUND
This discussion and analysis of financial position and results of operations is prepared as at September 30, 2006 and should be read in conjunction with the condensed consolidated financial statements for the three and nine months ended September 30, 2006. These condensed consolidated financial statements have been prepared using the generally accepted accounting principles in the United States of America on the same basis as the audited consolidated financial statements for the year ended December 31, 2005 and, in the opinion of management, include all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company.
Company’s overview
Dairy Fresh Farms Inc. (“Dairy Fresh” or the “Company”) and its wholly owned subsidiary, Dairy Fresh Technologies Ltd., have the exclusive license in Canada to develop and exploit the patented formula for a healthy milk based product ”Dairy Fresh Farms”. The Company launched a test trial of 2-liter regular milk and a 1-liter lactose free product with Canada Safeway stores in Western Canada during the period of January 2005 to December 2005.
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The Company will launch an expanded product line and in Ultra High Temperature (UHT) form when planned financing as discussed under “Liquidity and Capital Resources” is completed. Consequently there were no revenues in the three and nine months ended September 30, 2006.
Dairy Fresh Farms is an all natural process resulting in a healthier milk based product which is low in cholesterol, trans fat free, lactose free, low in saturated fat, 99% fat free and has high levels of omega 6 and 3 and monounsaturated fat enhanced without compromising great taste.
Critical accounting policies and estimates
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires application of management’s subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in the subsequent periods. Our actual results may differ substantially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to the consolidated financial statements included in the Form 10-KSB for the year ended December 31, 2005, we believe that the following accounting policies require the application of significant judgments and estimates.
Revenue recognition
The Company had entered into a co-packing agreement with a supplier. Under the terms of this agreement, the supplier manufactures the dairy products per the specifications and instructions of the Company and ships directly to the retailer. The supplier invoices and collects directly from the retailer. The supplier subtracts its manufacturing cost and markup, as well as freight and submits the net amount to the Company.
The Company records the revenue on a net basis in compliance with EITF 99-19, “Reporting Revenues Gross as a Principle versus Net as an Agent”. This is because the Company is not the primary obligor in the arrangement, as it relies on the supplier to provide the goods. Also, the Company has limited liability to assume risk of non-payment by its retailers.
The Company also records its revenue in accordance with SAB 104 which requires that four basic criteria must be met before revenue can be recognized (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the fee is fixed and determinable; and (iv) collectibility is reasonably assured.
The Company recognizes revenue when the product is shipped from the supplier.
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Plan of operation
The plan of operation for the Company was developed over a three-year period. Management started by studying the Australian experience as it related to the Canadian marketplace. Significant sales numbers had been delivered out of Sydney, Australia but with both market changes and potential differing Canadian tastes management decided to take another approach to tackling the Canadian market. Camelford Graham Research Group undertook an independent market research study. This study was conducted in Vancouver, British Columbia and Montreal, Quebec. The results from the study were published in December 2003 with resulting findings focusing our operations on several very important areas.
First, the size of the opportunity was much larger than originally anticipated due to the intent to purchase numbers that resulted from this study. This meant that management had to revise the packing sizes for the Dairy Fresh Farms upwards to accommodate the anticipated demand.
Second, the study directed management to launch in Western Canada as a first step into the rest of the country. It was perceived that the logistics and more importantly the market reception would be very favorable with a product launch in the West. This decision was also reinforced with the effort and support that Canada Safeway stores and their manufacturing division Lucerne Foods gave our group with initial manufacturing test runs and distribution expertise.
Finally, it was felt that perfecting the launch strategy in Western Canada would give Dairy Fresh Farms a strong base of operations prior to moving into the much larger and diverse markets of both Ontario and Quebec.
The most significant conclusion from our test launch with Canada Safeway/Lucerne was the need to produce the product in Ultra High Temperature (UHT) format, which will provide extended shelf life to approximately 45 days. This is necessary to build brand awareness with the customers during the early stages of growth and allow sufficient distribution time, as the product is rolled out to other retailers. Otherwise the Company would need to spend excessive amounts on marketing and in store demos in order to move the product on a timely basis.
We finished our test launch in December 2005. When financing is completed, we will resume our production and distribution plan for Western Canada and the rest of Canada.
