The accompanying notes are an integral part of these financial statements.
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, 2009 | 242,093,950 | $242,094 | 183,333 | $ 183 | $9,595,548 | $ (10,000) | $ - | $(11,642,365) | $(7,645) | $ (1,822,185) |
| | | | | | | | | | |
Issuance of common stock for consulting services | 11,500,000 | 11,500 | - | - | 83,500 | (80,000) | - | - | - | 15,000 |
Issuance of treasury stock for brokerage fees | - | - | - | - | 27,000 | - | - | - | 3,000 | 30,000 |
Amortization of unearned compensation | - | - | - | - | - | 22,500 | - | - | - | 22,500 |
Compensation expense for stock option plan | - | - | - | - | 42,466 | - | - | - | - | 42,466 |
Net loss | | - | - | - | - | - | - | (214,522) | - | (214,522) |
| | | | | | | | | | |
Balance at March 31, 2010 | 253,593,950 | $253,594 | 183,333 | $ 183 | $9,748,514 | $ (67,500) | $ - | $(11,856,887) | $(4,645) | $ (1,926,741) |
The accompanying notes are an integral part of these financial statements.
6
THE ENLIGHTENED GOURMET, INC.
STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2010 and 2009
| | | | |
| | March 31, 2010 | | March 31, 2009 |
| | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net Loss | $ | (214,522) | $ | (315,523) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Non-Cash stock based expense | | 82,965 | | 56,507 |
Amortization of deferred financing costs | | 2,469 | | 29,497 |
Amortization of debt discount | | 5,890 | | 23,535 |
Increase (decrease) in sales allowances taken | | (500) | | 60,000 |
Issuance of stock pursuant to a note payable | | - | | 40,000 |
Issuance of treasury stock | | 27,000 | | - |
| | | | |
Changes in Current Assets and Liabilities: | | | | |
Accounts Receivable | | 9,613 | | (59,427) |
Inventory | | 19,619 | | (16,360) |
Prepaid Expenses | | - | | - |
Accounts Payable | | 810 | | 38,864 |
Accrued Expenses | | 42,204 | | 50,355 |
| | | | |
NET CASH USED IN OPERATING ACTIVITIES | | (24,452) | | (89,552) |
| | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from Notes | | - | | 86,972 |
NET CASH PROVIDED BY FINANCING ACTIVITIES | | - | | 86,972 |
| | | | |
NET DECREASE IN CASH | | (24,452) | | (2,580) |
CASH, BEGINNING | | 19,523 | | 2,629 |
| | | | |
CASH, ENDING | $ | (4,929) | $ | 49 |
| | | | |
Supplemental cash flow information: | | | | |
Issuance of stock for payment of fees | $ | 90,000 | $ | 40,000 |
The accompanying notes are an integral part of these financial statements.
7
THE ENLIGHTENED GOURMET, INC.
NOTES TO FINANCIAL STATEMENTS
For the 3 months ended March 31, 2010 and 2009
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 March 31, 2010 the Company’s products were authorized in 20 supermarket chains having 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 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 raise 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 $214,522 for the three months ended March 31, 2010 and 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 and (v) expand product line. 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.
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 March 31, 2010 or 2009. 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 three months ended March 31, 2010 and 2009 were $5,891 and $23,535, respectively.
8
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 March 31, 2010 and 2009, 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).
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. For the quarter ending March 31, 2010 and 2009, the shipping and handling costs totaled $624 and $700, respectively.
Advertising and Promotions:
Advertising and promotional costs including print ads, commercials, catalogs, brochures and co-op are expensed as incurred. Advertising and promotional costs for the quarter ending March 31, 2010 and 2009 totaled $5,204 and $1,637 respectively.
9
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 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 impact on the Company’s results of operations, cash flows, or financial position.
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.
10
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 consideration of making the April 2006 Promiss ory 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 $168,688 and $123,668 as of March 31, 2010 and 2009 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 $65,305 and $47,305 as of March 31, 2010 and 2009 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 $15,673 and $11,353 as of March 31, 2010 and 2009 respectively.
(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 $16,117 and $11,616 as of March 31, 2010 and 2009 respectively.
11
(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 Promi ssory 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 maturity. Since April 1, 2007, the December 20 06 Promissory Note has borne interest at the rate of 18% per annum. Accrued interest for this Promissory Note is $27,000 and $18,000 as of March 31, 2010 and 2009 respectively.
