UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
X.ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
. TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to______
Commission filer number 0-51597
THE ENLIGHTENED GOURMET, INC.
(Exact Name of registrant as specified in its charter)
Nevada |
| 32-0121206 |
(State of Incorporation) |
| (I.R.S. Employer I.D. Number) |
(Address of principal executive offices) (Zip Code) |
Registrant’s Telephone Number (203) 823-8865
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 Par Value Per Share
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes .. No X.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes .. NoX.
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.
Yes X. No ..
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K..
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 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 by Rule 12b-2 of the Exchange Act) Yes .. No X.
As of June 30, 2009, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock as quoted on the National Association of Securities Dealers Inc. OTC Bulletin Board of $0.04 was approximately $6,226,303. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of April 9, 2010, 247,593,950 shares of the issuer's Common Stock were issued and 242,949,239 were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE –None
2
THE ENLIGHTENED GOURMET, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
3
ITEM 1. BUSINESS
THE COMPANY
We incorporated under the laws of the State of Nevada on June 25, 2004 under the name “ The Enlightened Gourmet, Inc. ” We have never been a debtor in bankruptcy, receivership or any similar proceeding.
We develop, market and sell food products the food industry classifies as the "Good for You" category. Our initial products were a no fat, no cholesterol, no lactose, no sugar added ice cream novelties. However, we recently completed the development of a no fat, no cholesterol, no lactose, high protein ricotta cheese for use in stuffed pasta dishes to be sold to school via the National School Lunch Program. While we have finished the development of this new cheese product, and are beginning to market it, the Company will need additional capital to exploit it. We also believe that we can transfer this recipe and process to other food items as well. Therefore, when and if we acquire additional financial resources, we plan to use our proprietary process and formulas to expand beyond our initial ice cream and frozen dessert products, as well as our ricotta cheese product.
Our ice cream is fat free, cholesterol free, and lactose free, and has no added sugar, but maintains the taste and texture of premium ice cream. We sell our ice cream under the trade name "Absolutely Free Gourmet Ice Cream" with the Absolutely Free® logo. All of our initial ice cream products are ice cream novelties, rather than bulk ice cream sold in pints, quarts, half gallons, etc. Initially we sold ice bars, sandwiches and cups, but because of limited authorizations and sales of sandwiches and cups we began focusing inclusively on ice cream bars in late 2006. We package our ice cream bars for sale as market packs to the retail grocery industry, and as single serve items for the impulse and convenience store market, vending machines and food service distributors.
We also intend to pack the ice cream bars for use in institutional food service venues such as schools, health care facilities and other institutions. Our ice cream bars are designed to appeal to the health conscious or weight conscious consumer, since they are low in calories and have no fat and no added sugar. Since our ice cream is free of lactose, we also market the product to individuals who are lactose intolerant. Additionally, we are also in the process of reformulating our recipe by eliminating the two artificial sweeteners included in our ice cream mix with a natural sweetener. This will provide us the opportunity to market our ice cream as “All Natural,” as well as fat free, cholesterol free, lactose free and with no sugar added. Based up the Company’s market research to date, no “Good for You” ice cream product can make those claims. The Company is confidant it can make this change, without adversely a ffecting the ice cream’s flavor profile, as the ingredients it is replacing are quite small in relation to the total.
Similar to our ice cream novelties, our recently developed ricotta cheese product is fat free, cholesterol free, lactose free and with the added benefit of being high in protein. The added protein is necessary to be able to create a product that is eligible for purchase by schools participating in the National School Lunch Program. The Company intends to use this no fat, no lactose, and high protein cheese in several stuffed pasta dishes for sale to schools across the United States. According to statistics provided by the Department of Agriculture, the National School Lunch Program serves over 30 million children annually at over 100,000 schools throughout the country. During the 2008 school year (most recent figure available), the Program served over 5 billion lunches. The new pasta entrées will help change the way children eat, which may reduce the incidence of childhood obesity. Obesity in children is correlated to adult onset of Type 2 Diabetes.
The Company believes that success with this new product should make it easier to introduce other items into the menu rotation at schools, including our ice cream bars, as we attempt to establish our brand as not just a healthy product, but one that is good tasting as well. Unlike some adults, children typically will not sacrifice taste for something that is good for you. Consequently, to be successful, you must have a product that is good tasting, as well as good for you. Additionally, children influence what their parents purchase, and having a healthy product that children like to eat, should have a positive effect on what foods parents buy for their children. According to a February, 2010 article in the Journal of Psychology & Marketing, and contrary to conclusions from prior research, children as young as 3 to 5-years of age have emerging knowledge of brands that are salient and relevant in their lives, compared to brands that are marketed p rimarily to teens and adults. They also found that children think differently than adult consumers of different food brands, suggesting that values associated with food choices are formed early in life. The study also suggests that public policy targeting eating habits should focus on intervention during early school years. Therefore, by marketing its healthy products to school children at an early age, and making the idea of healthy eating “fun and tasty,” the Company believes that can not only help create healthy eating habits in children, but become a recognizable brand at an early age.
We are looking to use our proprietary recipe and process to be not just a good for you ice cream company, but rather a good for you food company. The addition of our fat free ricotta cheese, and resulting stuffed pasta dishes, to our offerings is the first of what we anticipate to be many line extensions using our proprietary recipe and process. It has been long recognized that innovation comes from small companies, which are then pulled to the next level by larger companies with the greater capital, management expertise and with extensive distribution capabilities. Our ability to create additional products using our proprietary recipe and process should create opportunities for licensing these products to such larger companies, as we demonstrate that our products can have long product life cycles.
4
While we believe our ice cream products give us the potential to establish a recognized brand with staying power, and our newly developed ricotta cheese product provides an opportunity to diversify our business, like all new businesses, we face significant uncertainties and challenges, including controlling expenses, difficulties or complications in manufacturing our products, as well as delays or problems in raising capital. We have incurred operating losses since the inception of the Company, and we expect to incur significant increasing operating losses for the foreseeable future, primarily due to the expansion of our operations. Additionally, we have promissory notes in the amount of $449,000 that are in default, and the Company’s auditors have expressed substantial doubt about our ability to continue as a going concern due to our continued working capital deficits. Our ability to raise sufficient capital and our ability to continue as a going concern are dependent upon the Company’s ability to continue to raise capital and our ability to grow our sales to achieve a meaningful market share, and to manufacture our products on a consistent and cost effective basis. See ITEM 1A. Risk Factors
BACKGROUND
On September 27, 2004, we acquired, in a tax free stock merger, Milt & Geno's Frozen Desserts, Inc. ("M&G's") a company that at the time had similar ownership. We acquired M&G's because we believed that M&G's had formulas and recipes that would enhance our development. We also acquired in the merger the Absolutely Free® brand name and trade dress for M&G's ice cream product, together with some limited inventory.
From inception of our company through December, 2005, we were a development stage company with no sales or revenues and spent the majority of our time and effort seeking additional capital, completing the development of our products, preparing marketing plans, seeking strategic relationships, cultivating interest in our products with grocery and drug chains, food service companies and food distributors and creating our Absolutely Free® logo and related packaging, marketing and sales materials. We began our manufacturing and sales operations in January, 2006.
We market our products directly to stores, as well as to various other retail outlets via brokers and intermediaries. We do not presently have any independent capability to distribute our own product, and we do not believe it is feasible to develop our own distribution business. Instead, we rely on third-party distributors to deliver our products. Currently, since our products are only for sale in the New York Metro Area, we only have one regional distributor. However, as we broaden our distribution area, our products will be distributed through a number of geographically diverse ice cream distributors across the country, and not through one or two national distributors. Some of these distributors only distribute to certain classes of trade (e.g. grocery chains, but not convenience stores) and not all distributors will be located in a given geographic area. Accordingly, while our distribution system will be less efficient and perhaps mor e costly due to the number of distributors we will have to work with, we believe we will be less susceptible to the potential risks of dealing with one or two dominant national distributors, and we will be better off by not relying upon any single distributor . Therefore, with the exception of our New York Metro regional distributor who presently represents more than 25% of our sales, we do not anticipate any other distributor representing more than 25% of our future sales. In addition to the retail market, we intend to market some of our products to the institutional food service market, including schools, hospitals, nursing homes and other institutions.
Currently, the Company has had its products for sale in 20 supermarket chains representing approximately 600 stores. This total does not include any convenience stores, smaller grocery stores or independent distributors for which we have also received authorizations. The majority of these stores are national or well-known regional chains. . While the Company had its products for sale in a greater number of stores in both 2007 & 2008, the Company’s products were discontinued from many of these stores primarily because the Company was unwilling to pay slotting expenses to renew its shelf space. See Sales & Marketing-Slotting Charges-Ice Cream.
Supermarkets traditionally begin placing orders for new products around April 1 of each year. However, stores will typically notify companies before then, normally in February and March, which of their products have been authorized for sale. Initial orders from stores are typically enough to fill all of the shelf space assigned to our product in the particular chain and also include some limited stock to refill the shelves. Thereafter, the stores are reluctant to place large reorders until such time as they believe the product has traction with the stores customers. Therefore, future orders depend upon acceptance of the product by consumers.
While our initial products were all ice cream related, we have been able to use our proprietary recipe and process to create a fat free, lactose free high protein ricotta cheese. Our cheese product will be used to make various stuffed pasta dishes aimed primarily toward schools participating in the Nation School Lunch Program, as well as other institutional food service customers. Similar to our ice creams, the ricotta cheese has the taste and texture of a full fatted ricotta cheese, while being fat free. In addition to being fat free, our ricotta cheese has no lactose, and has added protein compared to typical ricotta cheese. The purpose for the added protein is to provide sufficient protein in the cheese, so that when made into a finished stuffed pasta entrée, it will meet the established federal standards to be eligible for sale under the National School Lunch Program.
5
We believe our technology is not limited to ice cream related products, or even our ricotta cheese product. We believe we can use our recipes and processing techniques in other sweet and savory food items to replace the fat normally found in these items, while providing the taste and texture, or mouth feel of a full fatted product.
Our executive offices are located at 236 Centerbrook Road, Hamden, CT 96518, our telephone number is 203-823-8865 and our web-site iswww.AbsolutelyFreeIceCream.com. The contents of our web site are not part of this Report.
PRODUCTS
Our recipe and process replaces fat, cream and butter in sweet and savory food applications, but at the same time maintains the taste and texture (mouth feel) and flavor-carrying capabilities of fat. The resulting product has significantly fewer calories than a similar fatted product, all while maintaining the food's normal taste and texture. Studies have shown that fat and added sugar are linked to obesity, diabetes and other diseases. In addition to our ice cream products, the Company recently completed the development and testing of its new fat free, lactose free, high protein ricotta cheese for use in a line of stuffed pasta dishes aimed primarily at schools that participate in the National School Lunch Program. Given the interest in healthy eating, the Company also believes that in addition to schools, there is a large market for these high protein-no fat products in hospitals, nursing homes, as well as other institutional food service entities .
The new cheese product demonstrates that the Company’s recipe and process is transferable into other sweet and savory food products, and that the Company’s future business is not relegated solely to ice cream. Therefore, when and if we acquire additional financial resources, we plan to use our proprietary process and formulas to expand beyond our initial ice cream and frozen dessert products, as well as our ricotta cheese product, into other food products that are high in added fat and/or sugar.
Ice Cream
Based upon our research, we believe no other ice cream novelty product presently on the market can claim to be free of fat, lactose and added sugar. In addition to these attributes, we are also in the process of reformulating our recipe by eliminating the two artificial sweeteners included in our ice cream mix with a natural sweetener. This will provide us the opportunity to market out ice cream as “All Natural,” as well as fat free, cholesterol free, lactose free and with no sugar added. Based up the Company’s market research to date, no “Good for You” ice cream product can make those claims. The Company believes that this change in our recipe will help increase sales as consumers focus more on foods that are considered “natural,” compared to foods that use artificial ingredients or chemical additives. This change will also provide the opportunity for our ice cream novelties to be sold in health and natural food stores most notably Whole Foods®. Presently none of the national brand Good for You ice cream novelties like Weight Watcher’s®, or Skinny Cow® is for sale in Whole Foods®, or any similar store, as their ingredients are not considered “natural.”
The shelf life of each of our ice cream products is approximately 270 days from the date of manufacture, so long as the product remains stored at a constant temperature not greater than minus five degrees Fahrenheit. This compares favorably to ice cream, which must be stored at a constant temperature of minus fifteen degrees Fahrenheit to maintain a similar shelf life. Each of our products is imprinted with a manufacturing date so that together with information we provide the stores; stores know when to discard the product.
Initially we sold ice cream cups and sandwiches, in addition to ice cream bars. However, beginning in 2007, we only offered our ice cream bars for sale. We found that the demand for our ice cream bars was significantly greater than the collective demand for the ice cream cups and sandwiches. During 2006, ice cream bars represented approximately 85% of our gross sales whereas ice cream cups and sandwiches together only represented approximately 15% of sales. Consequently, we decided to focus on selling only ice cream bars, rather than allocating limited capital to products like ice cream cups and sandwiches that had little relative demand compared to ice cream bars.
We presently have five different flavors of ice cream bars. Each of our ice cream bars in 4 fluid ounces.
Double Chocolate Fudge Swirl(Fat Free Chocolate Ice Cream with Fat Free Chocolate Fudge Sauce),
Orange&Vanilla Cream(Fat Free Vanilla Ice Cream with an Orange Shell),
Double Swirl Sundae(Fat Free Vanilla Ice Cream with Fat Free Chocolate Fudge Sauce and Fat Free Strawberry Sauce),
Peach Melba(Fat Free Peach Ice Cream with a Raspberry Shell),
Cappuccino Fudge Swirl(Fat Free Cappuccino Ice Cream with Fat Free Chocolate Fudge Sauce), and
6
We try to offer more “indulgent” flavors than those offered by our competitors. For example no other ice cream bars in the “Good for You” category are fat free, have no added sugar and offer coatings, or variegates, like a ripple of chocolate or strawberry syrup. More importantly, we will not reduce the serving size of our products in order to lower the number of calories per serving. Many of our competitor’s products are three ounces or less in order to reduce the number of calories in their products. Some of our competitors even offer products as small as 1 ¾ ounces in an effort to lower calories. Unfortunately, consumers may consume more than one serving, because they are not satisfied with eating such a small serving, and eventually consume more calories, simply because they eat more than a single serving.
Since we lack the name recognition of other more well-known brands, we believe that getting customers to try our products for the first time is an important element to our long-term success, and that the best way to accomplish this goal is to make our products both look and taste more appetizing than the products of our competition. We intend to add and subtract flavors based upon changes in market demand, and to add new products, or reintroduce our ice cream cups and sandwiches, when and if appropriate.
Cheese
Ricotta is our first no-fat, no lactose, high protein cheese product. Ricotta is a cheese that is used in various stuffed pasta dishes including ravioli, lasagna, manicotti and stuffed shells. We intend to use our ricotta cheese in various stuffed pasta dishes aimed primarily toward schools participating in the Nation School Lunch Program, as well as other institutional food service customers. Similar to our ice creams, the ricotta cheese has the taste and texture of a full fatted ricotta cheese, while being fat free. In addition to being fat free, our ricotta cheese has no lactose, and has added protein compared to typical ricotta cheese. The purpose of the added protein is to provide sufficient protein in the cheese, so that when made into a finished stuffed pasta entrée, it will meet established federal standards to be eligible for sale under the National School Lunch Program.
In addition to having no fat, no lactose and being high in protein, the cheese also includes a natural prebiotic which aids in the body’s absorption of calcium. According to a National Institute of Health study released in January, 2007, 75% of children between the ages of 9 and 12 do not get the recommended daily amount of calcium (1,300 mg) to build strong bones. Considering that ricotta cheese is high in calcium, the addition of the prebiotic to aid in the absorption of calcium is an enhancement over other cheese products; especially since our cheese products will be primarily consumed by children. We are also developing a mozzarella cheese with similar attributes that can be used as a replacement for full fatted, low protein mozzarella cheese on a pizza.
We believe that these new cheese products have several benefits compared to what is currently offered for school lunches. In addition to being fat free, our product is also lactose free. According to that same National Institute for Health report, 30-50 million Americans are lactose intolerant and certain ethic groups have an even greater rate of incidence. For example, about 90% of Asians are lactose intolerant, 75% of African Americans, as well as 65% of people with Middle Eastern ancestries. People, particularly children, who are lactose intolerant consume even less calcium in their diets due to the fact that they eat fewer dairy products. Making our cheese lactose free, allows children to consume dairy products high in calcium, like ricotta cheese, because they won’t have any allergic reactions, or experience any stomach discomfort after eating foods with lactose.
The high concentration of protein in our ricotta cheese also allows our serving size to be reduced, while still maintaining the required protein. Sometimes entrées in the Nation School Lunch Program are quite large in order to meet the nutritional requirements. The reduced portion size reinforces the idea that we should reduce the amount of food to combat obesity which may cause Type 2 Diabetes.
PACKAGING
Ice cream
We promote brand recognition by packaging our products in a distinctive manner. We have spent considerable time, effort and capital to develop our logo, packaging and related trade dress. Each package prominently displays the distinctive Absolutely Free® logo, together with the four major product attributes preceded by a check mark: Fat Free, Cholesterol Free, Lactose Free, and No Sugar Added, as well as a picture of the product all on a distinctive yellow background. We have registered both the name “Absolutely Free,” and our distinctive font style with the United States Patent and Trademark Office.
Our two primary avenues of retail distribution are grocery stores and convenience stores. We sell ice cream bars primarily through grocery stores in cartons commonly referred to as “market packs.” The market packs are constructed out of a clay coated kraft back paperboard commonly referred to as SUS Virgin Board. The paperboard has a smooth white top surface offering a good printing background and a smooth brown back. This type of board is commonly used in retail packaging because it provides excellent strength and stiffness. It is also moisture resistant, which helps maintain the integrity of the market pack while in a freezer space. The ice cream bars are individually wrapped and packaged as a single flavor, six to a market pack.
7
We will also offer certain flavors of the ice cream bars for sale as a single serve items. Our packaging for single serve, or “impulse items,” is different from our market pack packaging. As with the market packs, we promote brand recognition by packaging our products in a distinctive manner. Each single serve package prominently displays the distinctive Absolutely Free® logo, together with the four major product attributes preceded by a check mark: Fat Free, Cholesterol Free, Lactose Free, and No Sugar Added, all on a distinctive yellow background. The ice cream bars are packaged in an opaque flexible film with the characteristic color, logo and product attributes described above. The film provides excellent protection for the product and provides a surface that is easy to print on. The flexible film protects the product better than traditional paper wrapping, which is easily torn.