With the completion of our $1 million financing we intend to focus our sales and marketing efforts over the next 12 months primarily on expanding our distribution and retail share in Western Canada. We are continuing to raise funds for the growth of our distribution and retail share in the rest of Canada. In such event, if we are unable to raise additional funds on a timely basis or at all, any progress with respect our products and, therefore, our potential revenues would be adversely affected.
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RESULTS OF OPERATIONS
Fluctuations in operating results
Our results of operations have fluctuated significantly from period to period and are likely to continue to do so in the future. We anticipate that our annual results of operations will be impacted for the foreseeable future by several factors including the progress and timing of expenditures related to product launches. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.
Revenues
The Company’s two-litre regular milk product was listed with 134 Canada Safeway stores and the one litre lactose free product was listed with all 204 Safeway stores on January 12, 2005 and ended on December 10, 2005. These stores are all located in the western provinces of Canada. As a result of the trial period ending there were no sales in the three and nine months ended September 30, 2006.
OPERATING EXPENSES
Advertising and product support
With the launch of the Company’s initial two products there was a marketing program established to support sales in the three and nine months ended September 30, 2005. The majority of the focus was on in-store demos. With the products off shelves, there was little in the way of initiatives in this advertising and product support in the three and nine months ended September 30, 2006.
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Finder’s fee
As part of the reverse takeover transaction in March 2005, the Company issued 1,500,000 fully paid common shares as a finder’s fee to the Company’s advisor.
Management fees
Management fees decreased about 7% from the quarter ended June 30, 2006 with no changes to the management structure. Certain of the senior management team have temporarily reduced their compensation to preserve cash.
Professional fees
Professional fees in the quarter ended September 30, 2006 include an investment in licensing strategies in the Middle East and are consistent with the previous period.
Travel
Travel costs were at $38,462 for the quarter ended September 30, 2006. Travel costs increased during the quarter ended September 30, 2006 due to senior management maintaining a presence for financing and business activity in Western Canada and Frankfurt Germany where the Company is listed.
Off-Balance Sheet Arrangements
The Company did not engage in any off-balance sheet arrangements during the quarter.
New Accounting Pronouncements
FASB Interpretation 48
In June 2006, FASB Interpretation 48 “Accounting for Uncertainty in Income Taxes” was issued which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de−recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
This Interpretation is effective for fiscal years beginning after December 15, 2006, and earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. The Company has not yet determined the impact of FASB Interpretation 48 on its financial statements.
SFAS No. 156
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Instruments - an Amendment of SFAS No. 140” (“SFAS 156”). This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS 156 will have a material impact on its consolidated financial position, results of operations or cash flows.
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SFAS 157
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company does not expect the adoption of SFAS 157 will have a material impact on its consolidated financial position, results of operations or cash flows.
SAB 108
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement ("rollover") and balance sheet ("iron curtain") approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company has determined that there will be no impact to the financial statements upon the adoption of this bulletin.
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Liquidity and Capital Resources
At September 30, 2006, we have an accumulated deficit of $2,777,530 and we expect to incur additional losses in the short term at least until such time, if ever, that our products are manufactured and marketed profitably. We have financed our operations since inception primarily through the private placements of equity and debt securities. From our inception through September 30, 2006, we have received net proceeds of approximately $1,943,000 from private sales of our convertible debentures. We have been able to reduce our cash requirements with the deferral of management contracts of $700,966. The payment terms have not been defined for these management contracts.
At September 30, 2006, we have $593,714 in cash. Net cash used in operating activities was $437,121 for the nine months ended September 30, 2006 compared to $827,595 for the nine months ended September 30, 2005. The decrease in net cash used in operations in primarily due to a lower level of activity.
Net cash provided by financing activities was $1,011,993 for the nine months ended September 30, 2006 compared to $788,663 for the nine months ended September 30, 2005. The net cash provided by financing activities in the nine months ended September 30, 2006 was due to the net proceeds of $88,637 raised in a private note payable and $923,356 raised via an issuance of debt convertible to common shares.
We expect to put our current capital resources to the following uses:
- | for the marketing and sales of our products; |
- | to continue our product line expansion; |
- | for working capital purposes, including for additional salaries and wages as our organization grows and as we expand our presence in the Canadian Market and for additional professional fees and expenses and other operating costs. |
With the completion of our $1 million financing we intend to focus our sales and marketing efforts over the next twelve months on expanding our distribution and retail share in the Western Canadian marketplace. We are continuing our financing efforts for the expansion of our retail and distribution in the rest of the Canadian marketplace. In such event, if we are unable to raise additional funds on a timely basis or at all, any progress with respect to our products and, therefore, our potential revenues, would be adversely affected.