The following summarizes the stockholders notes as of March 31, 2010 and 2009:
| | |
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.
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 amoun t of bridge loans outstanding as of:
| | | | |
| | March 31, 2010 | | March 31, 2009 |
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 |
12
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 of 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.
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 $.04 per share for th e 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.
13
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.
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.
| | | | |
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 |
May 2009 Bridge Loan | $ | 50,000 | | |
Less Remaining Debt Discount | | (1,212) | | 48,788 |
| | | | |
| | | | 845,888 |
Total Notes Payable | | | $ | 1,294,888 |
NOTE 5.
CONVERTIBLE DEBENTURES:
During 2007, the Company sold to a group of outside investors (“Note Purchasers”), $1,500,000 of its 12% Convertible Notes (“Convertible Notes”). As of June 30, 2008, all of the Convertible Notes were converted into a cumulative total of 30,000,000 shares of the Company’s common stock. 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 March 31, 2010 and 2009 totaled $55,921 respectively.
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. However, only $2.2 milli on 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.
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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 March 31, 2010, 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.
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 sets the conversion price for all of the outstanding shares of the Series B Preferred. 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.
NOTE 7.
COMMON STOCK:
During the three months ended March 31, 2010 and 2009, 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 March 31, 2010 and changes during the two-year period ended March 31, 2010 is presented below:
| | | | |
Stock Option Summary |
| | | | Weighted |
| | | | Average |
| | | | Stock |
Stock Options | | Shares | | Price |
Outstanding, January 1, 2008 | | 21,320,000 | | $0.06 |
| | | | |
Granted, 2008 | | 3,680,000 | | $0.02 |
Granted, 2009 | | 2,000,000 | | $0.01 |
Exercised | | - | | - |
Forfeited | | (2,430,000) | | - |
Outstanding at March 31, 2010 | | 24,570,000 | | $0.05 |
| | | | |
Options vested at March 31, 2010 | | 11,552,500 | | $0.06 |
At March 31, 2010, the average remaining term for outstanding stock options is 7.9 years.
A summary of the status of non-vested shares under the Company’s Stock Option Plan, as of March 31, 2010 and changes during the two-year period ended March 31, 2010 is presented below:
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| | | | |
Non-Vested Option Summary |
| | | | Weighted |
| | | | Average |
| | | | Stock |
Stock Options | | Shares | | Price |
Non-vested, March 31, 2008 | | 9,117,500 | | $0.05 |
Non-vested, March 31, 2009 | | 2,100,000 | | $0.03 |
Granted during 2009 | | 1,800,000 | | $0.01 |
| | | | |
Total Non-vested, March 31, 2010 | | 13,017,500 | | $0.04 |
As of March 31, 2010 and 2009, there was a total of $449,969 and $640,159 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 7.9 years. This disclosure is provided in the aggregate for all awards that vest based on service conditions.
NOTE 9.
INCOME TAXES
As of March 31, 2010 and 2009, the Company had deferred tax assets of approximately $3,000,000 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 2010 and 2009, respectively.
At March 31, 2010, 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 distributor that accounted for approximately 100% of gross sales at March 31, 2010 and 81.3% as of March 31, 2009. However, this one distributor sells to the approximately 600 stores where the Company’s products are authorized. Additionally, net of slotting allowances, as of March 31, 2010 and 2009, one customer accounted for 100% and 81% of accounts receivables.
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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:
Management has evaluated subsequent events through May 20, 2010 and has determined that there are none to report.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis and other portions of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information. Factors that may cause such differences include, but are not limited to, availability and cost of financial resources, product demand, and market acceptance as well as other factors. This Management’s Discussion and Analysis should be read in conjunction with our financial statements and the related notes included elsewhere in this Quarterly Report.
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, a nd competition.
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 quarter ended March 31, 2010 were less than the comparable period of 2009, as the Company’s sales, like retail sales in general, continued to be hampered by the economic recession. Additionally, the severe weather in the New York area in January and February hampered deliveries to stores. Consequently, several times during the quarter, at various stores, we were unable to have product on the stores’ shelves. This resulted in lost sales. However, sales to stores in upper level economic areas remained strong, compared to stores in middle, or lower income areas, and the Company is continui ng to see early signs that consumer buying patterns may be returning to those experienced prior to 2008. 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 during the 1st quarter of 2009.
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 opportunity in the growing market f or healthier foods in schools, as well as health care institutions. The Company expects to begin recording sales of these new products in the 2nd quarter of 2010.