We imprint each market pack and each single serve item with a plant code designating where the product was manufactured, as well as its manufacturing date. This data provides stores with the information they would need to track our products if any product needs to be removed in a product recall or because it has expired.
Lastly, in addition to traditional retail, we also plan to offer for sale all of our products to institutional foods service distributors who serve the education and health industries. The packaging for these instructional markets will be more specialized to meet the individual requirements of each specific market and has not yet been designed. Accordingly, no such sales have been made to date.
Cheese
Unlike our ice cream products that are sold only in retail stores, we presently intend to sell our stuffed pasta dishes only to institutional food service distributors, and not at retail. Consequently the packaging is quite different, because unlike our ice cream products, the stuffed pasta dishes will not be packaged for retail point of sale. Rather, the stuffed pasta will be packed and sealed in plastic bags holding 25 pounds of finished product. The plastic bags containing the product will then be then placed inside a corrugated box for shipping. Each bag will be clearly marked with its contents, manufacturing date, plant code and nutritional information. The corrugated shipping container will be marked with its contents, as well as the manufacturing date and plant code.
MANUFACTURING
Ice Cream
We currently manufacture all our products under strict supervision via a co-packing arrangement with Mr. Cookie Face, Inc. an unaffiliated ice cream manufacturer located in Lakewood, New Jersey. We previously employed a second plant that also made our products, but discontinued their use in 2009 due to pricing and logistical issues. Our current co-packer now manufacturers all of our ice cream novelties. We chose both Mr. Cookie Face, as well as our discontinued co-packer based upon their experience in manufacturing ice cream and ice cream novelties, as well as price considerations. Based upon our sales expectations for 2010, we believe that our current co-packer can provide us the capacity to manufacture sufficient product to meet all of our expected sales. However, should that not be the case, it could jeopardize our ability to meet our expected sales. Mr. Cookie Face is required to maintain our high quality standards, and to do so in a n efficient and effective manner. While we presently do not have a written contract with Mr. Cookie Face, we do have an oral agreement with them to pay a fixed fee per case for manufacturing and packing the product. We expect that any contract we may enter into with Mr. Cookie Face, or any other manufacturer, would have an initial maturity of one year, with a right on our part to cancel the agreement on 60 days' notice at any time. We may provide and pay for some of the machinery our co-packers may need to make or package our products, but thus far we have not done so. Our arrangement with Mr. Cookie Face is not exclusive, and we may use other manufacturers if necessary or advantageous. We attempt to have a quality assurance person on site when manufacturing and packaging our final products, but this is not ways possible. However, we request that our co-packers test the products it is making for weight, appearance and other physical characteristics throughout its productio n run, and we review these production reports after the fact. Our co-packer also runs microbiological tests to insure that the product is not contaminated with any bacteria, and the finished product is not distributed until we receive the test results.
Cheese
Similar to our ice cream mix, our cheese product is presently manufactured by an independent cheese manufacturer. An independent pasta manufacturer then combines the cheese with the pasta to make our stuffed pasta entrées. Our co-packer for the stuffed pasta entrées is Pasta Italiana, Inc. a Massapequa, New York based pasta manufacturer. We chose Pasta Italiana based upon their experience in manufacturing pasta entrées, their knowledge of the National School Lunch Program, as well as price considerations. Pasta Italiana has all of the equipment necessary to manufacture and package the stuffed pasta dishes, and the Company will not have to provide Pasta Italiana any manufacturing equipment. Pasta Italiana will manufacture the stuffed pasta entrées under the Enlightened Gourmet name using our fat free, lactose free, high protein ricotta cheese. In addition to paying Pasta Italiana a fee for manufacturing the stuffed pas ta entrées, we will also purchase from them the pasta, as well as any other spices or flavorings that my be added to the finished product. We are presently working on documenting a long term contract with Pasta Italiana. However, until such time, we will work on a verbal price agreement for the goods and services they will provide.
8
Similar to when we manufacture our ice cream products, we attempt to have a quality assurance person on site when manufacturing and packaging our final products. However, just like when we manufacture our ice cream, this is not ways possible. Nevertheless, we request that they test the products it is making for weight, appearance and other physical characteristics throughout its production run, and we review these production reports after the fact. Pasta Italiana will also run microbiological tests to insure that the product is not contaminated with any bacteria, as well as confirm that the nutritional aspects of the fished product match the nutritional label included with the fished product. The finished products are not distributed until we receive all of the test results.
RAW MATERIALS
Ice Cream
We currently purchase all of the necessary raw materials and packaging supplies for our co-packer. All of these purchases are made from independent third-party sources. The cost of the raw materials and packaging is not fixed and, like all markets for commodities, the cost of these materials, and raw materials in particular, is subject to fluctuations based upon supply and demand. We have not experienced any shortages of raw materials or packaging materials to date, although we have experienced significant price fluctuations in the various dairy ingredients that go into making our products, as well as the cost of packaging. Any increase in the price of any raw materials or packaging above what we projected will reduce our projected profits unless we are able to pass along the increase by increasing our product's wholesale price. In an effort to control the prices of ingredients and packaging, we constantly look for more and alternative sources to provide these materials at a lower price without sacrificing quality.
Cheese
With the exception of the pasta, and a few spices and flavorings, we purchase all of the necessary raw materials and packaging supplies for our co-packer. We purchase the basic ingredients for making our cheese from an independent cheese manufacturer. The cost of the raw materials and packaging is not fixed and, like all markets for commodities, the cost of these materials, and raw materials in particular, is subject to fluctuations based upon supply and demand. Like our ice cream products, any increase in the price of any raw materials or packaging above what we projected will reduce our projected profits unless we are able to pass along the increase by increasing our product's wholesale price.
COMPETITION
Ice Cream
Our ice cream business is highly competitive. Our products compete on the basis of brand image, quality, breadth of flavor selection, price, and number of calories. There are relatively few barriers to new entrants in the ice cream business. Most ice cream manufacturers, including full line dairies, the major grocery chains and the other independent ice cream processors, are capable of manufacturing and marketing high quality, low fat or reduced fat ice creams. Existing competition includes low fat or reduced fat novelty products offered by Weight Watchers®, Skinny Cow®, and Healthy Choice®, as well as "private label" brands produced by or for the major supermarket chains. In addition, we compete with frozen desserts such as frozen yogurt and sorbet manufactured by Dannon, Healthy Choice® and others. Many of these competitive products are manufactured by large national or international food companies with si gnificantly greater resources than we have. We expect strong competition to continue in the form of price, competition for adequate distribution and limited shelf space.
Despite these factors, we believe the taste and quality of our products, and our unique product packaging, will enable us to compete in our market because we are the only company presently offering ice cream novelties that are "fat free," cholesterol free, have no sugar added and have no lactose; and our products have fewer calories than other products currently on the market.
We believe our products are more appetizing than similar products in the Good for You category. For example, rather than having simple flavors such as chocolate and vanilla, our line of products include flavors typically associated with premium brands like double chocolate fudge, orange and vanilla cream, cappuccino, and peach melba. In addition, our products include variegates like chocolate fudge and strawberry, providing greater variety than many competitors' products.
9
Lastly, we are working toward reformulating our recipe by eliminating the two artificial sweeteners included in our ice cream mix with a natural sweetener. This will provide us the opportunity to market out ice cream as “All Natural,” as well as fat free, cholesterol free, lactose free and with no sugar added. Based up the Company’s market research to date, no “Good for You” ice cream product can make those claims. The Company is confidant it can make this change, without adversely affecting the ice cream’s flavor profile, as the ingredients it is replacing are quite small in relation to the total. The Company also believes that this change in our recipe will help increase sales as consumers focus more on foods that are considered “natural,” compared to foods that use artificial ingredients or chemical additives. This change will also provide the opportunity for our ice cream no velties to be sold in health and natural food stores most notably Whole Foods®. Presently none of the national brand Good for You ice cream novelties like Weight Watcher’s®, or Skinny Cow® is for sale in Whole Foods®, or any similar store, as their ingredients are not considered ‘natural.”
Cheese
Unlike the competition in our ice cream business, the competition for the institutional food service business, especially for schools, is very fragmented and based more upon geography with many local companies providing products. Consequently, we believe, based upon our research with various food brokers that no company presently offers as compelling a product as our stuffed pasta entrées. We believe that offering an affordable entrée using our fat free ricotta cheese that is also lactose free and high in protein will be an attractive alternative to many of the current entrées sold in schools. Given the focus on teaching children to eat healthy foods, the Company believes that its stuffed cheese entrées helps to reinforce this goal, while at the same time providing an affordable good tasting meal. In addition to being fat free and high in protein, the Company believes that it stuffed pasta entrées fill another nutritional ne ed; providing children a good source of calcium. According to a study by the National Institute of Health study released in January, 2007, 75% of children between the ages of 9 and 12 do not get the recommended daily amount of calcium (1,300 mg) to build strong bones. According to the study, by the time children reach the age of 17, they have established 90% of the bone mass. Consequently, helping to provide children enough calcium helps prevents chronic diseases like osteoporosis later in life. To assist the body to absorb the calcium found in our entrées , we add a natural prebiotic which helps the body absorb the calcium. Considering that ricotta cheese is high in calcium, the addition of the prebiotic to aid in the absorption of calcium is an enhancement over other cheese products; especially since our cheese products will be primarily consumed by children.
The Company’s products are also lactose free. Approximately 30-50 million people in the United States are lactose intolerant. Consequently, as a result of allergic reactions, or stomach discomfort, they are unable, or unwilling to eat dairy products like milk and cheese which are high in calcium. Consequently, they obtain even less calcium on a daily basis, since they typically avoid dairy products. The Company removes the lactose form the milk before it makes the cheese so its product is lactose free. It removes the lactose found in the milk by treating it with the same enzyme that is missing in a person’s body who is lactose intolerant. Therefore, making our product lactose free, allows children to eat our stuffed pasta entrées who would otherwise not eat them for fear of an allergic reaction or stomach discomfort
Lastly, the high concentration of protein in our ricotta cheese also allows our serving size to be reduced, while still maintaining the required protein necessary to participate in the National School Lunch Program. Sometimes entrées in the Nation School Lunch Program are quite large in order to meet the nutritional requirements. The reduced portion size reinforces the idea that we should reduce the amount of food we consume to combat obesity which may cause Type 2 Diabetes.
The Company believes that success with this new product should make it easier to introduce other items into the menu rotation at schools, including our ice cream bars, as we attempt to establish our brand as not just a healthy product, but one that is good tasting as well. Unlike some adults, children typically will not sacrifice taste for something that is good for you. Consequently, to be successful, you must have a product that is good tasting, as well as good for you. Additionally, children influence what their parents purchase, and having a healthy product that children like to eat, should have a positive effect on what foods parents buy for their children.
MARKETING
Ice Cream
According to the United States Department of Agriculture, almost 1.6 billion gallons of ice cream and related frozen desserts were produced in 2007 (most recent statistics available). This amounted to sales of about $23 billion. Of this amount, the USDA reported that reduced fat, light and low-fat products accounted for about 23.5% of sales. 86% of all ice cream is still purchased from supermarkets. Convenience store sales were second at 11.4%. According to a study conducted by the International Ice Cream Association, ice cream and related frozen desserts are consumed by more than 90% of households in the United States. The total frozen novelty market in 2005 (most recent year available) was estimated at $2.4 billion, about the same as in 2004. 62% of all households purchasing ice cream purchase ice cream novelties. Ice cream bars are the most popular segment, amounting to 25% of the ice cream novelty market. (Source: I nternational Ice Cream Association).
10
Recent consumer research from Mintel, a Chicago-based research firm, shows that in 2007, ice cream accounted for nearly 60% of total sales from ice cream, frozen novelties, sherbet and frozen yogurt combined. Frozen novelties made up over a third of sales (36%), while sherbet and frozen yogurt accounted for just 5%. According to the study, frozen novelties sales increased as convenience and healthy eating trends drove more people to frozen novelties. These products, unlike bulk ice cream, are portable and portion-controlled. The authors of the study believe that with today’s health-conscious consumer looking for a balance between nutrition and indulgence, options like portion-controlled ice cream bars are increasing in popularity.
The ice cream market is part of a broader frozen dessert market. All of our products are considered novelty ice cream products. Novelty items are separately-packaged, single servings of a frozen dessert rather than bulk packaged goods (i.e. pints, quarts or half gallons) which have multiple servings per container. The Food and Drug Administration regulates both packaged goods and novelty products and has set labeling requirements as to ice cream fat content. Under the FDA's rules:
Foods that have less than a 0.5 gram of fat per serving are considered to be "no fat."
Low fat ice cream contains a maximum of three grams of fat per serving.
Reduced fat ice cream contains at least 25% less total fat than the comparable product (either an average of leading brands, or that of the brand’s regular full fatted product)
All of our ice cream novelties fall within the "no fat" ice cream category, because they have 0 grams of fat per serving.
The Company continues to believe that the best way to make consumers aware of its products is via in-store advertising and promotions, and not via mass media advertising. The Company also does in store demonstrations in an effort to have consumers sample the product. Given the Company’s financial resources, it has a limited budget for marketing and advertising.
Cheese
We believe that offering an affordable entrée using our fat free ricotta cheese that is also lactose free and high in protein will be an attractive alternative to many of the current entrées sold in schools. Given the focus on teaching children to eat healthy foods, the Company believes that its stuffed cheese entrées helps to reinforce this goal, while at the same time providing an affordable good tasting meal. Foods offered for school lunch programs need to taste good, otherwise students will not eat them. Consequently, if a food doesn’t taste good, it doesn’t matter how good it is for you, as it will not be eaten. Unlike adults who may make sacrifices by trading off calories for taste or texture, children will not.
In addition to being fat free and high in protein, the Company believes that it stuffed pasta entrées fill another nutritional need; providing children a good source of calcium. According to a study by the National Institute of Health study released in January, 2007, 75% of children between the ages of 9 and 12 do not get the recommended daily amount of calcium (1,300 mg) to build strong bones. According to the study, by the time children reach the age of 17, they have established 90% of their bone mass. Consequently, helping to provide children enough calcium helps prevents chronic diseases like osteoporosis later in life. To assist the body to absorb the calcium found in our entrées, we add a natural prebiotic which helps the body absorb the calcium. Considering that ricotta cheese is high in calcium, the addition of the prebiotic to aid in the absorption of calcium is an enhancement over other cheese products; especially since our cheese products will be primarily consumed by children.
The pasta entrées are marketed to schools, heath care facilities and large institutional food service companies. It is also marketed to food brokers who service this market. Accordingly, there is no retail advertising. Rather, information about the product in the form of “sell sheets” is sent to potential buyers, and those people who can influence a buyer (i.e. food brokers) both electronically (email), as well as via regular mail. Additionally, the Company plans to increase the awareness of our product by having representation at various trade shows. The Company believes that given the nature of its product: fat free, lactose free, high protein, low sodium, prebiotic for calcium absorption that its message is strong enough to warrant inquiries about its products. Therefore, the Company plans to make as many buyers aware of the Company’s product to warrant a call for more information. Unlike retail products whic h are point of sale and more impulsive, institutional food service is longer process that involves several steps including certification of nutritional statements and logistical information. However, advertising costs associated with institutional food service distributors is considerably less expensive that advertising a consumer retail product.
Additionally, 30-50 million people in the United States are lactose intolerant. Consequently, as a result of allergic reactions, or stomach discomfort, they are unable, or unwilling to eat dairy products like milk and cheese which are high in calcium. Consequently, they obtain even less calcium on a daily basis, since they typically avoid dairy products. The Company removes the lactose form the milk before it makes the cheese so its product is lactose free. It removes the lactose found in the milk by treating it with the same enzyme that is missing in a person’s body who is lactose intolerant. Therefore, making our product lactose free, allows children to eat our stuffed pasta entrées who would otherwise not eat them for fear of an allergic reaction or stomach discomfort.
11
According to a February, 2010 article in the Journal of Psychology & Marketing, and contrary to conclusions from prior research, children as young as 3 to 5-years of age have emerging knowledge of brands that are salient and relevant in their lives, compared to brands that are marketed primarily to teens and adults. They also found that children thought differently about consumers of different food brands, suggesting that values associated with food choices are formed early in life. The study also suggests that public policy targeting eating habits should focus on intervention during early school years. Therefore, by marketing its healthy products to school children at an early age, and making the idea of healthy eating “fun and tasty,” the Company believes that can not only help create healthy eating habits in children, but become a recognizable brand at an early age.
SALES AND DISTRIBUTION
Ice Cream
We distribute primarily through non-exclusive distribution arrangements with regional broadline grocery and frozen food distributors, as well as regional ice cream distributors. We believe the market for "Good for You" frozen desserts is continuing to increase. We expect that our business will generally experience its highest volumes during the winter and spring months and lowest volumes during the late summer and fall months.
We intend to expand our market by making our products available for purchase in select national supermarkets, middle tier supermarkets and convenience stores. In many cases, the local managers of supermarket and convenience chain stores do not have the authority to determine on their own initiative which products the local stores will stock; district or higher level management authorizes local stores to stock specific products. We pursue these authorizations through efforts of our principal officers, and through the collective efforts of our brokers. Since the 1st quarter of 2009, the Company has had its products for sale in 20 supermarket chains representing approximately 600 stores. The majority of these stores are national or well-known regional chains. However, this total does not include any convenience stores, smaller grocery stores or independent distributors for which we have also received authorizations. While our products were for sale in a greater number of stores in both 2007 & 2008, the Company’s products were discontinued from many of these stores primarily because the Company was unwilling to pay slotting expenses to renew its shelf space. See Sales & Marketing-Slotting Charges-Ice Cream.
Some of our competitors distribute their frozen desserts under a direct store distribution, or "DSD" system, as do we. Under this distribution system the distributor's employees deliver products directly to the retail ice cream cabinet rather than relying on employees of the retail outlet to maintain appropriate quantities and an appropriate mix of product in the store. The advantages of a DSD distribution are improved handling, quality control, flavor selection and retail display. However, the sales price for products sold to DSD distributors is approximately 15-20% less than products sold to broadline distributors because these distributors expect to be compensated for the extra service they provide. Beginning in January of 2008, we began using the services of a DSD distributor to service our accounts in the Metro New York area, while we continue to use broadline distributors for all of our other accounts. Sales from stores in 2008 that for the first time were serviced by our DSD distributor, increased more than 20% compared to 2007 when they were serviced by a broadline distributor. While we continue to believe that our sales are greater under our DSD distribution system, compared to a broadline distributor, we have no year to year baseline to make that comparison. Additionally, even though our gross margin on these sales is lower, due to the lower wholesale price, we believe that DSD distribution is better for our products in the New York Metro area, because we are assured of having our products on the store shelf compared to a broadline distributor.