In the event that our plans change, our assumptions change or prove inaccurate, or if our existing cash resources, together with other funding resources including anticipated sales of our products, otherwise prove to be insufficient to fund our operations, we could be required to seek additional financing. We have no current arrangements with respect to sources of additional financing.
The condensed consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations.
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If the Company was not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying values reflected in the condensed consolidated financial statements. As described elsewhere in this report, at September 30, 2006, there are certain conditions that currently exist which raise substantial doubt about the validity of this assumption. While the Company anticipates raising additional private placement funds to remove the substantial doubt, these private placements are not assured. Failure to raise additional funds may result in the Company curtailing operations or writing assets and liabilities down to liquidation values, or both.
The auditors’ report on the Company’s consolidated financial statements as of December 31, 2005 states that the net loss incurred during the year ended December 31, 2005, the accumulated deficit as of that date, and the other factors described in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, raise substantial doubt about the Company’s ability to continue as a going concern. The auditors’ report on the Company’s financial statements for the year ended December 31, 2004 contained a similar statement. The consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Risks Related to Our Company
We have not been profitable since our inception in 2003. As of September 30, 2006, we have an accumulated deficit of $2,777,530 primarily as a result of our start up expenses. We may never realize sufficient revenues from the sale of our products or be profitable. Each of the following factors, among others, may influence the timing and extent of our profitability, if any:
- | the completion and success of financing to provide marketing and administration support for the launch of our product; |
- | the market acceptance of Dairy Fresh Farms with the Canadian Consumer; |
- | our ability to effectively and efficiently manufacture, market and distribute our products; and |
- | our ability to sell our products at competitive prices which exceed our per unit costs. |
We anticipate that, if cash generated from operations is insufficient to satisfy our requirements, we will require additional funding to continue to market our products. We will continue to rely on private funding. However, our projections of future cash needs and cash flows may differ from actual results.
Our plan to sell additional equity securities or convertible debt could result in dilution to our stockholders. We can give no assurance that we will be able to generate adequate funds from operations, that funds will be available to us from debt or equity financing or that, if available, we will be able to obtain such funds on favorable terms and conditions. If we cannot obtain such funds if needed, we would need to curtail or cease some or all of our operations.
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ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures as of September 30, 2006 were not effective due to material weakness in our internal controls over financial reporting described below, and other factors related to the Company’s financial reporting processes.
As disclosed in the Company’s Form 10-KSB for the year ended December 31, 2005, both the Company and its independent registered public accounting firm identified certain significant internal control deficiencies that we considered to be, in the aggregate, a material weakness. The primary concern was the adequacy of review of supporting schedules that result in adjusting journal entries being entered into the accounting systems that were inaccurate or disclosures in the notes to the financial statements that were incorrect or inadequate. These inaccuracies were not detected by the control procedures of management reviewing the schedules and supporting documentation, resulting in errors appearing on the financial statements and subsequent detection in the audit. The other area of concern was the inadequate segregation of duties among the administrative staff. Due to the size of our Company and the costs associated to remediate these issues, we still consider these concerns to be relevant.
Changes in Internal Controls
There have been no material changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the quarter ended September 30, 2006.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2006, 26,000 common shares were issued as payment for professional fees incurred in the year ended December 31, 2005, valued at $0.50 per share which represents the fair value of the Company’s share when the services were completed. The excess in the par value is recorded in contributed surplus.
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In February 2006, the Company issued 35,000 common shares in exchange for professional fees incurred. The shares were valued at $0.75 per share which represents the fair value of the Company’s share when the services were completed. The excess in the par value is recorded in contributed surplus.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
A. Exhibits:
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. | |
31.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. | |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. | |
32.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Ottawa, Canada.
DAIRY FRESH FARMS INC. | ||
| | |
By: | /s/ Robert Harrison | |
Robert Harrison | ||
Chief Executive Officer |
Date: November 24, 2006 |
| | |
By: | /s/ Don Paterson | |
Don Paterson | ||
Principal Financial and Accounting Officer |
Date November 24, 2006 |
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