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Results of Operations.
During the three months ended March 31, 2010, we recorded gross sales of $27,579 compared to $64,194 for the comparable quarter of 2009. The decline in sales was primarily due to the fewer number of stores that our products were authorized in 2010 compared to 2009, and the severe winter weather in January & February which limited the ability of the Company’s distributor to make store deliveries, which consequently reduced sales. We were offered the opportunity to return to many of the stores we were authorized in 2009, but would have had to pay additional slotting to do so. Given the scarcity of capital, we decided not to do so. However, without garnering new stores, increases in the Company’s sales to levels previously obtained will be difficult to return to.
Another reason for the decrease in sales is the continuing weak economy which adversely affected sales, as consumers looked 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. Consumers typically cut back on higher priced items, regardless of their health benefits, as they usually conserve cash during weak or uncertain economic times. Accordingly, our revenue for the 3 months ending March 31, 2010 was significantly less than it was for the comparable periods in 2009.
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 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. The Company continues to believe that these are attributes that consumers will find attractive and will return to purchasing the Company’s products and as the economy improves. This belief continues to be supported by the positive feedback the Company receives from brokers, store representatives and consumers that its products are well received in the marketplace. Additionally, the Company has completed its internal testing of the reformulation of its recipe to allow its ice cream to be considered “All Natural.” The Company’s initial tests, including taste testing, were very positive. Th e “natural” segment of food sales, together with the “organic” segment are two of the fastest growing divisions of grocery sales. Based upon definitions of what is considered an all natural product, primarily from information publicly available from Whole Foods, the Company‘s tests have revolved around replacing one of its ingredients with another ingredient. Historically, consumers have been willing to pay more for foods considered to be natural and/or organic and the Company believes this will be beneficial to the Company. The Company plans to present its new product to potential customers at several national and regional trade shows this summer and fall. Since stores typically authorize new products only once a year in either fall or spring, the Company does not expect to receive any authorizations from stores for its new all natural product until at least the 3rd quarter of 2010.
All of our revenue during the first quarter of 2010 was from the sale of ice cream bars to supermarket chains. Our Orange & Vanilla Cream bar became our top selling bar during the quarter representing 34.3% of sales, beating out for the first time our Double Chocolate Fudge bar which represented 26.7% of sales. Our Double Sundae Swirl bar continued to have good sales representing 26.5% of sales and our Peach Melba bar represented 13.8% of sales. The comparable percentages for the first quarter of 2009 were Double Chocolate Fudge 38.4%, Orange & vanilla Cream 24.5% Sundae Swirl 23.3%, Cappuccino Fudge 10% and Peach Melba 6.7%. The lack of sales of the Cappuccino Fudge bar in 2010 is a function of not having any authorized stores during the quarter. We still believe that the Cappuccino Fudge bar is an attractive flavor in the New York and New England markets where coffee flavored beverages are strong sellers.
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.
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All of our ice cream bars are manufactured at our original co-packing facility in Lakewood, New Jersey. Due to logistical concerns, we no longer manufacture any products at the second co-packer we employed located in Wisconsin. We had no long term agreement to manufacture our products with the Wisconsin co-packer, and presently do not have a long term agreement to manufacture our product with our original co-packer. While having two co-packers helped diminish the potential adverse effects should either co-packer experience any production issues, or shortages, the logistical concerns of having two co-packers and scheduling production time caused us to consolidate back into a single co-packer. However, to the extent that our 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. Accordingly, during the 4th quarter of 2009, we increased our finished goods inventory to help insure that we have adequate inventories going into 2010 to meet our expected sales. Additionally, we did so to also diminish the likelihood of any problems should our co-packer be unable to manufacture our product. While the Company has sufficient inventories to fill orders between now and the end of the year for certain flavors, it will need to produce certain other flavors to make certain we have sufficient inventories of all flavors to avoid any product shortages. The Company is managing it’s inventory so that it can introduce its new “all natural” bar later this year, without having an excess inventory of our existing bar. Going forward, we still anticipate the need to enter into a long-term production agreement with this co-packer once we can reasonably determine our sales for the next twelve to eighteen months. Additionally, we believe that until we are more stab le financially, this co-packer 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 $214,522 for the 1st quarter of 2010, compared to a net loss $312,523 for the comparable quarter ended 2009, reducing its loss by $98,001; an improvement of 31.4%. However, sales for the 3 months ending March 31, 2010 were less than the 1st quarter of 2009. Consequently the Company’s cost of goods sold was less in the 1st quarter of 2010, compared to the 1st quarter of 2009. Additionally, the Company’s Cost of Goods Sold as a percentage of Sales in the 1st quarter of 2010 (71.1%), while still greater than the Company prefers, was a considerable improvement from the 1st quarter of 2009, when it actually represented 102.7% of sales. Slotting fees and expenses paid by the Company in the quarter were considerably less than those incurred in the comparable quarter of 2009. As previously stated, the Company focused its efforts on increasing sales from existing stores ra ther than attempting to get sales from new stores. Consequently the Company’s slotting expenses were considerably less this quarter compared to the comparable quarter of 2009. The Company’s selling, general and administrative expenses increased slightly from $154,510 for the 3 months ending March 31, 2009 to $164,221 for the same three month period this year Finally, as a result the Company’s past and continuing efforts to reduce its debt burden, the Company’s interest expense was considerably less for the 3 months ending March 31, 2010 ($52,064) compared to the 3 months ending March 31, 2009 ($96,274). The Company has worked hard to make its operations more efficient and to reduce its debt burden so that it can have more capital available for production related expenses to insure it has product to sell, as well as capital to market and promote its products. This is a continuation of the trend that began earlier this year.