Slotting charges
Ice Cream
Supermarket chains generally are reluctant to give up shelf space to new products when existing products are performing. These chains often insist on payment of “Slotting charges” to authorize local stores to purchase a new product. “Slotting charges” are one time payments made to retail outlets to access their shelf space. These fees are common in most segments of the food industry and vary from chain to chain. While slotting payments are expensive, we believe that the only way to make our products available to a broad spectrum of consumers is to pay the charges required to have sale of our product authorized in the dominant supermarkets within a geographic area. Supermarket chains typically request that slotting be paid in cash, and stores will withhold payment to the Company for product purchased until such time that the Company pays the agreed upon slotting fees. To the extent that Company does not pay the slottin g in cash, the stores will pay themselves by deducting the amount of the slotting fees from any amount due the Company. This “right of offset” is common in the grocery industry. Because of this right of offset, until we pay the slotting fees in cash, we will not receive any payment from the customer for the product we ship to the store until after the cumulative cost of the product shipped is equal to the slotting fees. Consequently, any expansion into new markets may be limited by the amount of cash we have available to pay for slotting fees.
12
However, more recently, supermarkets have been asking for annual slotting payments, commonly referred to as “Pay to Stay,” to add additional revenues to their stores. The Company is examining this recent trend and how the Company can avoid paying additional slotting fees to retain its shelf space. Nevertheless, the Company anticipates that until the rollout of its products to all stores in the country is completed, slotting expenses and discounts will continue to offset a portion of sales revenue. However over time, as more stores authorize the Company’s products, even with “Pay to Stay,” slotting payments should represent a smaller portion of gross revenues. However, slotting fees are not a guarantee that a store will reauthorize our product from one year to the next. For example, if sales of the Company’s products are not acceptable to the stores, the Company’s products may be disc ontinued, similar to what happened to the Company with certain supermarket chains the Company was selling to in 2007 and to a lesser degree in 2008. While the Company intends to focus on increasing its sales revenues by attempting to increase existing store sales via marketing and promotional programs rather than adding new stores, it also needs to obtain authorizations from new stores to return sales to their previous levels. Regardless if the Company receives new store authorizations, or receives a new authorization from a current authorized store for a new product that was not previously authorized, additional slotting expenses will most likely be assessed.
Cheese
Unlike our ice cream products that are marketed and sold only to consumers in retail stores, we presently do not intend to sell our stuffed pasta dishes at retail. Consequently, no slotting will be due to get distribution. Rather, the stuffed pasta entrées will only be sold to wholesale food services distributors. Wholesale food distributors do not charge slotting fees.
Advertising
Ice Cream
Television and radio advertising are not generally used in our industry. We intend to advertise in supermarket flyers, and by attractive point of sales advertising or signage on the ice cream freezers. We will also offer coupons for discounts generally ranging from $0.50 to $1.00. We also plan to advertise in professional trade journals to inform health care professionals who we believe can influence consumers' buying habits. Based upon our sales experience to date sales, on average, increased approximately 300% during periods when we promoted our product compared to periods when it was not promoted.
We believe that word-of-mouth will also help generate demand for our products. There are many Internet web sites dedicated to informing fellow consumers of the latest consumer trends, and of new and interesting products. Readers of the various web sites quickly pass this information to other readers. This type of marketing is commonly referred to as "buzz" or "viral" marketing. Buzz or viral marketing captures the attention of consumers and the media to the point where talking about your brand becomes entertaining, fascinating, and possibly newsworthy resulting in numerous people finding out about your products very quickly. Recently the Company’s ice cream products have received positive reviews from such web sites likewww.FoodFacts.com andwww.FoodFacts.com which focus on healthy eating. We believe that buzz or viral marketing will o nly increase as more and more consumers use the Internet as their primary source of information. We believe our products will be excellent candidates for this type of marketing because the packaging is new and different and no other product in the marketplace can make the same claims: it tastes good and it's good for you. While in the past the Company has not used the services of a public relations firm to help tell its story, we are currently interviewing several firms to assist us in getting our message out to the public. Any work done by a public relations firm would be in addition to our in-store marketing initiatives.
Supermarkets traditionally begin authorizing new products in the first quarter of each year for orders that will begin in April of that year. We made presentations to new stores for product placement beginning in the spring of 2010 as well as presentations to existing stores to add additional products. Similar to last year, we are focusing some of our attention on obtaining new authorizations for additional products in existing stores, rather than focusing solely on obtaining authorizations from new stores.
Cheese
Unlike our ice cream products that are sold only in retail stores, our stuffed pasta dishes will be sold to institutional food service distributors, and not at retail. Therefore, the marketing and advertising is quite different. The pasta entrées are marketed to schools, heath care facilities and large institutional food service companies. It is also marked to food brokers who service this market. Accordingly, there is no retail advertising or in store ads. Rather, information about the product in the form of “sell sheets” is sent to potential buyers, and those people who can influence a buyer (i.e. food brokers) both electronically (email), as well as via regular mail. Additionally, the Company plans to increase the awareness of our product by having representation at various trade shows. The Company believes that given the nature of its product: fat free, lactose free, high protein, low sodium, prebiotic for calciu m absorption that its message is strong enough to warrant inquiries about its products. Therefore, the Company plans to make as many buyers aware of the Company’s product to warrant a call for more information. Unlike retail products which are point of sale and more impulsive, institutional food service is longer process that involves several steps including certification of nutritional statements and logistical information. However, advertising costs associated with institutional food service distributors is considerably less expensive that advertising a consumer retail product.
13
INTELLECTUAL PROPERTY PROTECTION
None of our products are covered by any patents, nor is our basic recipe and process. We protect our primary formulas and processes as trade secrets. We believe that these formulas and processes give us a significant competitive advantage, and we have taken steps to maintain their confidentiality. These steps include requiring each our co-packers and vendors to sign a confidentiality and non circumvention agreement prohibiting disclosure of our proprietary formula. In addition, we limit the number of people who actually have access to our proprietary formula.
We have registered our trademark Absolutely Free®with the United States Patent and Trademark Office. The registration is for both Class 29: Dairy based food beverages, vegetable based food beverages and fruit based beverages, and Class 30: Frozen confections, ice cream, cheesecakes, grain based food beverages, and puddings. We have also trademarked Absolutely Natural®, as a potential name for an “all natural product,” and Absolutely Cool® as a potential name for a school product. Both of these trademarks were registered under Class 29: Dairy based food beverages, vegetable based food beverages and fruit based beverages, and Class 30: Frozen confections, ice cream, cheesecakes, grain based food beverages, and puddings. Presently, we have not undertaken to register “The Enlightened Gourmet” for any of our cheese related entrées.
REGULATION
We are regulated by various governmental agencies, including the U.S. Food and Drug Administration and the U. S. Department of Agriculture. Our co-packers must comply with all federal and local environmental laws and regulations relating to quality, waste management and other related land use matters. The FDA also regulates finished products by requiring disclosure of ingredients and nutritional information. The FDA can audit on us and can audit our co-packers to determine the accuracy of the information disclosed on our packaging. State and local laws may impose additional health and cleanliness regulations on our co-packers. Based on assurances from our current co-packer and from our former co-packer, we believe each co-packer is in compliance with these laws and regulations, and has passed all regulatory inspections necessary for the co-packer to continue operations, and for us to continue selling our products. We do not believe the c ost of complying with applicable governmental laws and regulations is material to our business.
RESEARCH AND DEVELOPMENT
We do not intend to engage in any significant research and development in the near future, as we will need to use our limited capital for other purposes. However, similar to the development of our ricotta cheese product, we do, from time to time, attempt to develop line extensions using our proprietary recipe and process. In the longer term, we cannot presently predict how much capital we will be allocating each year to researching new products or improving our existing products.
ENVIRONMENTAL
We do not own any manufacturing facilities. Independent third parties manufacture all of our products. We believe, based upon representations from each of our current co-packers that each co-packer is currently in compliance with these laws and regulations and has passed all regulatory inspections necessary for each co-packer to continue operations, as well as for us to continue to sell its products. We believe that the cost of compliance with applicable governmental laws and regulations is not material to its business.
INSURANCE
Our business could expose us to possible claims for personal injury from contamination of our ice cream. We regularly test and monitor the quality of our products, but contamination could nevertheless occur as a result of customer or distributor misuse or storage. While we do not currently maintain a separate product liability insurance policy, we require each of our manufacturers and vendors to have a minimum of $5 million in product liability coverage and to name of us as an additional insured on those policies. While we have made only limited sales to date, and have no historical experience regarding any claims of this type, we believe the insurance coverage is adequate for our present business operations. We cannot give any assurance that product liability claims will not arise in the future or that our vendors’ policies will be sufficient to pay for those claims.
EMPLOYEES
As of December 31, 2009, we had only one full-time employee and two consultants. In January, 2010, we retained an unaffiliated commissioned salesperson to represent our products. This commissioned sales representative replaced a salaried person who previously performed this function. We do not have a collective bargaining agreement, we believe our relations with our employee, and consultants are good.
14
ITEM 1A RISK FACTORS
You should carefully consider the following risk factors and the other information included herein as well as the information included in other reports and filings made with the Securities and Exchange Commission before investing in our common stock. The following factors, as well as other factors affecting our operating results and financial condition, could cause our actual future results and financial condition to differ materially from those projected. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.
HOLDERS OF SOME OF OUR PROMISSORY NOTES WHICH ARE NOW IN DEFAULT COULD, IF THEY WERE TO SUCCESSFULLY ENFORCE THOSE NOTES IN A LAW SUIT, LEVY ON OUR ASSETS AND HAVE THEM SOLD TO SATISFY OUR OBLIGATIONS ON THE NOTES.
The $449,000 in principal amount of our 12% Notes held by some of our shareholders is in default, as are the $550,000 principal amount of our 12% 2007 Promissory Notes, and we are still not in a position to repay them. Holders of these notes could if they choose to sue on those notes, and if they were successful in their lawsuits could levy on our assets and have those assets sold to satisfy the amounts we owe them.
WE HAVE INCURRED OPERATING LOSSES SINCE INCEPTION AND WE MAY NEVER BECOME PROFITABLE.
We continue to expect to incur significant operating losses for the foreseeable future, primarily due to the expansion of our operations. The negative cash flow from operations is expected to continue for the foreseeable future. Our ability to earn a profit depends upon our ability to grow our sales to achieve a meaningful market share, and to manufacture our products on a consistent and cost effective basis. We cannot give any assurance that we will ever earn a profit from the sale of our products.
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
In their report dated April 13, 2010, Mahoney Sabol & Company, LLC, stated that our financial statements for the fiscal year ended December 31, 2009, were prepared assuming that we would continue as a going concern. However, they also expressed substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of losses suffered from operations and a working capital deficiency. We continue to experience operating losses. We can give no assurance as to our ability to raise sufficient capital or our ability to continue as a going concern.
WE MAY BE UNABLE TO MANAGE OUR GROWTH OR IMPLEMENT OUR EXPANSION STRATEGY.
We may not be able to expand our product offerings, our client base and markets, or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will place a significant strain on our administrative, operational and financial resources. If we cannot successfully manage our future growth, establish and continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, our financial condition and results of operations could be materially and adversely affected.
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE OPERATING OUR BUSINESS, AND WE HAVE NO COMMITMENTS TO PROVIDE THAT CAPITAL.
We do not currently have enough cash flow to operate our business. We will therefore need additional capital (i) to pay slotting fees for supermarket shelf space, (ii) to purchase ingredients and packaging supplies for our co-packers, (iii) to pay co-packers for their services, (iv) to cover general and administrative overhead and (v) to repay outstanding debt and pay interest charges on outstanding debt. Therefore we will be dependent upon additional capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements with them. We cannot give any assurances that we will be able to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot get the needed capital, we may not be able to become profitable and may have to curtail or cease our operations.
WE DEPEND HEAVILY ON KEY PERSONNEL AND CONSULTANTS
We believe our success depends heavily on the continued active participation of our current executive officer and the outside consultants we employ. If we were to lose the services of our executive officer, or any of our consultants, the loss could have a material adverse effect upon our business, financial condition or results of operations. In addition, to achieve our plans for future growth we will need to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees is intense, and if we cannot attract, retain and motivate these additional employees their absence could have a materially adverse effect on our business, financial condition or results of operations.
15
WE FACE STRONG COMPETITION FROM LARGER AND BETTER-CAPITALIZED COMPANIES.
Our business is very competitive. Large national or international food companies, with significantly greater resources than we have, manufacture competing products. We expect to continue experiencing strong competition from these larger companies in the form of price, competition for adequate distribution and limited shelf space.
In addition, these larger competitors may be able to develop and commercialize new products to compete directly against our products, which may render our products obsolete. If we cannot successfully compete, our marketing and sales will suffer and we may not ever be profitable.
OUR PRODUCTS ARE NEW AND UNPROVEN.
We sell our products only in a limited number of stores and the products are therefore relatively unknown. Initial sales have been good in the limited number of stores where we currently have our products, but we cannot give any assurance that our products will be accepted in other markets we will try to reach.
WE DO NOT HAVE ANY PATENT PROTECTION FOR OUR INTELLECTUAL PROPERTY.
Our intellectual property consists of a proprietary recipe and manufacturing process. Together these two elements give us the ability to manufacture foods traditionally high in fat and added sugar without fat or added sugar. We decided not to seek a patent for this recipe, and process, and the time for us to be able to seek patent protection for our process and recipe has passed. We believe that by treating the recipe and manufacturing process as a trade secret, we will have greater protection than a patent would give us, because a patent would become public knowledge. As a result, the only legal protection for our intellectual property is protection as a trade secret. If our competitors were to learn our trade secrets, or develop their own methods of manufacturing competitive products, we might not be able to become profitable.
WE ARE SUBJECT TO POTENTIAL CLAIMS FOR PRODUCT LIABILITY.
Our business could expose us to claims for personal injury from contamination of our ice cream. We believe that the quality of our products is carefully monitored through regular product testing, but we may be subject to liability as a result of customer or distributor misuse or storage. While we do not currently maintain a separate product liability insurance policy, we require each of our manufacturers and vendors to have a minimum of $5 million in product liability coverage and to name of us as an additional insured on those policies. We believe this coverage will be adequate to cover claims made as a result of any liability arising from our products. Nevertheless, we cannot give any assurances that the insurance policies will be adequate, and loss of a lawsuit in excess of the available insurance coverage could adversely affect our ability to earn a profit.
THE COSTS OF COMPLYING WITH GOVERNMENT REGULATIONS MAY IN THE FUTURE REDUCE OUR PROFIT POTENTIAL.
Our industry is highly regulated by the Federal government, as well as by State and local governments. We are subject to regulation at the federal level by the U.S. Food and Drug Administration and the U. S. Department of Agriculture. Co-packers that manufacturer our products must also comply with all federal and local environmental laws and regulations relating to air quality, waste management and other related land use matters. The FDA also regulates finished products by requiring disclosure of ingredients and nutritional information.
State and local laws may impose additional health and cleanliness regulations on our manufacturers. We believe that presently the cost of complying with all of the applicable Federal, State and local governmental laws and regulations is not material to our business. However, to the extent that complying with all of the applicable laws and regulations becomes more burdensome, compliance requirements may adversely affect our profitability by increasing our cost of doing business.
WE MUST RELY ON A NUMBER OF SMALLER ICE CREAM DISTRIBUTORS, RATHER THAN LARGE DISTRIBUTORS TO DISTRIBUTE OUR PRODUCTS.
We do not presently have any independent capability to distribute our own product, and we do not believe it is feasible to develop our own distribution business. Consolidation within the ice cream industry has made it more difficult to distribute ice cream products not affiliated with large ice cream distributors. For example, in terms of sales, Nestle's-Dreyer's and Unilever control more than 30% of the ice cream market, and each of these companies has a product that competes with ours. In addition, in some markets these two companies control substantially all of the ice cream distribution to supermarkets. Therefore, we must work with a number of independent ice cream distributors, rather than a few large distributors, to distribute our Products, both regionally and nationally. Our need to rely upon smaller distributors limits our ability to distribute our products and/or makes that distribution more costly.
16
INCREASES IN PRICES OF COMMODITIES NEEDED TO MANUFACTURE OUR PRODUCT COULD ADVERSELY AFFECT PROFITABILITY.
The ingredients and materials to manufacture and package our products are subject to the normal price fluctuations of the commodities markets. Any increase in the price of those ingredients and materials that cannot be passed along to the consumer will adversely affect our profitability. Any prolonged or permanent increase in the cost of the raw ingredients to manufacture our products may in the long term make it more difficult for us to earn a profit.
OUR BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL.
Our ability to increase sales, and to profitably distribute and sell our products and services, is subject to a number of risks, including changes in our business relationships with our principal distributors, competitive risks such as the entrance of additional competitors into our markets, pricing and technological competition, risks associated with the development and marketing of new products and services in order to remain competitive and risks associated with changing economic conditions and government regulation.
RISKS RELATED TO OUR STOCK
THE TERMS OF THE OUTSTANDING SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK MAY MAKE IT DIFFICULT OR IMPOSSIBLE FOR US TO RAISE ANY ADDITIONAL FUNDS THROUGH THE SALE OF EQUITY SECURITIES WHILE THAT STOCK IS OUTSTANDING.
During the first and second quarter of 2008, we issued a total of 183,333 shares, including shares issued to the placement agent, of our Series B Convertible Redeemable Preferred Stock (Series B Preferred”) and raised a total $2.2 million, before fees and expenses. All of the shares of the Series B Preferred were outstanding on December 31, 2009. However, on March 19, 2010, the Company received notice from certain shareholders to convert their shares of the Series B Preferred to common stock. Pursuant to the Series B Preferred’s Certificate of Designation, a request by any shareholder to convert their holding automatically triggers a mandatory conversion of all outstanding shares of the Series B. Preferred. Accordingly, based upon the number of shares of the Company’s common stock outstanding on March 19, 2010, the 183,333 shares of the Series B Preferred will be converted into a cumulative total of 58,330,551 sh ares of our common stock representing 18.33% of the outstanding shares of common stock on March 19, 2010, including the shares issued as a result of the conversion of the Series B.
The Series B Preferred provided an anti dilution protection to the Series B shareholders so that 18.33% of the benefit from any investment in our common stock until the Series B Preferred stock was converted, or redeemed, inured to the benefit of investors in the Series B Preferred shares rather than proportionately among existing holders of the common stock and common stock bought by the new purchasers. We were entitled to force holders of the Series B Preferred shares to convert under some circumstances, but to do so we needed to achieve specific hurdles of revenue or external financing which we were unable to do. However, as a result of the conversion notices received by the Company on March 19, 2010, all 183,333 outstanding shares of the Series B Preferred will be converted into a cumulative total of 58,330,551 shares of our common stock. The Company is currently in the process of notifying Series B Preferred shareholders of this mandatory conversion and how to submit their Series B Preferred stock certificates for conversion into shares of the Company’s common stock.
THERE MAY NEVER BE, AN ACTIVE MARKET FOR OUR SHARES OF COMMON STOCK.
On February 11, 2008, shares of our common stock commenced quotation on the OTC Bulletin Board under the symbol ENLG. We cannot give any assurance that an active market for our common stock will develop. If an active public market for our common stock does not develop, you may find it difficult re-sell the shares of our common stock that you would receive on conversion of the shares you are purchasing, and could lose some or all of your investment.
FLUCTUATIONS IN OUR OPERATING RESULTS AND ANNOUNCEMENTS AND DEVELOPMENTS CONCERNING OUR BUSINESS AFFECT OUR STOCK PRICE.
Our operating results are subject to numerous factors, including purchasing policies and requirements of our customers, our ability to grow through strategic acquisitions, and any expenses and capital expenditure which we incur in distributing products. These factors, along with other factors described under “Risk Factors” may affect our operating results and may result in fluctuations in our quarterly results all of which could affect our stock price or could result in volatility in our stock price.
17
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
We do not expect that there will be an active well-developed market for our shares for some time. Other stockholders may sell substantial amounts of our stock in the public market. Shares sold at a price below the then current market price at which the common stock is trading will cause that market price to decline. In addition, the offer or sale of a large number of shares at any price may cause the market price to fall. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we think is reasonable or appropriate.
IF THE COMPANY FAILS TO REMAIN CURRENT ON ITS REPORTING REQUIREMENTS, THE COMPANY COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL ITS SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If the Company fails to remain current on its reporting requirements, the Company could be removed from the OTC Bulletin Board. As a result, the market liquidity for its securities could be severely adversely affected by limiting the ability of broker-dealers to sell its securities and the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC.
The Securities and Exchange Commission’s Rule 15g-9 defines a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, or with an exercise price of less than $5.00 per share, subject to some exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
·
that a broker or dealer approve a person's account for transactions in penny stocks; and
·
that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
·
obtain financial information and investment experience objectives of the person; and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
·
Before any transaction in a penny stock, the broker or dealer must also deliver, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: sets forth the basis on which the broker or dealer made the suitability determination; and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made aboutthe risks of investing in penny stocks in both public offerings and in secondary trading,the commissions payable to both the broker-dealer and the registered representative,current quotations for the securities, andthe rights and remedies available to an investor in cases of fraud in penny stock transactions.
Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
18
ITEM 2. PROPERTIES
Our executive offices are presently located at 236 Centerbrook Road, Hamden, CT, 06518 on premises owned by the spouse of our President. The premises are used on a rent-free basis. We still plan to enter into a lease for approximately 750-1,000 square feet of general office and warehouse space, when and if we acquire the required financial resources.
ITEM 3. LEGAL PROCEEDINGS
Pioneer Logistics, Inc.(“Pioneer”) commenced, by summons and complaint dated July 8, 2008, an action against The Enlightened Gourmet, Inc. in the State of Connecticut Superior Court. The amount claimed is $32,422.42 for unpaid amounts due Pioneer. The Company did not dispute the amount owed, and Pioneer received a Default Judgment against the Company. However, all of the Company’s assets are pledged to certain lenders of the Company’s 2007 12% promissory Notes to secure this borrowing, so it is unlikely that that Pioneer could levy on our assets and have those assets sold to satisfy the judgment we owe them.. Nevertheless, the Company is trying to work out a payment plan with Pioneer.
The Company is not a party to any other legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.
On February 11, 2008, shares of our common stock commenced quotation on the OTC Bulletin Board under the symbol ENLG. We cannot give any assurance that an active trading market for our common stock will continue to develop. The following table sets forth the range of high and low prices per share of our common stock for each period indicated during 2009.
Period | High | Low |
1st Quarter, 2009 | $.0375 | $0.012 |
2nd Quarter, 2009 | $0.040 | $0.015 |
3rd Quarter, 2009 | $0.045 | $0.015 |
4th Quarter, 2009 | $0.021 | $0.005 |
Holders
As of December 31, 2009, there were approximately 257 holders our common stock. A precise number of holders is difficult to determine since many of the shares are held in a nominee name at various brokerage firms, rather than as certificated shares. The number of active record holders was determined from the records of our transfer agent and an estimate of the beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Action Stock Transfer Corporation, 7069 S. Highland Dr., Suite 300, Salt Lake City, UT 84121.
Dividends
We have neither declared nor paid any cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. We have limited revenues and no earnings. Our current policy is that if we were to generate revenue and earnings we would retain any earnings in order to finance our operations. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law. There are no restrictions on our ability to declare or pay dividends, but we have not declared or paid any dividends since our inception and we do not expect to pay dividends in the foreseeable future.
19
2004 Stock Option Plan
On July 1 2004, the Board of Directors approved our company's 2004 Stock Option Plan (the “Plan"). The Plan was subsequently approved by the majority of our company’s stockholders at a meeting held on September 1, 2004. Pursuant to the Plan, we may grant incentive stock options (“Incentive Options”) or other stock options (“Non-Statutory Stock Options” and together with Incentive Options, “Options”) to purchase an aggregate of 25,000,000 shares of common stock to key employees, directors, and other persons who have or are contributing to the success of our company. The Incentive Options granted pursuant to the Plan are qualified options conforming to the requirement of Section 422 of the Internal Revenue Code of 1986 as amended. The Board of Directors administers the Plan.
The exercise price of each Incentive Option, for each share of Common Stock deliverable upon the exercise of an Incentive Option is 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted. The exercise price of each Non-Statutory Stock Option, for each share of Common Stock deliverable upon the exercise of a Stock Option, is 100% of the fair market value of a share of Common Stock on the date the Non-Statutory Stock Option is granted. In the event that any Non-Statutory Stock Option is granted an employee in lieu of a cash bonus, the exercise price of such Non-Statutory Stock Option, for each share of Common Stock deliverable upon the exercise of a Non-Statutory Stock Option, is 80% of the fair market value of a share of Common Stock on the date the Non-Statutory Stock Option is granted.
"Fair Market Value”, as of a particular date, means (i) if the shares of Common Stock are then listed or admitted for trading on a national securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System, the last reported sales price of the Common Stock on such date or, if no such sale occurred, the average of the closing bid and ask prices, as applicable, of the Common Stock on the last trading day before such date, or (ii) if the shares of Common Stock are not then listed or admitted for trading on a national securities exchange, or quoted on the National Association of Securities Dealers Automated Quotation System, such value as the Board of Directors in its discretion, may determine in good faith.
For the fiscal year ended December 31, 2009, we issued 2,000,000 Options pursuant to the Plan, and 2,430,000 options were forfeited. At December 31, 2009, a total of 24,570,000 options were issued and outstanding.
Recent Sales of Unregistered Securities
Other than as stated herein, all shares of our restricted stock made during 2009 have been reported in a Current Report on Form 8-K or in a Quarterly Report on Form 10-Q.
During the 4th quarter of 2009, we issued a total of 1,000,000 restricted shares of our common stock to a consultant in lieu of paying them $10,000 cash, for the services they provided to the Company.
During the 4th quarter the Company also issued 1,081,644 in lieu of paying $10,816.44 cash for accrued interest on its $100,000 12% February 2009 Bridge Loan.
Lastly, the Company issued 5.5 million shares of the Company’s unregistered common stock in connection with a private placement offering and received $55,000 in gross proceeds from the offering.
In connection with each of the foregoing transactions, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder since, among other things, the transactions did not involve public offerings, the investors were accredited individuals, and no advertising or general solicitation was employed in offering these securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
The Company claims an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investor was an accredited investor, and no advertising or general solicitation was employed in offering the securities.
20
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance as of the fiscal year ended December 31, 2009.
ITEM 6. SELECTED FINANCIAL DATA
N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our continued ability to make our product; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect our recipe; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview.
Since January 1, 2006, the Company’s major activities have been producing and selling product, as well as attempting to expand our sales base. Prior to January 1, 2006, the Company was a development stage company and recorded no revenues from sales. The Company presently has its products for sale in approximately 600 stores; primarily in the New York Metro Area Sales for the year ended 2009 were less than the comparable period of 2008, as the Company’s sales, like retail sales in general, continued to be hampered by the economic recession. However, sales to stores in upper level economic areas remained strong, compared to stores in middle, or lower income areas, and the Company is beginning to see early signs that consumer buying patterns may be returning to those experienced prior t0 2008. A substantial part of the Company’s gross revenue in both 2009 and 2008 was offset by either slotting payments to the various stores at which the Compan y’s products are sold, or for various promotional activities related to the products’ introduction.
21
Unlike previous years, the Company did not make many presentations to new stores to obtain product placement, or to obtain new SKUs. Rather, because of the weak economy, the Company focused its attention on its existing stores with various promotions in an attempt to maintain sales. Additionally, many of the stores where the Company’s products were authorized, in attempt to maintain their profitability, requested additional slotting fees to maintain the Company’s shelf space. In many cases the Company believed the cost to maintain the shelf space was not justified given the expected level of sales, and the Company declined to pay the additional slotting fees. This resulted in the Company losing approximately 800 stores compared to the number of stores the Company’s products were authorized in 2008.
In an attempt to diversify the Company’s revenues and use the Company’s proprietary recipe and processes, the Company recently completed the development of a ricotta cheese product that is fat free, cholesterol free, lactose free and with the added benefit of being high in protein. The added protein is necessary to be able to create a product that is eligible for purchase by schools participating in the National School Lunch Program. The Company intends to use this no fat, no lactose, high protein cheese in several stuffed pasta dishes for sale to schools across the United States. According to statistics provided by the Department of Agriculture, the National School Lunch Program serves over 30 million children annually at over 100,000 schools throughout the country. During the 2008 school year (most recent figure available), the Program served over 5 billion lunches. The Company believes that these new products will provide an oppor tunity in the growing market for healthier foods in schools, as well as health care institutions. The Company expects to begin recording ales of these new products in the 2nd quarter of 2010.
Results of Operations.
During the year ended December 31, 2009, we recorded gross sales of $221,514 compared to $732,709 for the year ended 2008; a decline of $511,195. The decline in sales was primarily due to the fewer number of stores that our products were authorized in 2009 compared to 2008. This decline in the number of stores was a result of many of the chains requesting additional slotting payments to maintain the shelf space the Company had paid for in previous years. This so called “Pay to Stay,” was an effort by the chains to maintain their profitability during the economic recession. Given the Company’s scarcity of capital, and the fact that given the weaker than usual expected sales due to the weak economy, the Company declined to pay the additional slotting, and consequently our products were discontinued from these stores During weak or uncertain economic times, consumers look to conserve money by purchasing less expensive brands. ;While our products offer long term health benefits compared to regular full fatted ice cream, consumers are typically less likely to make short term sacrifices, by paying more for our products, to garner long term benefits. This too adversely affected our sales. Consequently, our revenue for 2009 was significantly less than it was for 2008. In 2010 we are going to continue to focus more on increasing sales from our existing stores, rather than attempting to increase the number of stores. Based upon customer comments to web sites likewww.JunkFoodBlog.com andwww.GoodGuide.com, the Company’s product has a loyal following.
The Company typically promotes its products by offering discounted pricing to retailers, coupons and in-store demonstrations to increase customer awareness of its products. The Company continues to believe, based upon its previous sales experience that the key to increasing market share is to induce potential customers to try its products. The Company considers this valid, because the Company believes it offers the only no fat, no lactose, no sugar added ice cream with fewer calories than the competition while maintaining the taste and texture of full fatted premium ice cream. This belief is supported by positive feedback from brokers, store representatives and consumers validating that its products are well received in the marketplace, as well as comments made about the Company’s products on various Internet web sites, blogs and chat rooms.
All of our revenue during 2009 was from the sale of ice cream bars to supermarket chains. Our Double Chocolate Swirl remained our best selling flavor in 2009; garnering about 42.9% of our sales. Our Orange & Vanilla Cream bar, with the look and taste of a traditional “50/50” bar remained our second best selling product representing about 31.2% of sales. Our Double Sundae Swirl bar, introduced in mid-2007, represented about 14.7% of sales and our Peach Melba bar represented 5.2% of sales. Our Cappuccino Fudge bar, reintroduced with limited availability in 2009, represented about 7.7% of our sales.
There are several reasons why our Double Chocolate Swirl bar and Orange & Vanilla Cream bar continue to be our best selling flavors, and why we believe in 2009, sales of the Double Sundae Swirl bar will continue to expand. Principally, our sales are dramatically influenced by what the supermarket chains authorize us to sell in their respective stores. The reasons supermarkets authorize a particular product are varied, but are directly correlated to what the supermarket chain or store already has for sale, as the stores want to have a variety of different items and flavors available for consumers to purchase, rather than having several different brands of the same product. Therefore, while we believe that all of our products appeal to consumers, if a particular supermarket chain or store doesn’t authorize a particular product, it will not be available for purchase at that respective chain or store. Every store that we received an authorization fro m authorized the Double Chocolate Swirl bar. Additionally, almost all of the stores authorized the Orange & Vanilla Cream bar. Consequently, it’s not surprising why these two bars were our best sellers, as compared to our other flavors, these two bars were for sale in almost every authorized store in 2009. Additionally, vanilla and chocolate historically represent the two most popular flavors in the ice cream industry. The Sundae Swirl bar has vanilla ice cream, as well as a chocolate and strawberry variegate so it has the most popular ice cream flavor (vanilla), as well as chocolate and strawberry.
22
The Company ended 2008 with its products authorized for sale in approximately 20 supermarket chains representing approximately 600 stores; primarily in the New York Metro area. On average these stores authorize, or carry about 2-3 items per store. The Company expects the number of products authorized in these stores to remain at this level in 2010, as the Company believes that until the economy improves, the cost of paying slotting for product authorizations is not attractive given the Company’s expectations for sales.
We have no manufacturing facilities of our own and we rely on third-party vendors, or co-packers, to manufacture our products. Unlike traditional co-packing arrangements where the co-packer is responsible for purchasing all of the raw materials to manufacture the items and then selling the completed product back to the marketing company at a profit to reflect its manufacturing costs, we are responsible for purchasing and maintaining the inventory of all of the necessary ingredients and packaging and then paying a separate fee to the co-packer to manufacture our products. While the traditional method would be more efficient and effective for us, because we would not be responsible for purchasing and maintaining inventories of raw materials, the uniqueness of our products, coupled with the start-up nature of our company, precluded any co-packer from entering into such an arrangement at this time.
During 2009 we manufactured all of our ice cream bars at one unaffiliated co-packing facility. While we previously co-packed our products at two separate facilities, we consolidated all of our production into a single co-packer. While we continue to believe that having multiple co-packers offers more diversity, and protects the Company in the event of a production problem at our existing facility, the logistics of maintaining two production facilities given the Company’s current level of sales is not an effective and efficient use of the Company’s limited capital. To the extent that our current co-packer is unable to manufacture our products going forward, or produce amounts that are sufficient to meet customer demands, we would not be able to fill all of our orders and, similar to what took place in 2007, we could be adversely impacted. We have had discussions with our co-packer to determine the likelihood that they can continue to meet o ur need for production time, and they have assured us that so long as we can continue to pay for such production in a timely basis, it has sufficient capacity to meet our projected needs through 2010. We have no long term agreement to manufacture our products with our current co-packer. We still anticipate the need to enter into a long-term production agreement with a co-packer once we can reasonably determine its sales for the next twelve to eighteen months. Additionally, we believe that until we are more stable financially, co-packers will not be willing to enter into a long-term agreement since they cannot be reasonably assured we will be able to pay for such production.
The Company incurred a net loss of $1,096,348 for 2009, compared to a net loss $2,774,367 for the year ended December 31, 2008, or a difference of $1,678,019. The net loss in 2009 was less than the loss for 2008 due to the fact that the Company had fewer sales in 2009, so its cost of goods sold was less in 2009 compared to 2008. The Company also had lower slotting costs in 2008, as the majority of its slotting payments for shelf space were paid in previous years. Additionally, the Company’s selling, general and administrative expenses were $1,060,433 less in 2009 ($656,713) compared to 2008 ($1,717,146). Lastly, the Company’s interest expense also declined from $892,387 in 2008 compared to $306,124 for the year ended 2009.
While the Company generated gross sales of $221,514 during the year, the supermarkets and stores deducted approximately $149,848, or 67.6% of sales, to pay for slotting charges, promotional fees & expenses and payment discounts. Accordingly, the Company recorded only $71,666 in net revenue for the year. The percentage of sales paid in slotting and promotional fees & expenses was considerably greater in 2009, compared to 2008; $340,500 on sales of $732,709, or 46.5% of sales, as the Company spent more money on advertising its products in 2009 in an attempt to maintain sales during a weak economic environment. Slotting charges are typically one-time payments made to retail outlets to access their shelf space. These fees are common in most segments of the food industry and vary from chain to chain. The Company anticipates that until the rollout of its products to all stores in the country is completed, slotting expenses and discounts will conti nue to offset a significant portion of sales revenue, as will advertising expenses. However, over time, as more stores authorize the Company’s products, slotting payments should represent a smaller portion of gross revenues, as slotting payments are typically a one-time fee. However, slotting fees are not a guarantee that a store will reauthorize our product from one year to the next. For example, if sales of the Company’s products are not acceptable to the stores, the Company’s products may be discontinued, similar to what happened with certain supermarket chains the Company was selling to in 2007. Additionally many stores, in an effort to boost their revenues are trying to get companies to pay slotting fees every year. This so called, “pay to stay” practice is expensive for companies like ours and has caused us to stop selling to certain stores, because we feel it is unprofitable to pay slotting more than once. Nevertheless, as the Company receiv es new store authorizations, or receives an order from an authorized store for a new product that was not previously authorized, additional slotting expenses will most likely be assessed.