The Company had revenues of $27,579 and paid $6,198, representing 22.5% of sales, in slotting, discounts & other credits in the quarter compared to revenues of $64,194 and slotting discounts & other credits of $60,000 in the comparable quarter of 2009. The decrease in slotting fees represents the Company’s continuing efforts to attempt to increase sales from existing accounts, rather than from obtaining authorizations from new stores, or “paying to stay” in existing stores. The Company believes it is best served by using its available capital to insure that it can make and deliver product to the stores, and increase sales in existing stores by spending more money on marketing and promotion rather than slotting. Historically, slotting charges have typically been 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. However, more recently, sup ermarkets have been asking for annual slotting payments, called “Pay to Stay,” to add additional revenues to the stores. The Company is continuing to examine 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 discontinued, similar to what happened with certain supermarket chains the Company was selling to in 2007 and to a lesser degree i n 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.
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The $214,522 loss for the 1st quarter of 2010 resulted primarily from (i) selling, general and administrative expenses, (ii) slotting fees and discounts, (iii) the Company’s unusually high cost of goods sold incurred during 2010, and (iv) interest expense. Supermarkets deducted 6,198, representing 22.5% of sales, during the quarter to pay for marketing and promotional fees and expenses, including consumer price discounts in existing stores. The Company’s slotting expenses, as a percentage of revenues, declined compared to the comparable quarter last year, as the Company did not increase the number of authorized stores, and elected not to pay additional slotting to stay in some of the stores it had been authorized in 2009. Consequently, slotting expenses were lower, but sales were also lower due the decrease in the number of stores selling the Company’s products. The Company expects this trend to continue through the end o f this year, because it committed to spend fewer dollars on slotting this year compared to previous years. The Company expects that the interest in its new all natural ice cream product will be such that slotting expenses will increase next year, as stores authorize this new product. The Company’s cost of goods sold, $19,618, or 71.1% of sales, while still high, was a considerable improvement over the 92.6% it average during 2009, and even more when compared to the 102.7% observed in the 1st quarter of 2009. However, as a result of the Company’s inability, due to lack of working capital, to order raw materials in sufficient volume to obtain bulk purchasing prices, its cost of goods sold is higher than what the Company would like. Until such time as the Company can purchase its ingredients in greater quantities, further improvement will be limited. Beginning in early 2009, the Company changed the way it orders its raw materials to make its basic ice cream mix, as well as how it is blended and mixed, which has led to this improvement. Additionally, the Company is continuing to look for ways to increase its gross margin without sacrificing the quality of its product. The Company has never had sufficient financial 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. 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 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. The weak economy has also helped hold down the prices for the raw materials the Company purchases to make its product.