23
The $1,096,348 loss for the year 2009 resulted primarily from (i) one-time slotting fees and discounts, (ii) the Company’s high cost of goods sold, and (iii) finance charges and interest expense as a result of the Company’s borrowings, and (iv) selling, general and administrative expenses. Supermarkets deducted 149,848, or 67.6% of sales, during 2009 to pay for slotting charges, promotional fees & expenses and payment discounts. The Company’s cost of goods sold, $205,177, or 92.6% of sales, was greater than 2008’s $557,043, or 76.1%, but similar to 2007’s 85.5% of sales. Cost of goods sold as a percentage of the Company’s sales is still considerably greater than what the Company wants and expects this expense to be, and is directly correlated to not being able to purchase raw materials and ingredients in greater amounts and receive bulk pricing. The Company has never had sufficient financia l resources to purchase its raw materials in greater volume, so it still incurs smaller batch pricing. The Company continues to believe it will be able to lower the cost of its ingredients and packaging if and when it can purchase these items in greater quantity. Additionally, while the Company’s borrowings have declined $932,415 from December 31, 2007 to December 31, 2009, it still incurred considerable finance and interest charges during the year ($306,124), although less than the $892,387 the Company incurred in the year ended 2008. The Company continues to believe that as its sales increase, and the payments for slotting as a percentage of gross sales are eventually reduced, the Company’s working capital will improve. Additionally, the Company expects that at some point it will be able to purchase its raw materials, including packaging and ingredients, in sufficient volume to obtain discounts from what it has paid for these materials to date which will also improve its c ash flow. Lastly, the Company is still looking to raise additional equity capital equity in its continuing effort to pay off its existing debt, and to raise working capital. If successful, this additional equity capital should increase the Company’s cash flow as it will no longer have to service the debt it incurred over the past few years, as well as provide funds for working capital.
The Company’s selling, general and administrative expenses equaled $656,713 for the year, down $1,060,433 from $1,717,146 in 2008. Of this amount, $282,655 represented professional fees including legal, accounting and consulting fees, as well consultants’ reimbursable expenses. These expenses declined by $711,666 compared to the $884,321 incurred in 2008. The majority of 2009’s SG&A is related to the various financial advisory and investment banking fees the Company paid to its financial advisors ($150,000). $25,052 represented sales and distribution expenses including brokerage commissions, cold storage and freight charges to deliver the Company’s products from its co-packer to its clients. $84,957 represented salaries and benefits, and $3,938 was related to travel and entertainment expenses during the year primarily for the costs incurred in attending various sales meetings, trade conferences and making sales calls to the Company’s customers. The balance was expended on related overhead.
The Company incurred significant finance and interest charges of $306,124 during the year related to all of its borrowings. $180,258 represented interest charges, $41,768 represented amortization charges and $84,099 represented non-cash interest costs associated with the value of the stock issued to lenders as additional compensation for providing loans to the Company. The value of this stock is deemed as interest and therefore is included in the Company’s interest expense even though it is a non-cash transaction. The Company’s finance and interest charges of $306,124 for the year was $586,263 less than the $892,387 incurred in 2008, as the Company reduced its outstanding indebtedness buy $963,415 since December 31, 2007.
Demand for the Company’s products remained relatively stable in those economic areas that can afford to purchase our product, but declined in those areas affected more by the weak economy. Even though the Company’s products offer greater health benefits compared to full fatted ice cream, certain consumers appeared reluctant to spend more money in the short run for long term benefits. The Company continues to receive good support for its products on various Internet web sites related to healthy eating. Therefore, the Company is optimistic about its sales for 2010, so long as it can continue to raise capital and have working capital available to manufacture product and promote its products.
Liquidity and Capital Resources.
For the year ended December 31, 2009, the Company recorded a net loss of $1,096,348 compared to $2,774,367 for 2008. The Company’s total assets increased by $30,089 to 505,517 from $475,428 in 2008. $16,884 of this increase was a result in the increase of cash from $2,629 in 2008 to $19,523 in 2009. $2,781 of the increase was a result in net receivables, and $2,954 was a result of an increase in deferred financing costs. Lastly, the Company’s inventories, including both finished goods and raw materials increased by $7,460 from $211,013 in 2008 to $218,473 in 2009.
During the year the Company sold 33 million shares of restricted common stock in various private placements and received $330,000 in gross proceeds from these sales. $91,175 of the net proceeds received from these sales went to repay certain loans and advances made to the Company. The balance was used primarily for production related expenses to increase the Company’s inventories and for working capital. The Company also issued 2 million shares of restricted common stock to retire a $25,000 promissory note, including accrued interest, and issued a total of 5,395,069 additional shares of restricted common stock in lieu of paying in cash a cumulative total of $53,951 of accrued interest on certain promissory notes. The Company also issued 2,225,000 shares of restricted common stock as additional consideration for a cumulative total of $165,000 it borrowed during 2010 from three unaffiliated lenders. The value of these issuances is considered debt discount and is being amortized over the life of these loans.
24
During the 2009 the Company issued a total of 7,570,833 shares of common stock, of which 6,633,333 shares were restricted shares, in lieu of paying a cumulative total of $115,000 in cash to various professionals. Additionally, the Company issued 2,634,543 shares of restricted common stock in lieu of paying a cumulative total $58,897 in cash to settle $58,897 owed certain unaffiliated vendors who supplied raw materials to the Company. Lastly, the Company issued 1,500,000 shares of restricted common stock in lieu of paying $15,000 cash for a retainer fee required by a public relations firm retained by the Company.
The Company’s liabilities increased by $258,953 from $2,068,748 to $2,327,701. Of this increase, accrued expenses increased by $195,496 from $474,338 at December 31, 2008 to $669,834 at year end 2009. Outstanding notes payable, net of any debt discount, increased $140,399. Offsetting these increases, accounts payable decreased by $76,942 from $445,811 in 2008 to $368,869 in 2009
During 2009, the Company borrowed $165,000 from three unaffiliated lenders to help finance its operations. Of the amounts borrowed, $15,000 was secured by the Company’s trade receivables and has been repaid. The remaining $150,000 is still outstanding. The Company issued a total of 2,225,000 shares of restricted common stock as additional compensation to the lenders to make these loans. Additionally, during the year the Company’s investment banker made several advances to the Company totaling $77,600. Other than a 1% facility fee on each of these loans (total $776), the borrowings did not bear any interest, and no additional consideration was given the Company’s investment banker for entering into these loans. All of the advances were repaid during the year, including the $776 in cumulative facility fees.
The Company remains in default with five separate shareholder lenders, each of which is neither an officer or a director of the Company, for unsecured loans totaling $449,000. The unsecured loans have been in default since 2006. If the Company’s current equity offering is successful, the Company is looking to pay down a considerable portion of theses defaulted loans. The defaulted loans continue to accrue interest at the default rate of interest (18%).
Other than the typical 30 day grace period for paying vendors, the Company presently has no bank credit lines that it may rely on to fund working capital. However, in the past many of the Company’s vendors have been willing to lengthen payment terms and generally accommodate the Company’s needs, and the Company’s investment banker has made advances to the Company. However, because of the Company’s continuing cash flow constraints, vendors have been less accommodating and several have requested payment in advance, or to be paid before shipping future orders. Nevertheless the Company continues to operate in spite of its cash position.
While the Company’s products continue to be accepted in the stores, and it is receiving repeat orders from all of its current customers, the Company is still dependent upon additional capital in the near term in the form of either debt or equity to continue its operations. This is necessary because the Company’s working capital is presently insufficient to pay for the necessary ingredients and packaging, as well as production costs to manufacture the Company’s expected orders, as well as to pay down its accounts payable and existing indebtedness beyond about 60 days from the date of this filing. The Company has been able to finance its operations, but has never received sufficient capital at any given time not to have to focus considerable attention to raising capital. Consequently, it is still dependent upon additional capital, particularly equity capital, to pay down its indebtedness to a more manageable amount and to insure its long term financial stability. Compounding the Company’s liquidity problem, the Company presently does not have any sources of credit that it can access on a ready basis. The Company requires additional capital in order to (i) purchase additional raw materials, including ingredients and packaging, as well as pay the cost of manufacturing its products all in a timely basis; (ii) pay advertising costs and other marketing expenses to promote the sale of its products; (iii) finish paying its slotting fees; (iv) repay its existing indebtedness including its accounts payable and (v) increase its corporate infrastructure. It’s possible that the Company’s reputation may be damaged if it is not able to deliver its products to the supermarkets from which it has received orders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our company’s audited financial statements for the years ended December 31, 2009 and December 31, 2008begin on page F-1 to this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
25
ITEM 9 A(T). CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Disclosure controls and procedures are designed to provide reasonable assurance and are effective at the reasonable assurance level. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of December 31, 2009,we carried out an evaluation,under the supervision andwith the participation ofour Chief Executive Officerand Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded thatour disclosure controls and procedureswere effective in ensuring that information required to be disclosedby usin our periodic reports is reco rded, processed, summarized and reported, within the time periods specifiedfor each report and that such information is accumulated and communicated toour management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
During the year ended December 31, 2009, there were no changes in our internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.
Management’s Report of Internal Control over Financial Reporting.
We are responsible for establishing and maintainingadequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15. With the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Our internal control over financial reporting are designed to provide a reasonable assurance of achieving their objectives. ;Our Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)in Internal Control–Integrated Framework. Based on this evaluation, our management concluded that, as of December 31, 2008, Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2009, based on those criteria.
This annual report does not include an attestation report of the Company’s registered accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission
ITEM 9B. OTHER INFORMATION
None
26
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our directors, executive officer, as well as their ages and the positions they held, as of December 31, 2009, are set forth below. Our directors hold office until our next annual meeting of stockholders and until their successors in office are elected and qualified. Our Officer serve at the discretion of our Board of Directors. On December 26, 2007, Alexander L. Bozzi, IV, the adult son of our President, resigned as Secretary of our company. On February 23, 2008, the Board of Directors appointed Alexander L. Bozzi, III, as Secretary and Treasurer of the Company. There are no other family relationships among our executive officers and directors.
Executive Officers and Directors
Name | Position | Age |
Alexander L. Bozzi, III | Chairman of the Board, President, Chief Operating Officer , Treasurer, Secretary, Principal Executive Officer & Chief Accounting Officer | 67 |
Geno Celella | Director | 74 |
Significant Employees
None
Alexander L. Bozzi, III – President and Chairman of the Board
Mr. Bozzi is the creator and the principal founder of our Company. Since inception of the Company in June 2005, he has been the Company’s President, Chief Operating Officer and Chief Accounting Officer and is directly responsible for the day to day operations of our Company. Since February 23, 2008, Mr. Bozzi has also been the Company’s Treasurer and Secretary. From September, 2002 until he founded the Company in June of 2005, Mr. Bozzi was the general manager of Kenwood’s Farms LLC, an ice cream manufacturer of both propriety and private label brands, based in West Hartford, CT.
Mr. Bozzi has been in the ice cream business his entire adult life. He is the third generation of his family to be involved in the industry. From 1982 until 1987, Mr. Bozzi was employed by the Häagen Dazs Company, initially as General Manager of Häagen Dazs West and then as Director of National Chain Stores. Mr. Bozzi left Häagen Dazs four years after it was acquired by Pillsbury Inc. From 1987 to 1993, Mr. Bozzi was a private consultant to various ice cream and frozen dessert companies focusing on manufacturing, sales and distribution. During this time he consulted for Cool A Coo Ice Cream of Whittier, CA and was responsible for expanding the company’s international business which provided the opportunity for the company to export ice cream novelties to several countries including China, Japan and the United Kingdom. He also developed a line of products for Club Stores and obtained authorizations from retailers like Costco. Mr. Bozzi also c onsulted for Integrated Specialty Foods (“ISF”) of California based in Commerce, CA, a company owned by his adult children, and its successor M.G.B. Specialty Foods, also of Commerce, CA. M.G.B. was formed by the merger between ISF and Mario’s Gelato. The combined operation was then moved to Sun Valley, CA. The merger, facilitated by Mr. Bozzi, created the opportunity for ISF to become a manufacturer of ice cream products, rather than just a distributor.
Geno Celella – Director
Mr. Celella is one of the founders of our company and has spent his entire career in the ice cream industry. Since March, 2009, he has been Vice President of Production for Park Frozen, an ice cream manufacturer located in West Hartford, CT. From January, 2009 to March, 2009 he was Vice President of Production for Alexander’s Ice Cream. Park Frozen and Alexander’s Ice Cream are companies having similar ownership that were based in the same West Harford manufacturing facility. From April, 2005 to January, 2009, he was Vice President of Production for Nutmeg Farms Ice Cream, also located at the same West Hartford address. Nutmeg Farms formerly manufactured and co-packed certain of our products. From June, 2004 through March 2005, he was our company’s Senior Vice President of Product Development and Manufacturing. From 2000 until June 2004, he was part owner of Kenwood Farms Ice Cream, a company a lso located in West Hartford, CT that manufactured and co-packed specialty ice creams. Mr. Celella was responsible for all of Kenwood’s ice cream production. From 1985 to 2000, he was General Manager of Production for Naugatuck Dairy located in Naugatuck, CT. Prior thereto, from 1965 until 1985, Mr. Celella held a number of management positions with companies such as Brock-Hall Dairy, H.P. Hood and Baskin-Robbins.
27
Committees
Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the executive officer and the Company’s consultants and investment banker, by reviewing materials provided to them and by participating at meetings of the board and its committees.
We presently do not have any committees of our board of directors. However, our board of directors intends to establish various committees at a later date.
Audit Committee
We do not have an Audit Committee of the Board of Directors and therefore has no Audit Committee FinancialExpert.
Nominating Committee
We do not have a nominating committee of the Board of Directors and the Board has not established any procedures pursuant to which it will consider Board candidates recommended by shareholders.
Code of Ethics
We have not adopted a code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. Wehave notadopted such a code of ethics because all of management’s efforts have been directed to building the business of the Company. A code of ethics may be adopted by the board of directors at a later date.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Exchange Act and the regulations of the SEC, our company’s executive officers, directors and10 % beneficial owners must file reports of ownership and changes in ownership with the SEC. During the fiscal year ended December 31, 2009, the following officers, directors and 10% shareholders were late in their filings: Paul. Taboada and AAR Accounts Family Ltd Partnership did not file Form 4s.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the years indicated, all cash compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered to us by our Chief Executive Officer and all other executive officers in such years who received or are entitled to receive remuneration in excess of $100,000 during the stated periods.
SUMMARY COMPENSATION TABLE | |||||||||
Name & Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compen- sation ($) | Non-qualified Preferred Compensation Earnings ($) | All Other Compen- sation ($) | Total ($) |
Alexander L. Bozzi, III President & Chairman | 2009 | 12,600 |
| 0 | 6,400 | 0 | 0 | 0 | 19,000 |
2008 | 45,500 |
| 0 | 19,500 | 0 | 0 | 0 | 65,000 | |
28
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information as to options held by the officers named in the Summary Compensation Table.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |||||||||
| OPTION AWARDS | STOCK AWARDS | |||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Alexander L. Bozzi, III | 3,375,000 | 4,125,000 | 0 | $0.05 | Oct., 2017 | 0 | 0 | 0 | 0 |
375,000 | 1,125,000 | 0 | $0.025 | Oct., 2018 | 0 | 0 | 0 | 0 | |
50,000 | 950,000 |
| $0.01 | Oct., 2019 | 0 | 0 | 0 | 0 | |
Employment Agreements
We executed an employment agreement with Mr. Bozzi effective October 1, 2008. Prior to this date we had no such agreement with Bozzi. The agreement is for three years and pays Mr. Bozzi an annual salary of $78,000 per year. In addition to Mr. Bozzi’s cash compensation, we also agreed, on each anniversary of the agreement, to issue him that number of shares of our common stock equal to $165,000. However, due to the Company’s limited cash flow, the Company has been unable to pay Mr. Bozzi the entire amount of his cash compensation, and the difference between what Mr. Bozzi is due pursuant to the Employment Agreement and what he has been paid, has been accrued as a liability. Additionally, the company has not issued Mr. Bozzie any of the shares related to his common stock compensation. We have not granted Mr. Bozzi any options or other stock awards, or any benefits payable upon the termination of employment, his resignation or retirement or a change in control of the Company. Additionally, the Board of Directors awarded Mr. Bozzi 1,000,000 options exercisable at $0.01 per share on October 1, 2009.
Director Compensation
Our directors have not received any fees for their services as a director; however, they are reimbursed for expenses incurred by them in connection with conducting the Company's business. Other than Alexander Bozzi, III, who in addition to his duties as a director is the Company’s President, no options were issued to any directors during the year ended December 31, 2009.
29
All of Mr. Bozzi’s compensation for the fiscal year ended December 31, 2009 was a result of his duties as the Company’s President.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table identifies, as of April 9, 2010, the number and percentage of outstanding shares of common stock beneficially owned by (i) each person we know to beneficially own more than five percent of the voting power on matters requiring a vote of shareholders, (ii) each named executive officer and director, and (iii) and all our executive officers and directors as a group:
Title of Class | Name & Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class(2) |
Common Stock | AAR Accounts Family Ltd Partnership (3) c/o Attn: Andrew & Aniela Roth 17 Beverly Road Little Neck, NY 11363 | 12,705,586(3) | 5.0% |
|
|
|
|
Common Stock | Alexander L. Bozzi, III (4) c/o Joseph Levine & Associates 555 Sherman Avenue, Hamden, CT 06514 | 1,175,000 (4) | 0.5% |
|
|
|
|
Common Stock | Beulah J. Celella (5) 240 Park Road, West Hartford, CT 06119 | 9,500,000(5) | 3.8% |
|
|
|
|
Common Stock | Geno Celella (6) 240 Park Road, West Hartford, CT 06119 | 10,575,000 (6) | 4.3% |
|
|
|
|
Common Stock | Paul Taboada (7) c/o Charles Morgan Securities, Inc. 120 Wall Street New York, NY 10005 | 42.993,083(7) | 15.9% |
|
|
|
|
Common Stock | All Officers & Directors as a Group (8) | 15,956,099(8) | 4.8% |
|
|
|
|
(1)
"Beneficial Ownership" means having or sharing, directly or indirectly (i) voting power, which includes the power to vote or to direct the voting, or (ii) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares underlying options or warrants to purchase common stock, or other securities convertible into common stock, that currently are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power.
(2)
Based on 247,593,950 shares of common stock outstanding as of the date of this memorandum. Does not include any out of the money warrants or options or the shares of common stock to be issued as a result of the mandatory conversion of the Company’s Series B Preferred.
(3)
Consists of 6,739,951 shares of common stock. Also includes 5,965,635 shares of common stock which the AAR Accounts Family Ltd Partnership will acquire pursuant to the mandatory conversion of their 18,750 shares of the Series B Preferred. Andrew Roth and his wife Aniela Roth have voting and investment power over the shares held by AAR Accounts Family Ltd Partnership.
(4)
Alexander L. Bozzi, III is our President and Chairmen of the Board. Consists of 1,075,000 shares of common stock and 100,000 shares of common stock held by Mr. Bozzi’s spouse, Giovanna Bozzi. Doers not include 4,300,000 vested options at various exercise prices between $0.01 and $0.05 per share
(5)
Consists of 9,500,000 shares of common stock. Does not include 1,075,000 shares of common stock owned by Ms. Celella’s spouse, Geno Celella, a director of the Company, as noted in Note 6.
(6)
Geno Celella is a director of the Company. Consists of 1,075,000 shares of common stock and 9,500,000 shares of common stock owned by Mr. Celella’s spouse, Beulah J. Celella, as noted in Note 5.
30
(7)
Includes 65,000 shares held by Mr. Taboada directly, 18,508,426 shares held by entities controlled by Mr. Taboada, and 1,087,500 shares held by Mr. Taboada’s minor children which he controls. Also includes 23,332,157 shares of common stock which entities controlled by Mr. Taboada will acquire pursuant to the mandatory conversion of their 73,333 shares of the Series B Preferred. Does not include 6,300,000 shares issuable upon exercise of warrants held by Charles Morgan Securities, Inc. at various exercise prices between $0.0125 and $0.06 per share.
(8)
Includes shares owned or controlled by Alexander L. Bozzi, III, and Geno Celella and each of their spouses.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
On September 27, 2004, we acquired Milt & Geno’s Frozen Desserts, Inc. (“M&G’s”) in a tax free stock merger, issuing 37,500,000 shares of our common stock in the merger. Four founders of our company, including Alexander L Bozzi, III, our President, and Geno Celella, one of our directors, together with Milton Bayer and Elliott Tertes, two other founders of our Company, collectively owned ninety-six percent (96%) of M&G’s. Prior to the merger Mr. Tertes was the sole trustee of a voting trust holding the power to vote the M&G’s shares beneficially owned by Messrs. Bayer and Celella. Therefore, Mr. Tertes controlled M&G’s by virtue of controlling seventy-two percent (72%) of the stock of M&G’s. We acquired M&G’s because we believed that company had certain formulas and recipes that would enhance our development. In addition, through the merger, we acquired the brand name and trade dress for M&G’s ice cream product Absolutely Free®, together with some limited inventory. We assumed less than $10,000 in liabilities in the transaction.
Transactions with Nutmeg Farms Ice Cream, LLC, Alexander’s Ice Cream & Park Frozen.
Nutmeg Farms Ice Cream, LLC (“Nutmeg”) was a Connecticut Limited Liability Company based in West Hartford, CT that manufactured and co-packed our ice cream cups and sundaes until we voluntarily discontinued these items late in 2006. Nutmeg ceased doing business in the first quarter of 2008. While they no longer co-packed for us after 2006, they did perform some product testing for us in 2007. Nutmeg employed Geno Celella, one of our directors, but he had no equity interest in Nutmeg. We initially chose Nutmeg to manufacture our ice cream cups and sundaes because of their expertise in making and co-packing ice cream and ice cream novelties, as well as price considerations, and not solely because Nutmeg employed Mr. Celella. We negotiated the co-packing fees we paid Nutmeg at an “arm’s length” agreement and we believe they are comparable to those that would have been paid to an unaffiliated third party. We paid Nut meg $10,115 for co-packing and $3,414 for product testing in 2006. We paid them $1,710 for product testing in 2007. We made no other payments to Nutmeg in either 2008 or 2009.
Geno Celella is presently employed by Park Frozen, and for a short period of 2009 Alexander’s Ice Cream; companies with similar ownership that manufactured ice cream out of the same West Hartford facility. The Company has never employed, nor made any payments to either Park Frozen or Alexander’s Ice cream. Other than employing Mr. Celella, Nutmeg Ice Cream, Alexander’s Ice Cream or Park Frozen have mot had any other relationship with our Company, or any of its officers, directors or shareholders.
Director Independence
None of our directors are independent directors, using the Nasdaq definition of independence.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES:
Audit Fees
The aggregate fees billed by Mahoney Sabol & Company, LLP, our auditors for professional services rendered for the audit of our annual financial statements and in connection with statutory and regulatory filings were $36,100 and $34,850 for the years ended 2009 and 2008, respectively. This category also includes the review of interim financial statements and services in connection with registration statements and other filings with the Securities and Exchange Commission.
Audit Related Fees
For the years ended 2009 and 2008, Mahoney Sabol & Company, LLP did not bill any fees relating to the performance of the audit of our financial statements which are not reported under the caption “Audit Fees” above.
Tax Fees
For the years ended 2009 and 2008, Mahoney Sabol & Company, LLP billed $4,500 and $2,500 respectively for tax compliance, tax advice and tax planning services.
31
For the years ended 2009 and 2008, Mahoney Sabol & Company, LLP did not bill any fees for other products and services not described above.
ITEM 15. EXHIBITS
THE ENLIGHTENED GOURMET, INC.
Exhibit3.1. Articles of Incorporation. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Registration Statement on Form 10-SB on November 1, 2005.)
Exhibit3.2. Certificate of Correction to Articles of Incorporation, as filed with the Secretary of State of Nevada on October 21, 2004. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Registration Statement on Amendment No. 1 to Form 10-SB on December 12, 2005.)
Exhibit3.3 Certificate of Amendment to the Articles of Incorporation, as filed with the Secretary of State of Nevada on November 21, 2007
Exhibit 3. 4 Certificate of Designations for the Series B Preferred Stock (Incorporated by reference to exhibit 3.1 filed with the Company’s Current Report on Form 8-K on March 18, 2008.)
Exhibit 3.6. Bylaws. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Registration Statement on Form 10-SB on November 1, 2005.)
Exhibit 10.1. Stock Option Plan. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Registration Statement on Amendment No. 1 to Form 10-SB on December 12, 2005.)
Exhibit 10.2. Agreement and Plan of Merger, dated as of September 1, 2004, among the Company, Gourmet Merger Sub, Inc. and Milt & Geno’s Frozen Desserts, Inc. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Registration Statement on Amendment No. 1 to Form 10-SB on December 12, 2005.)
Exhibit 10.3. Form of Subscription Agreement executed with various investors in connection with private placement of Company stock in 2005. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Registration Statement on Amendment No. 1 to Form 10-SB on December 12, 2005.)
Exhibit 10.4. Investment Advisory Agreement, dated as of October 31, 2006, between the Company and Charles Morgan Securities, Inc. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Current Report on Form 8-K on November 20, 2006
Exhibit 10.5. Investment Banking Agreement, dated as of October 31, 2006, between the Company and Charles Morgan Securities, Inc. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Current Report on Form 8-K on November 20, 2006.)
Exhibit 10.6. Form of 12% Convertible Note issued to each of the Note Purchasers. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Current Report on Form 8-K on November 20, 2006.)
Exhibit 10.7. Form of Security Agreement with the Note Purchasers. (Incorporated by reference to correspondingly-numbered exhibit filed with the Company’s Current Report on Form 8-K on November 20, 2006.)
Exhibit 10.8.Form of 12% Promissory Note (Incorporated by reference to exhibit 4.1 filed with the Company’s Current Report on Form 8-K on February 8, 2008.)
Exhibit 10.9 Form of Note and Stock Purchase Agreement(Incorporated by reference toexhibit 4.1 filed with the Company’s Current Report on Form 8-K on February 8, 2008.)
Exhibit 10.10 Form of Security Agreement (Incorporated by reference to exhibit 4.1 filed with the Company’s Current Report on Form 8-K on February 8, 2008.)
Exhibit 10.11 Form of Subscription Agreement (Incorporated by reference to exhibit 99.1 filed with the Company’s Current Report on Form 8-K on March 18, 2008.)
32
Exhibit 10.12 Employment Agreement between the Company and Alexander L. Bozzi, III,(Incorporated by Reference to exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 14, 2008.
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm. (Filed herewith)
Exhibit31.1 Certification of principal executive officerand principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
Exhibit 31.2 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
Exhibit 32. Certification of executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized .
Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signedbelow by the following personsonbehalf of the registrant and in the capacities and on the dates indicated .
33
FINANCIAL STATEMENTS
THE ENLIGHTENED GOURMET, INC.
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR EACH OF THE YEARS IN THE TWO YEAR PERIOD ENDED DECEMBER 31, 2009.
F-1
CONTENTS
F-2
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
The Enlightened Gourmet, Inc.
Hamden, Connecticut
We have audited the accompanying balance sheets of The Enlightened Gourmet Inc. (the “Company”) as of December 31, 2009 and 2008 and the related statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made b y management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Enlightened Gourmet Inc. as of December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the years in two-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has an accumulated deficit of approximately $11,642,000 and a working capital deficit of approximately $2,075,000. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Mahoney Sabol & Company, LLP
Certified Public Accountants
Glastonbury, Connecticut
April 13, 2010
F-3
THE ENLIGHTENED GOURMET, INC.
BALANCE SHEETS
For the Years ended December 31, 2009 and 2008
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
CURRENT ASSETS: |
|
|
|
| |
Cash |
| $ | 19,523 | $ | 2,629 |
Accounts receivable |
| 18,567 |
| 251,786 | |
| Less slotting fees |
| 4,000 |
| 240,000 |
|
|
| 34,090 |
| 11,786 |
Inventory |
|
|
|
| |
| Finished goods |
| 71,032 |
| 34,136 |
| Raw materials |
| 147,441 |
| 176,877 |
|
|
| 218,473 |
| 211,013 |
|
|
|
|
|
|
TOTAL CURRENT ASSETS |
| 252,563 |
| 225,428 | |
|
|
|
|
|
|
DEFERRED FINANCING COSTS |
| 2,954 |
| - | |
|
|
|
|
|
|
INTANGIBLE ASSETS |
| 250,000 |
| 250,000 | |
|
|
|
|
|
|
TOTAL ASSETS | $ | 505,517 | $ | 475,428 | |
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
| |
| Accounts payable | $ | 368,869 | $ | 445,811 |
| Accrued expenses |
| 669,834 |
| 474,338 |
|
|
|
|
|
|
| Notes payable |
|
|
|
|
| Stockholders |
| 449,000 |
| 449,000 |
| Other |
| 839,998 |
| 699,599 |
|
|
| 1,288,998 |
| 1,148,599 |
TOTAL CURRENT LIABILITIES |
| 2,327,701 |
| 2,068,748 | |
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT: |
|
|
|
| |
Preferred stock, series B, $0.001 par value; 250,000 shares authorized |
|
|
|
| |
| 183,333 shares issued and outstanding (liquidation preference in |
|
|
|
|
| the aggregate of $3,660,000 and redemption amount of $183) |
| 183 |
| 183 |
Additional paid in capital on preferred stock |
| 1,938,174 |
| 1,938,174 | |
Common stock,par value $0.001, 350,000,000 shares authorized, |
|
|
|
| |
| 242,093,950 and 185,068,505 shares issued and outstanding |
| 242,094 |
| 185,069 |
Additional Paid in Capital |
| 7,657,375 |
| 6,867,638 | |
Accumulated Deficit |
| (11,642,365) |
| (10,546,017) | |
|
|
| (1,804,539) |
| (1,544,953) |
Less: | Treasury stock, 7,644,711 shares |
| (7,645) |
| (10,645) |
| Deferred financing costs |
| - |
| (27,722) |
| Unearned compensation |
| (10,000) |
| - |
TOTAL STOCKHOLDERS’ DEFICIT |
| (1,822,184) |
| (1,593,320) | |
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 505,517 | $ | 475,428 | |
The accompanying notes are an integral part of these financial statements.
F-4
THE ENLIGHTENED GOURMET, INC.
STATEMENTS OF OPERATIONS
For the Years ended December 31, 2009 and 2008
|
|
| 2009 |
| 2008 |
|
|
|
|
|
|
REVENUE: |
|
|
|
| |
| Sales of products | $ | 221,514 | $ | 732,709 |
| Less discounts and slotting fees |
| (149,848) |
| (340,500) |
NET REVENUE |
| 71,666 |
| 392,209 | |
|
|
|
|
|
|
COST OF SALES |
| 205,177 |
| 557,043 | |
|
|
|
|
|
|
GROSS MARGIN |
| (133,511) |
| (164,834) | |
|
|
|
|
|
|
EXPENSES: |
|
|
|
| |
Selling, general & administrative |
| 656,713 |
| 1,717,146 | |
Interest |
| 306,124 |
| 892,387 | |
|
|
| 962,837 |
| 2,609,533 |
|
|
|
|
|
|
LOSS BEFORE TAXES |
| (1,096,348) |
| (2,774,367) | |
|
|
|
|
|
|
INCOME TAX EXPENSE |
| - |
| - | |
|
|
|
|
|
|
NET LOSS | $ | (1,096,348) | $ | (2,774,367) | |
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE | $ | (0.01) | $ | (0.02) | |
|
|
|
|
|
|
Weighted average number of |
|
|
|
| |
shares of common of stock outstanding |
| 204,600,116 |
| 170,867,998 | |
The accompanying notes are an integral part of these financial statements.
F-5
THE ENLIGHTENED GOURMET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
|
|
|
|
| Additional |
| Deferred |
|
| Total |
| Common Stock | Preferred Stock | Paid – In | Unearned | Offering | Accumulated | Treasury | Stockholders’ | ||
| Shares | Amount | Shares | Amount | Capital | Compensation | Expense | Deficit | Stock | Equity |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 | 169,430,536 | $169,430 | - | $ - | $ 5,795,290 | $ (646,042) | $(292,951) | $ (7,771,650) | $ (16,445) | $ (2,762,368) |
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
from treasury as payment for |
|
|
|
|
|
|
|
|
|
|
convertible debenture |
|
|
|
|
|
|
|
|
|
|
obligation | - | - | - | - | 578,200 | - | - | - | 11,800 | 590,000 |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
consulting services | 15,012,785 | 15,013 | - | - | 191,418 | - | - | - | (6,000) | 200,431 |
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
as payment for accrued |
|
|
|
|
|
|
|
|
|
|
interest on convertible debt | 625,184 | 626 | - | - | 48,965 | - | - | - | - | 49,591 |
Issuance of preferred stock | - | - | 172,083 | 172 | 3,441,488 | - | - | - | - | 3,441,660 |
Placement fees & expenses for |
|
|
|
|
|
|
|
|
|
|
issuance of preferred stock | - | - | - | - | (1,728,303) | - | - | - | - | (1,728,303) |
Issuance of preferred stock |
|
|
|
|
|
|
|
|
|
|
as payment of note payable | - | - | 11,250 | 11 | 224,989 | - | - | - | - | 225,000 |
Issuance of warrants pursuant |
|
|
|
|
|
|
|
|
|
|
to certain notes payable | - | - | - | - | 77,701 | - | - | - | - | 77,701 |
Amortization of unearned |
|
|
|
|
|
|
|
|
|
|
compensation- | - | - | - | - | - | 646,042 | - | - | - | 646,042 |
Amortization of deferred |
|
|
|
|
|
|
|
|
|
|
financing cost | - | - | - | - | - | - | 265,229 | - | - | 265,229 |
Compensation expense for |
|
|
|
|
|
|
|
|
|
|
stock option plan | - | - | - | - | 176,064 | - | - | - | - | 176,064 |
Net loss | - | - | - | - | - | - | - | (2,774,367) | - | (2,774,367) |
Balance at December 31, 2008 | 185,068,505 | $185,069 | 183,333 | $ 183 | $ 8,805,812 | $ - | $ (27,722) | $ (10,546,017) | $ (10,645) | $ (1,593,320) |
The accompanying notes are an integral part of these financial statements.
F-6
THE ENLIGHTENED GOURMET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
|
|
|
|
| Additional |
| Deferred |
|
| Total |
| Common Stock | Preferred Stock | Paid – In | Unearned | Offering | Accumulated | Treasury | Stockholders’ | ||
| Shares | Amount | Shares | Amount | Capital | Compensation | Expense | Deficit | Stock | Equity |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 | 185,068,505 | $185,069 | 183,333 | $ 183 | $8,805,812 | $ - | $(27,722) | $(10,546,017) | $(10,645) | $(1,593,320) |
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
for cash | 33,000,000 | 33,000 | - | - | 297,000 | - | - | - | - | 330,000 |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
consulting services | 5,000,000 | 5,000 | - | - | 50,000 | (15,000) | - | - | - | 40,000 |
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
pursuant to certain notes |
|
|
|
|
|
|
|
|
|
|
payable | 2,225,000 | 2,225 | - | - | 42,275 | - | - | - | - | 44,500 |
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
for payment of debt & interest | 7,395,069 | 7,395 |
|
| 76,347 | - | - | - | - | 83,742 |
Issuance of common stock for |
|
|
|
|
|
|
|
|
|
|
repayment of accounts payable | 9,405,376 | 9,405 | - | - | 124,492 | - | - | - | - | 133,897 |
Issuance of treasury stock for |
|
|
|
|
|
|
|
|
|
|
brokerage fees | - | - | - | - | 27,000 | - | - | - | 3,000 | 30,000 |
Amortization of deferred |
|
|
|
|
|
|
|
|
|
|
financing cost | - | - | - | - | - | - | 27,722 | - | - | 27,722 |
Amortization of unearned |
|
|
|
|
|
|
|
|
|
|
Compensation | - | - | - | - | - | 5,000 | - | - | - | 5,000 |
Compensation expense for |
|
|
|
|
|
|
|
|
|
|
stock option plan | - | - | - | - | 172,622 | - | - | - | - | 172,622 |
Net loss | - | - | - | - | - | - | - | (1,096,348) | - | (1,096,348) |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 | 242,093,950 | $242,094 | 183,333 | $ 183 | $9,595,548 | $ (10,000) | $ - | $(11,642,365) | $ (7,645) | $(1,822,185) |
The accompanying notes are an integral part of these financial statements.
F-7
THE ENLIGHTENED GOURMET, INC.