The Company incurred Selling, General & Administrative costs of $164,221 in the current quarter compared to $154,510 last year; an increase $9,711. The Company incurred Sales and Distribution expenses during the 1st quarter of 2010, of $2,109 of which $1,374 was related to sales commissions for product sold. The Company has significantly reduced its cold storage expenses, as the majority of our products are stored in our distributor’s warehouse at very little cost to the Company. All of the Company’s sales during the 1st quarter were sales made by the Company’s direct store distributor which services the New York Metro region. This distributor picks up their orders directly from its warehouse where the Company now stores its products. Previously the Company leased cold storage space from an unaffiliated company. The distributor deducts 2% of the cost of the item to cover the delivery cost. This is less expensive than hiring an independent truc ker to deliver these orders. Almost all of the decrease in Sales and Distribution expenses in 2010 compared to 2009 was due to significant decreases in cold storage costs and lower fright costs as a result of this new program.
The Company incurred $12,000 in costs attributable to salaries and benefits during the 1st quarter, compared to $39,857 in the comparable period of 2009. The decrease is related to the reduction in full time head count of one employee which took place during the 1st quarter of 2009. While it does not effect the Company’s earnings, the Company’s President has continued to defer a considerable portion of his salary, which improves the Company’s working capital. The balance of the Company’s SG&A was incurred in general operating expenses including advertising, marketing, travel and entertainment.
The Company incurred interest charges of $52,064 during the quarter compared to $96,274 in the comparable period in 2009; a decrease of $44,210 or about 45.9%. While the interest accruals for both the 1st quarter of 2010 and 2009 were approximately the same ($43,704 and $43,242 respectively), the majority of the $44,210 difference between the respective quarters was due to lower amortization of deferred financing costs and debt discount in 2010, compared to 2009. As of December 31, 2009, almost all of the costs associated with the Company’s borrowings has been amortized. Accordingly, for the 1st quarter of 2010, the Company amortized $2,469 of deferred financing costs, compared to $29,497 in 2009. The Company also amortized $5,890 of debt discount in the quarter, compared to $23,535 in 2009. The majority of the interest expense in the current quarter is related to the $449,000 Stockholders Notes that are currently in default and accruing interest at the default rate of 18%. The balance of the Company’s indebtedness accrues interest at an annual rate of 12%.
Liquidity and Capital Resources.
During the quarter the Company’s total assets decreased by $50,683 from $505,517 at December 31, 2009 to $454,834 at March 31, 2010. The decline was principally the result of the cumulative effect of a decrease in cash ($19,483), a decrease in net accounts receivable ($9,113), as a result of receiving monies due the Company, a decrease in finished goods inventories ($19,618) to reflect product sold, and a decrease in deferred financing costs of $2,469 as the Company continued to amortize the costs of its 2009 borrowings.
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The Company’s current assets decreased $48,214 from $252,563 at December 31, 2009 to $204,349 at March 31, 2010. The decrease in current assets was primarily as a result of the aforementioned decrease in cash ($19,483), decrease in net accounts receivable ($9,113), and a decrease in finished goods inventory ($19,618). At March 31, 2010, the Company had negative working capital of approximately $2,177,226, which consisted of current assets of approximately $204,349 and current liabilities of $2,381,575. The Company’s negative working capital was up $102,088 from $1,822,184 at year end. The majority of this increase came from a decrease in current assets, $48,214, and an increase in accrued expenses ($42,205), primarily accrued interest. The balance was attributable to a cash overdraft of $4,969, an increase in other notes payable ($5,890) as a result of the amortization of debt discount and an increase in accounts payable of $810. All of the Company’s borrowings come due within the next 12 months, or are in default and are past due. Consequently this has a negative impact on the Company’s working capital. The Company is continuing to work with each of its lenders and several of its creditors to work out an alternative repayment plan and to extend the maturity of the various loans. The Company’s working capital is also hampered by $369,679 of accounts payable which, while down from historical highs, is still quite high given the Company’s current sales. Additionally, the Company’s accrued expenses of $712,039 are up $42,205 from $669,834 at December 31, 2009. The majority of the increase in accrued expenses is a result of the accrued interest on the Company’s indebtedness. Our current assets consisted of $40 cash, $5,454 in trade accounts receivables net of slotting fees, discounts and allowances, $198,855 in inventory including both finished goods, $51,414, and raw materials, $147,441, and deferred financing cos ts of $485. Our current liabilities included accounts payable of $369,679 up $810 from $368,869 at December 31, 2009, accrued expenses of $712,039 up $42,205 from $669,834 at December 31, 2009 and various promissory notes payable within one year of $1,294,888. Of this amount, $449,000 has been and continues to be in default. The note holders of the defaulted notes have demanded repayment. The Company is in continuing discussions with each of the lenders to enter into a settlement for the amounts due. Additionally, $350,000 of the $550,000 2007 bridge loans are also in default. The Company has made an offer to each of these lenders to pay the accrued interest and outstanding principal in shares of common stock and to extend the maturity of each of the loans to December 31, 2010.