STATEMENTS OF CASH FLOWS
For the Years ended December 31, 2009 and 2008
|
|
| 2009 |
| 2008 |
|
|
|
|
|
|
CASH FLOWS FROM |
|
|
|
| |
OPERATING ACTIVITIES: |
|
|
|
| |
Net Loss | $ | (1,096,348) | $ | (2,774,367) | |
Adjustments to reconcile net loss to net cash |
|
|
|
| |
used in operating activities: |
|
|
|
| |
| Non-Cash stock based expense & debt service |
| 509,762 |
| - |
| Amortization of deferred financing costs |
| 41,768 |
| 450,644 |
| Amortization of debt discount |
| 83,949 |
| 200,727 |
| Decrease in sales allowances taken |
| (236,000) |
| (80,000) |
| Common stock compensation |
| - |
| 376,496 |
| Warrants |
| - |
| 77,701 |
| Stock based registration payment arrangement |
| - |
| - |
| Stock based management fee expense |
| - |
| 646,042 |
Changes in Current Assets and Liabilities: |
|
|
|
| |
| Accounts Receivable |
| 233,219 |
| 73,892 |
| Inventory |
| (7,460) |
| 77,236 |
| Prepaid Expenses |
| - |
| 90,500 |
| Accounts Payable |
| (76,942) |
| 86,419 |
| Accrued Expenses |
| 195,446 |
| 87,693 |
NET CASH USED IN |
|
|
|
| |
OPERATING ACTIVITIES |
| (352,606) |
| (687,017) | |
|
|
|
|
|
|
CASH FLOWS FROM |
|
|
|
| |
FINANCING ACTIVITIES: |
|
|
|
| |
| Proceeds from sale of common stock |
| 330,000 |
| - |
| Debt financing cost |
| (47,500) |
| (284,694) |
| Proceeds from Note |
| 151,000 |
| 168,100 |
| Payment on Note |
| (64,000) |
| (1,175,000) |
| Proceeds from the sale of Preferred Stock |
| - |
| 1,975,000 |
|
|
|
|
|
|
NET CASH PROVIDED BY |
|
|
|
| |
FINANCING ACTIVITIES |
| 369,500 |
| 683,406 | |
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
| 16,894 |
| (3,611) | |
|
|
|
|
|
|
CASH, BEGINNING |
| 2,629 |
| 6,240 | |
|
|
|
|
|
|
CASH, ENDING | $ | 19,523 | $ | 2,629 | |
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
| |
Issuance of stock for payment of fees | $ | 188,897 | $ | 1,667,091 | |
Issuance of stock for payment of debt | $ | 78,951 | $ | 1,405,000 | |
Interest paid | $ | 58,743 | $ | 49,593 | |
The accompanying notes are an integral part of these financial statements.
F-8
THE ENLIGHTENED GOURMET, INC.
NOTES TO FINANCIAL STATEMENTS
For the Years ended December 31, 2009 and 2008
NOTE 1.
FORMATION AND OPERATIONS OF THE COMPANY, GOING CONCERN AND MANAGEMENT’S PLAN:
Formation and Operations of the Company:
The Enlightened Gourmet, Inc. (the “Company”) was organized in the State of Nevada on June 25, 2004. The Company seeks to establish itself as a leading marketer and manufacturer of fat-free foods. As of December 31, 2009 and 2008, the Company’s products were authorized in and 20 supermarket chains having approximately and 600 stores. This total does not include any convenience stores, smaller grocery stores or independent distributors for which we have also received authorizations. The Company’s major activities consist of producing and selling product and expanding its existing sales base; therefore management has determined that it is no longer a development stage entity.
During 2009, the Company expended funds on the development of a fat free, lactose free, high protein cheese based upon the concept and processes used to make its ice cream product. The Company believes it has developed a commercially viable product that can be used in stuffed pasta dishes sold primarily to schools and health care facilities. The Company expects to begin actively marketing this line extension in the 2nd quarter of 2010.
Going Concern and Management’s Plan:
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. However, the Company is presently still dependent upon additional capital in the form of either debt or equity to continue its operations and is in the process of continuing to raise such additional capital through private placements of securities. This additional capital is necessary, because the Company’s working capital is presently insufficient to pay for the necessary ingredients and packaging, as well as production costs to manufacture the Company’s present and expected orders. Compounding this problem, the Company presently does not have any sources of credit that it can access on a ready basis. In addition to needing additional capital to maintain it operations, the Company also needs to rais e capital to pay for the various shareholder notes that are currently in default. (See Note 4)
As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $1,096,348 during the year ended December 31, 2009. Additionally, as of that date, the Company’s current liabilities exceeded its current assets. Those factors, and those described above, create an uncertainty about the Company’s ability to continue as a going concern. Management is developing a plan to (i) continue to contain overhead costs, (ii) increase sales (iii) significantly increase gross profits by reducing the slotting fees to be paid in 2010 and (iv) raise additional capital from the Company’s current equity offering. These steps, if successful, together with the monies raised throughout 2009 (see Note 13) and 2010 provide management with a course of action they believe will allow the Company to deal with the current financial conditions and continue its operations.
F-9
NOTE 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventories:
Inventories are stated at the lower of cost or market. The cost of inventories is determined by the first-in, first-out (“FIFO”) method. Inventory costs associated with Semi-Finished Goods and Finished Goods include material, labor, and overhead, while costs associated with Raw Materials include only material. The Company provides inventory allowances for any excess and obsolete inventories.
Intangible Assets and Debt Issuance Costs:
Management assesses intangible assets for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For other intangible assets, the impairment test consists of a comparison of the fair value of the intangible assets to their respective carrying amount. The Company uses a discount rate equal to its average cost of funds to discount the expected future cash flows. There were no intangible assets deemed impaired as of December 31, 2009 or 2008. The existing intangible assets, consisting of non patented technology have an infinite life and are therefore not amortized. The intangible assets are tested for impairment each year as discussed in Note 3.
Debt issuance costs are amortized over the life of the related debt or amendment. Amortization expense for debt issuance costs for the years ended December 31, 2009 and 2008 were $41,768 and $450,644, respectively.
Stock Options:
The Company accounts for stock-based compensation under the provisions of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 718-10 (formerly Statement of Financial Accounting Standards (SFAS) No. 123R (revised 2004),“Share-Based Payment”), which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value and generally recognizes the costs in the financial statements over the employee’s requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718-10.
Income Taxes:
Income tax expense is based on pretax financial accounting income. The Company recognizes deferred tax assets and liabilities based on the difference between the financial reporting and tax bases of assets and liabilities, applying tax rates applicable to the year in which the differences are expected to reverse, in accordance with FASB ASC 740-10 (formerly SFAS 109,Accounting for Income Taxes). A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized.
The Company adopted the provisions of FASB ASC 740-10 (formerly FASB Interpretation No. (FIN) 48Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109) on January 1, 2007. As a result of the implementation of FASB ASC 740-10, the Company performed a comprehensive review of any uncertain tax positions in accordance with recognition standards established by FASB ASC 740-10. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax returns that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company believes it has no material uncertain tax positions and, accordingly, did not record any charges.
The Company will recognize accrued interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2009 and 2008, the Company did not have any tax-related interest or penalties. The Company files income tax returns in the U.S. Federal and various state jurisdictions. The Company is not currently under examination by The Internal Revenue Service (IRS) or any other state jurisdictions. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2006.
Revenue Recognition:
Sales, net of an estimate for discounts, returns, rebates and allowances, and related cost of sales are recorded in income when goods are shipped, at which time risk of loss and title transfers to the customer, in accordance with FASB ASC 650-10 (formerly Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104,Revenue Recognition).
F-10
Additionally, the Company must initially pay customers for shelving space in the form of “slotting fees”. Slotting fees are one-time payments made to retail outlets to access their shelf space. These fees are common in most segments of the food industry and vary from chain to chain. Supermarket chains generally are reluctant to give up shelf space to new products when existing products are performing. These fees are deducted directly from revenues and revenues are shown net of such costs.
Accounts Receivable:
Accounts receivable are carried at original invoice amount less slotting fees deducted by the customers and less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating past due balances. Individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.
Shipping and Handling Costs:
Shipping and handling costs are included in Selling, General and Administrative expense and are expensed as incurred. In 2009 and 2008 shipping and handling costs totaled $5,169 and $58,416, respectively.
Advertising and Promotions:
Advertising and promotional costs including print ads, commercials, catalogs, brochures and co-op are expensed during the year incurred. Advertising and promotional costs totaled $30,760 in 2009 and $66,362 in 2008.
Cash and Cash Equivalents:
Cash and Cash Equivalents include demand deposits with banks and highly liquid investments with remaining maturities, when purchased, of three months or less.
Financial Instruments:
Market values of financial instruments were estimated in accordance with FASB ASC 825-10 (formerly SFAS No. 107,Disclosures about Fair Value of Financial Instruments), and are based on quoted market prices, where available, or on current rates offered to the Company for debt with similar terms and maturities. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded values.
Use of Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements:
In May 2008, the FASB issued FASB ASC 105-10 (formerly SFAS No. 168,The Hierarchy of Generally Accepted Accounting Principles, which superseded SFAS No. 162). FASB ASC 105-10 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. FASB ASC 105-10 will become effective 60 days after the SEC approves the Public Company Accounting Oversight Board’s (PCAOB) amendments to AU Section 411 of the Codified AIPCA Professional Standards. FASB ASC 105-10 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.
In May 2009, the FASB issued FASB ASC 855-10 (formerly SFAS No. 165,Subsequent Events), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, FASB ASC 855-10 sets forth (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. FASB ASC 855-10 is effective for interim or annual financial reporting periods ending after June 15, 2009. The adoption of FASB ASC 855 did not have a material i mpact on the Company’s results of operations, cash flows, or financial position.
F-11
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05,Measuring Liabilities at Fair Value. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of FASB ASC 820-10,Fair Value Measurements and Disclosures. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance, October 1, 2009 for the Company. The Company does not expect the adoption of ASU 2009-05 to have a material impact on results of operations, cash flows, or financial position.
In August 2009, an update was made to ASU 2009-05. This update permits entities to measure the fair value of liabilities, in circumstances in which a quoted price in an active market for an identical liability is not available, using a valuation technique that uses a quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets or the income or market approach that is consistent with the principles ofASU 2009-05. Effective upon issuance, the Company has adopted this guidance.
NOTE 3.
IMPAIRMENT:
The impairment of intangible assets with respect to the non patented technology was assessed in accordance with the provisions of FASB ASC 350-10 (formerly SFAS No. 142,Goodwill and Other Intangible Assets). The impairment test required us to estimate the fair value of the intangible asset. Management estimated fair value using a discounted cash flow model. Under this model, management utilized estimated revenue and cash flow forecasts, as well as assumptions of terminal value, together with an applicable discount rate, to determine fair value. Management then compared the carrying value of the intangible asset to its fair value. Since the fair value is greater than its carrying value, no impairment charge was recorded.
NOTE 4.
NOTES PAYABLE:
Stockholders
(a) A stockholder, on December 21, 2005, made cash advances to the Company of $245,000 (the “December 2005 Promissory Note”), which is $5,000 less than its face value of $250,000, resulting in a discount. The December 2005 Promissory Note did not accrue interest and is prepayable by the Company without penalty at any time. The borrowing was due and payable on April 1, 2006. In consideration of making the December 2005 Promissory Note, the lender received 666,667 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.0463, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $31,000, which has been fully amortized. This December 2005 Promissory Note was refinanced with the stockholder under identical terms and conditions and the new maturity date was July 1, 2006 (the “April Promissory Note”). In considerat ion of making the April 2006 Promissory Note the lender received an additional 666,667 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.0437, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $29,133, which has been fully amortized. The April Promissory Note is in default for failure to pay the principal when due at maturity. Since July 1, 2006, the April Promissory Note has borne interest at the rate of 18% per annum. Accrued interest for this Promissory Note is $157,438 and $112,500 as of December 31, 2009 and 2008 respectively.
(b) Another stockholder, on February 28, 2006, made cash advances to the Company of $94,000 (the “February 2006 Promissory Note”), which is $6,000 less than its face value of $100,000, resulting in a discount. The February 2006 Promissory Note did not accrue interest. The borrowing was due and payable on August 15, 2006. In consideration of making the February 2006 Promissory Note, the lender received 266,667 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.0463, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $11,893, which has been fully amortized. The February 2006 Promissory Note is in default for failure to pay the principal when due at maturity. Since August 15, 2006, the February 2006 Promissory Note has borne interest at the rate of 18% per annum. Accrued interest for this Promissory Note is $60,805 and $42,750 as of December 31, 2009 and 2008 respectively.
(c) Another stockholder, on March 10, 2006, made cash advances to the Company of $22,560 (the “March 2006 Promissory Note”), which is $1,440 less than its face value of $24,000, resulting in a discount. The March Promissory Note did not accrue interest. The borrowing was due and payable on August 15, 2006. In consideration of making the March 2006 Promissory Note, the lender received 64,000 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.0436, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $2,854, which has been fully amortized. The March 2006 Promissory Note is in default for failure to pay the principal when due at maturity. Since August 15, 2006, the March 2006 Promissory Note has borne interest at the rate of 18% per annum. Accrued interest for this Promissory Note is $14,593 and $10,260 as of December 31, 2009 and 2008 respectively.
F-12
(d) Another stockholder, on May 1, 2006, made cash advances to the Company of $23,875 (the “May 2006 Promissory Note”), which is $1,125 less than its face value of $25,000 resulting in a discount. The May 2006 Promissory Note did not accrue interest. The borrowing was due and payable on September 1, 2006. In consideration of making the May 2006 Promissory Note, the lender received 83,333 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.0467, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $3,600, which has been fully amortized. The May 2006 Promissory Note is in default for failure to pay the principal when due at maturity. Since September 1, 2006, the May 2006 Promissory Note has borne interest at the rate of 18% per annum. Accrued interest for this Promissory Note is $14,991 and $10,500 as of December 31, 2009 and 2008 respectively.
(e) Another stockholder, on April 27, 2006, made cash advances to the Company of $47,750 (the “April 2006 Promissory Note”), which is $2,250 less than its face value of $50,000 resulting in a discount. The April 2006 Promissory Note did not accrue interest. The borrowing was due and payable on July 31, 2006. In consideration of making the April 2006 Promissory Note, the lender received 133,333 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.046, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $5,700, which has been fully amortized. The face value of the April 2006 Promissory Note ($50,000) was refinanced with the same stockholder with a new maturity date of December 1, 2006 and a stated interest rate of twelve percent (12%) (the “July 2006 Promissory Note”). In consideration of making the July 2006 Promissory Note, the lender received 266,667 warrants exercisable at $0.15 per share. Following a Black Scholes valuation model, the value of a warrant was $0.047, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $12,534, of which $5,837 has been fully amortized. The stockholder agreed to extend the terms of the July 2006 Promissory Note as of December 1, 2006, with a maturity date of April 1, 2007 (the “December 2006 Promissory Note”). The stockholder received an additional 266,667 warrants exercisable at $0.05 per share. Following the same Black Scholes valuation model as previously, the value of a warrant was $0.0155, which resulted in an additional debt discount and corresponding additional paid in capital of approximately $4,133, of which approximately $1,001 was amortized through December 31, 2006. The December 2006 Promissory Note is now in default for failure to pay the principal when due at maturi ty. Since April 1, 2007, the December 2006 Promissory Note has borne interest at the rate of 18% per annum. Accrued interest for this Promissory Note is $24,750 and $18,750 as of December 31, 2009 and 2008 respectively.
The following summarizes the stockholders notes as of December 31, 2009 and 2008:
Stockholder Notes in Default: |
|
|
|
|
|
(a) Note due July 1, 2006 | $ | 250,000 |
(b) Note due August 15, 2006 |
| 100,000 |
(c) Note due August 15, 2006 |
| 24,000 |
(d) Note due September 1, 2006 |
| 25,000 |
(e) Note due April 1, 2007 |
| 50,000 |
|
|
|
Total Stockholder Notes outstanding | $ | 449,000 |
On June 13, 2007, each stockholder lender entered into an agreement to accept their pro rata amount of an aggregate of 4,644,711 shares of common stock in provisional satisfaction of the indebtedness represented by the Stockholder Notes in default. Under the terms of these agreements, each stockholder lender may, for a period of 30 days following the date that the Securities and Exchange Commission (“SEC”) declares effective the Registration Statement filed by the Company on Form SB-2 with the SEC on June 18, 2007, sell these shares, or, at their option, elect to return their shares of common stock to the Company, in whole or in part, and have all or a portion of their Stockholder Note reinstated.
On October 3, 2007, the Company notified the SEC that it was voluntarily withdrawing the previously filed SB-2. Consequently, the conditional settlement negotiated with each of the stockholder lenders could not be completed. The $449,000 in stockholder loans remains in default, and continues to accrue interest at the Default Rate of 18% per annum. The Company is negotiating with each of the lenders a new and different settlement to repay the amounts due them.
F-13
Bridge Loan Financing
During the period March 15, 2007 through November 21, 2007 the Company entered into eight promissory notes (collectively the “2007 Promissory Notes”) with a combined face value $1,975,000. Each of the 2007 Promissory Notes were due one year from the date of its issuance and accrue interest at the annual rate of 12%. The Company pledged all of its tangible and intangible assets as security for each of the 2007 Promissory Notes. However, this security interest in the Company’s assets was subordinate to the security interest granted to the Convertible Notes described in this Note 5. In consideration of making the 2007 Promissory Notes, the lenders received a total of 6.3 million shares of the Company’s common stock valued at $0.05 per share, which resulted in an additional debt discount and corresponding additional paid in capital of $315,000 which was amortized over the life of the loan. The following is the dollar amount of bridge loans outstanding as of:
|
| December 31, 2009 |
| December 31, 2008 |
Face Value of Bridge Loans Outstanding | $ | 550,000 | $ | 575,000 |
Less: Debt discount due to share issuance |
| - |
| - |
Net Bridge Loans Outstanding | $ | 550,000 | $ | 575,000 |
Charles Morgan Securities (“CMS”) acted as placement agent and sold each of the 2007 Promissory Notes to investors that were neither officers nor directors of the Company. In connection with the sale of the 2007 Promissory Notes, CMS received a placement fee equal to 10% of the aggregate proceeds ($197,500) and a non-accountable expense allowance equal to 3% of the aggregate proceeds ($59,250). Additionally, CMS received 7,612,501 shares of the Company’s Common Stock as compensation for placing the 2007 Promissory Notes.
On September 14, 2007, the Company entered into a promissory note with a face value of $200,000 (the “September 2007 Bridge Loan”). The September 2007 Bridge Loan accrued interest at the annul rate of 12% and was due September 14, 2008. The Company pledged all of its tangible and intangible assets as security for the September 2007 Bridge Loan. The September 2007 Bridge Loan is currently in default for failure to pay the principal amount and accrued interest due at maturity On January 14, 2009 the Lender agreed to waive the default and extend the maturity of the September 2007 Bridge Loan to September 14, 2009.
On October 24, 2007, the Company entered into a promissory note with a face value of $100,000 (the “October 2007 Bridge Loan”). The October 2007 Bridge Loan accrued interest at the annul rate of 12% and was due October 24, 2008. The Company also pledged all of its tangible and intangible assets as security for October 2007 Bridge Loan. Other than being subordinate to the September 2007 Bridge Loan, the holder of the October 2007 Bridge Loan has a priority interest in all of the tangible and intangible assets of the Company. The October 2007 Bridge Loan is currently in default for failure to pay the principal amount and accrued interest due at maturity. The Company is negotiating with the holder of the October 2007 Bridge Loan to pay the accrued interest due, and to extend its maturity. No assurances can be given that the holder of the October 2007 Bridge Loan will agree to any such terms.
On November 21, 2007, the Company entered into promissory notes with three separate lenders with a combined face value of $275,000 (the “November 2007 Bridge Loans”). The November 2007 Bridge Loans accrued interest at the annul rate of 12% and were due November 21, 2008. The Company also pledged all of its tangible and intangible assets as security for November 2007 Bridge Loans. Other than being subordinate to both the September 2007 Bridge Loan and the holder of the October 2007 Bridge Loan, the November 2007 Bridge Loans have a priority interest in all of the tangible and intangible assets of the Company. The November 2007 Bridge Loans are currently in default for failure to pay the principal amount and accrued interest due at maturity. The Company is negotiating with each of the holders of the November 2007 Bridge Loans to pay the accrued interest due, and to extend its maturity. No assurances can be given that the holder o f the November 2007 Bridge Loan will agree to any such terms.
On July 16, 2009, a lender representing a $25,000 November 2007 Bridge Loan converted their debt to equity. The Company issued 2,000,000 shares of the Company’s unregistered common stock from Treasury in satisfaction of the debt including $4,792 of accrued interest.
F-14
Working Capital Notes
On July 14, 2008, July 28, 2008, July 31, 2008, August 29, 2008, and October 22, 2008, the Company sold to a single accredited investor (“Investor”), five unsecured promissory notes (the “July-Oct 2008 Promissory Notes”). The respective amounts of each of the July-Oct 2008 Promissory Notes are: $12,000, $35,000, $11,500, $25,000 and $4,600. Each of the July-Oct 2008 Promissory Notes accrues interest at the annual rate of 12% and is due one year from its date of issuance. As additional compensation to purchase the July-Oct 2008 Promissory Notes, the Investor was issued 250,000 warrants exercisable at $0.065 per share for the July 14thNote, 650,000 warrants exercisable at $0.06 per share for the July 28th Note, 250,000 warrants exercisable at $0.06 per share for the July 31st Note, 575,000 warrants exercisable at $0.05 per share for the August 29th Note, and 135,000 warrants exercisable at $.0 4 per share for the October 22, 2008. This resulted in a debt discount of $49,126 and corresponding additional paid in capital which will be amortized over the life of the loans. Each of the warrants expires five years after the date of its issuance. The July-Oct 2008 Promissory Notes were sold in a private transaction arranged by the Company. Accordingly, no compensation was paid to any broker or placement agent.
On June 23, 2008, the Company sold to a single accredited investor (“Investor”), an unsecured promissory note (the “June 2008 Promissory Note”) in the amount of $50,000. The June 2008 Promissory Note accrues interest at the annual rate of 12% and is due one year from its date of issuance. Additionally, as additional compensation to purchase the June 2008 Promissory Note the Investor was issued 750,000 warrants exercisable at $0.08 per share. The warrants have a cashless exercise provision and expire on June 23, 2013. Following a Black Scholes valuation model, the value of a warrant was $0.038, which resulted in a debt discount and corresponding additional paid in capital of approximately $28,575, which is being amortized over the term of the loan. The June 2008 Promissory Note was sold in a private transaction arranged by the Company. Accordingly, no compensation was paid to any broker or placement agent.
On July 31, 2008 and September 5, 2008, the Company’s investment banker, Charles Morgan Securities, Inc., (“CMS”) arranged for two unsecured loans; each in the amount of $15,000 (the “CMS Notes”). Each of the CMS Notes was arranged as a professional courtesy and accrue no interest, were due 30 days from the date they was issued. Neither loan has been repaid nor have the lenders taken any action against the Company. CMS did not charge any placement agent, or additional investment banking fees for arranging these borrowings. Between May 28, 2009 and June 17, 2009 the Company borrowed an additional $62,600. A 1% facility fee was charged to the Company. The $62,600 was repaid on July 9, 2009.
On February 6, 2009, the Company entered into a promissory note with a face value of $100,000 (the “February 2009 Bridge Loan”). The February 2009 Bridge Loan accrues interest at the annul rate of 12% and is due February 14, 2010. In consideration of making the February 2009 Bridge Loan, the lender received 1,500,000 shares of the Company’s common stock valued at $0.02 per share, which resulted in an additional debt discount and corresponding additional paid in capital of $30,000 which will be amortized over the life of the loan.
On February 17, 2009, to obtain funding for working capital, the Company entered into a loan agreement with an accredited investor for the sale of an $18,000 Promissory Note (the “February Note”). The Note was sold at a discount of $3,000 and bears no interest. In connection with this transaction, the Company issued the Investor 225,000 restricted shares of common stock valued at $0.02 per share, which resulted in an additional debt discount and corresponding additional paid in capital of $4,500 which, together with the $3,000 discount, will be amortized over the life of the loan. The Note was originally due May 18, 2009. However, on May 17, 2009 the lender agreed to extend the maturity to July 18, 2009. The full principal amount of the Note is due upon default under the terms of Note. On June 26, 2009 the Company repaid the February Note.
F-15
The Company borrowed $50,000 from an unaffiliated lender on May 14, 2009 (the May 2009 Bridge Loan). This 12% unsecured loan is due May 14, 2010. In consideration of making the loan, the lender received 500,000 shares of common stock valued at $0.02 per share, which resulted in a debt discount of $10,000, which will be amortized over the life of the loan.
Reconciliation of Outstanding Notes Payable | |||
Stockholder Notes |
| $ | 449,000 |
|
|
|
|
2007 Bridge Loans |
|
| 550,000 |
June 2008 Promissory Note |
|
| 50,000 |
July-Oct 2008 Promissory Notes |
|
| 88,100 |
CMS Note |
|
| 9,000 |
February 2009 Bridge Loan | $100,000 |
|
|
Less Remaining Debt Discount | $(3,390) |
| 96,610 |
May 2009 Bridge Loan | $50,000 |
|
|
Less Remaining Debt Discount | $(3,712) |
| 46,288 |
|
|
| 839,998 |
Total Notes Payable |
| $ | 1,288,998 |
NOTE 5.
CONVERTIBLE DEBENTURES:
During 2007, the Company sold, to a group of outside investors (“Note Purchasers”), 12% Convertible Notes (“Convertible Notes”). The Convertible Notes were sold in private transactions arranged through Charles Morgan Securities, Inc. (“CMS”) pursuant to a Placement Agreement (the “Placement Agreement”) between the Company and CMS, which provides for the private placement by CMS of up to $1,500,000 aggregate principal amount of Convertible Notes. As of December 31, 2007, $1,500,000 of Convertible Notes were issued and the net proceeds received by the Company. The Convertible Notes issued are, pursuant to the terms of the Convertible Notes, convertible into shares of the Company’s Common Stock at the rate of $.05 per share. No beneficial imbedded conversion benefit was recognized due to the conversion price being equal to or greater than the fair value of the Common Stock.
The Convertible Notes are secured by a lien upon the Company’s accounts receivable and general intangibles and a pledge of 30,000,000 shares of the Company’s Common Stock, which shares of Common Stock have been issued as treasury stock, which does not affect the Company’s net stockholders’ deficit.
In connection with the sale of the Convertible Notes, CMS received (i) a placement fee equal to 10% of the aggregate proceeds ($150,000 at December 31, 2007); (ii) a non-accountable expense allowance equal to 3% of the aggregate proceeds ($45,000 at December 31, 2007), and a common Stock Purchase Warrant (the “Warrant”) to purchase shares equal to 10% of shares issuable upon conversion of the Convertible Notes; 3,000,000 shares at December 31, 2007). The Warrant is exercisable at $.06 per share. The Company recognized the amounts paid to CMS for its accountable and non-accountable expenses and legal costs totaling $197,000 as deferred financing costs. These costs were amortized as an expense using the interest method until the Convertible Notes were repaid.
During the last quarter of 2007 and the first nine months of 2008, lenders representing $1,500,000 converted their debt to equity. The Company issued 30,000,000 common shares from Treasury in satisfaction of the debt. In addition, 1,352,876 common shares valued at $0.1125 were issued for payment of accrued interest totaling $131,459. Accrued interest unpaid as of December 31, 2009 and 2008 totaled $55,921 and $81,865, respectively.
Pursuant to the terms of the Convertible Notes, the Company was obligated to file a registration statement with the Securities and Exchange Commission within 90 days of closing the Convertible Notes. Because the Company did not file such registration statement within this 90 day period, the Company was obligated to issue to the holders of such notes an aggregate amount of 21,874,977 shares of common stock of the Company. The shares were issued on December 31, 2007 pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended.
F-16
NOTE 6. PREFERRED STOCK
On February 12, 2008, the Company entered into a placement agreement (“Placement Agreement”) with CMS to sell up to $3 million of the Company’s Series B Convertible Redeemable Preferred Stock (“Series B Preferred”). Pursuant to the Placement Agreement, CMS could sell, on a best efforts basis, a maximum of 165,000 shares of Series B Preferred Stock, including a 10% broker’s over allowance, par value $.001 per share. The Series B Preferred have a liquidation preference of $20.00 per share and if all of the shares in the offering are sold, holders of all of the shares of the Series B Preferred (including those issued to CMS) would receive, upon conversion, common stock equal to 25% of the number of shares of the Company’s common stock that would be outstanding as of the date of conversion if all of our outstanding convertible securities were converted and all of the Company’s outstanding warrants were exercised. Howeve r, only $2.2 million of the offering was sold. Additionally, due to the thinly traded nature of the Company’s common stock, management believes that any rapid sale of the shares of common stock received as a result of the conversion would significantly affect the market price; therefore, this conversion option does not possess net settlement characteristics. The Series B Preferred is only convertible into 18.33% of the Company’s fully diluted outstanding shares, or 73.3% of the Offering. The variable nature of the conversion related solely to antidilutive activities, if any, initiated by the Company.
The Company can redeem the Series B Preferred Shares upon not less than 15 days written notice to the holder at a price of $.001 per share: (i) at any time after the Company’s annual revenue is not less than $20 million, (ii) upon closing of a financing, or multiple financings, from unrelated investors totaling not less than $8,000,000, or (iii) at any time after the second anniversary of their date of issuance.
As of December 31, 2009, CMS has sold 110,000 shares of the Series B Preferred ($2,199,947).
In connection with the sale of the Series B Preferred, CMS received (i) a placement fee equal to 10% of the aggregate proceeds ($220,000 at September 30, 2008); (ii) a non-accountable expense allowance equal to 3% of the aggregate proceeds ($66,000 at September 30, 2008), and (iii) 73,333 shares of the Series B Preferred.
NOTE 7.
COMMON STOCK:
During the year ended December 31, 2009 the Company issued 33,000,000 of common stock in connection with private placement offerings. During 2008, the Company issued no shares of common stock in connection with private placement offerings.
NOTE 8.
STOCK BASED COMPENSATION:
The Company currently utilizes the Black-Scholes option pricing model to measure the fair value of stock options granted to employees. While FASB ASC 718-10 permits entities to continue to use such a model, it also permits the use of a “lattice” model. The Company expects to continue using the Black-Scholes option pricing model in connection with its adoption of FASB ASC 718-10 to measure the fair value of stock options.
A summary of the option awards under the Company’s Stock Option Plan as of December 31, 2009 and changes during the two-year period ended December 31, 2009 is presented below:
Stock Option Summary | ||
|
| Weighted |
|
| Average |
|
| Stock |
Stock Options | Shares | Price |
Outstanding, January 1, 2007 | 2,820,000 | $0.14 |
Granted, 2007 | 18,500,000 | $0.05 |
Granted, 2008 | 3,680,000 | $0.02 |
Granted, 2009 | 2,000,000 | $0.01 |
Exercised | - | - |
Forfeited | (2,430,000) |
|
Outstanding at December 31, 2009 | 24,570,000 | $0.05 |
|
|
|
Options vested at December 31, 2009 | 10,324,000 | $0.06 |
At December 31, 2009, the average remaining term for outstanding stock options is 8.1 years.
F-17
A summary of the status of non-vested shares under the Company’s Stock Option Plan, as of December 31, 2009 and changes during the two-year period ended December 31, 2009 is presented below:
Non-Vested Option Summary | ||
|
| Weighted |
|
| Average |
|
| Stock |
Stock Options | Shares | Price |
Non-vested, December 31, 2007 | 10,096,000 | $0.05 |
Non-vested, December 31, 2008 | 2,250,000 | $0.03 |
Granted during 2009 | 1,900,000 | $0.01 |
| - | - |
|
|
|
Total Non-vested, December 31, 2009 | 14,246,000 | $0.04 |
As of December 31, 2009 and 2008, there was a total of $492,433 and $686,666 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Stock Option Plan, respectively. That cost is expected to be recognized over a weighted-average period of 8 years. This disclosure is provided in the aggregate for all awards that vest based on service conditions.
NOTE 9.
INCOME TAXES
As of December 31, 2009 and 2008, the Company had deferred tax assets of approximately $4,000,000 and $3,600,000, respectively, with equal corresponding valuation allowances in accordance with the provisions of FASB ASC 740-10
Realization of the deferred tax assets is largely dependent upon future profitable operations, if any, and the reversals of existing taxable temporary differences. As a result of previous pre-tax losses from continuing operations and future taxable income expected to arise primarily from the reversal of and creation of temporary differences for the foreseeable future, management determined that in accordance with FASB ASC 740-10, it is not appropriate to recognize these deferred tax assets. Although there can be no assurance that such events will occur, the valuation allowance may be reversed in future periods to the extent that the related deferred income tax assets no longer require a valuation allowance under the provisions of FASB ASC 740-10.
There were no income tax payments in 2009 and 2008, respectively.
At December 31, 2009, the Company has loss carry-forwards available to reduce future taxable income and tax thereon. The carry-forwards will expire as outlined in the following table:
Federal Expiration |
|
|
|
| State Expiration |
| Federal |
| State | ||
2024 | $ | 67,516 | $ | - | 2009 |
2025 |
| 1,026,016 |
| 1,026,016 | 2010 |
2026 |
| 2,145,548 |
| 2,143,198 | 2011 |
2027 |
| 3,420,263 |
| 3,417,596 | 2012 |
2028 |
| 2,079,543 |
| 2,079,543 | 2013 |
2029 |
| 907,022 |
| 907,022 | 2014 |
TOTALS | $ | 9,645,908 | $ | 9,573,375 |
|
NOTE 10.
RELIANCE ON OFFICERS:
The Company presently has only 1 full time employee; the president of account sales. This individual is presently the only person who has the experience to develop and sell the Company’s products. If this person were no longer able or willing to function in that capacity, the Company would be negatively affected. The Company also retains a full time consultant to assist with the operations of the Company.
NOTE 12.
CONCENTRATION OF CREDIT RISK:
The Company has one major customer that accounted for approximately 73% of gross sales, another customer that accounted for 17% of gross sales and a third customer that accounted for 4% of gross sales during 2009. Additionally, net of slotting allowances, as of December 31, 2009, one customer accounted for 66% of accounts receivables at year end, one customer accounted for 44% of accounts receivable and two customer accounted for approximately 17% of receivables each.
F-18
NOTE 13.
FINANCIAL ADVISORY AGREEMENTS:
Charles Morgan Securities, Inc.
In connection with entering the Placement Agreement with CMS regarding the sale of the Convertible Notes (see Note 5), the Company and CMS entered into an Investment Advisory Agreement pursuant to which CMS has agreed to provide certain advisory services in exchange for (i) the payment of a $30,000 engagement fee, (ii) an agreement to pay $240,000 over 24 months, and (iii) the issuance to CMS of 13,250,000 shares of the Company’s Common Stock.
The fees of $270,000 ($240,000 plus $30,000) are being amortized on a straight line basis over the 24-month term of the Investment Advisory Agreement. The 13,250,000 shares received by CMS are valued at $0.05 per share based upon the exercise prices of various warrant awards. This results in a value of $662,500, which is recognized as an issuance of common stock and additional capital of which the total amount is also being amortized into expense over the 24-month period of the Investment Advisory Agreement. The unamortized amount is shown as unearned compensation expense as a further increase to stockholders’ deficit.
Also in connection with entering the Placement Agreement with CMS, the Company and CMS entered into an Investment Banking Agreement providing for the sale of the Convertible Notes and contemplating a future placement of the Company’s securities by CMS.
NOTE 14.
SUBSEQUENT EVENTS:
On January 15, 2010, the Company issued 4,000,000 shares of the Company’s unregistered common stock as a prepayment toward $20,000 in fees due the Company’s Public Relations Company for the period January 15, 2010 to May 15, 2010.
On February 1 2010, the Company renewed its investment banking agreement with Charles Morgan Securities (“CMS”), an unaffiliated investment banking firm. The renewal was for six months, commencing February 1, 2010 and ending July 31, 2010. The monthly fee due CMS for the period is $10,000, or a total of $60,000. The Company issued CMS 6,000,000 shares of the Company’s unregistered common stock as a prepayment of the $60,000 investment banking fees due CMS.
On February 23, 2010, the Company issued 1,500,000 shares of the Company’s unregistered common stock in full satisfaction of $15,000 of consulting fees due to a consultant retained by the Company.
On March 24, 2010 the Company received notice from several stockholders of the Company’s Series B Convertible Redeemable Preferred Stock (“Series B Preferred”) their intent to convert their shares of the Series B Preferred into shares of common stock. Pursuant to the Series B Preferred’s Certificate of Designation, notice by one stockholder of their intention to convert, automatically triggers the conversion of all of the remaining stockholders. The Company has calculated that each share of Series B Preferred outstanding shall be converted into 318.167 shares of the Company’s common stock. Based upon the 183,333 shares of Series B Preferred issued and outstanding, the Company will issue a cumulative total of 58,330,551 shares of its common stock as a result of the conversion of the Series B Preferred.
F-19