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, many of the Company’s vendors continue to lengthen payment terms and generally accommodate the Company’s needs, based upon the fact that Company has previously paid their invoices; albeit not in a timely manner. In many cases vendors work with the Company, because they view it in their best interest to work with the Company during this period of limited working capital. However, not all vendors have been willing to extend such credit terms, and many vendors continue to require sizeable up-front deposits, or full payment in advance.
While the Company has been able to raise equity capital in the past, it is still dependent upon additional capital in the near term in the form of either debt or equity to continue its operations, continue to build the companies inventories of finished foods and complete the rollout of it new stuffed pasta dishes and its “all natural” ice cream bars. 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 continue to increase its inventories of finished goods, and to pay down its accounts payable and existing indebtedness. The Company 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 basi s. 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); complete the rollout of its new stuffed pasta dishes and its “all natural” ice cream, (iv) repay its existing indebtedness including its accounts payable and (v) increase its corporate infrastructure. The Company believes that it needs about $1,000,000 of additional capital, of which $500,000 would go toward manufacturing and marketing its existing products, as well as complete the rollout of its new products, which it plans to introduce this year. The balance of this amount, if received, would go towards reducing the Company’s remaining indebtedness. However, we do not have any current agreements to receive additional capital and there can be no assurance that the Company will be able to ob tain additional financing in amounts or on terms acceptable to us, or at all. To the extent that the Company is unable to receive such funding on a timely basis, the Company’s ability to continue to pay its existing obligations, as well as enter new markets or exploit existing markets may be delayed or potentially lost, and management’s revenue projections will not be met. Additionally, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
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ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedure
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 March 31, 2010, the Company’s management carried out an evaluation, with the participation of the Company's Chief Executive Officer (principal executive officer) and Chief Accounting Officer (principal financial officer), of the effectiveness of the Company's disclosure controls and procedures and the Company’s internal control over financial reporting. Management concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level in timely alerting it to material information required to be included in the Company's periodic Securities and Exchange Commission filings and were also effective at the reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Sec urities and Exchange Commission and is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There was no change in the Company's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
N/A
ITEM 1A. RISK FACTORS
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No advertising or general solicitation was employed in offering the securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
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. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No advertising or general solicitation was employed in offering the securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
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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. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No advertising or general solicitation was employed in offering the securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company continues to be in default with respect to $449,000 aggregate principal amount of unsecured promissory notes (the “Promissory Notes”) payable to various stockholders of the Company (each a “Lender”). The interest rate on such Promissory Notes has increased to the Default Rate of 18% per annum from the stated rate of 12% per annum.
On June 13, 2007, each Lender entered into an agreement to accept their pro rata amount of an aggregate of 4,644,711 shares of common stock in conditional satisfaction of the indebtedness represented by such Promissory Notes. Under the terms of theses agreements, each 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 Promissory Notes reinstated.
To the extent any Lender elects to return some or all of their shares of common stock to the Company, the Company intends to repay such Promissory Notes with the proceeds from future financings, although there can be no assurance that such future financings will be available to the Company, or that if financings become available in the future what the terms of such financings will be, or that they will be in amounts sufficient to pay these Promissory Notes and other obligations of the Company.
On October 2, 2007, the Company notified the SEC that it was withdrawing the Registration Statement, and the Promissory Notes are still in default and continue 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.
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 was 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 June 30, 2009, the Company issued 4,313,425 shares of the Company’s unregistered common stock to the Lender in lieu of $43,134.25 cash in full satisfaction of accrued interest due for the period September 14, 2007 to June 30, 2009 and the Lender agreed to extend the maturity to December 31, 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 two separate lenders with a combined face value of $250,000 (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 each of the 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 of the November 2007 Bridge Loan will agree to any such terms.
On June 26, 2008, the Company entered into a promissory note with a lender in the amount of $50,000 (the “June 2008 Loan”). The June 2008 Loan accrues interest at the annual rate of 12% and was due June 26, 2008 and is unsecured. The June 2008 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 June 2008 Loan to pay the accrued interest due, and to extend its maturity. No assurances can be given that the lender of the June 2008 Loan will agree to any such terms.
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Between July 14, and August 8, 2008, the Company entered into a various promissory notes with an unaffiliated lender totaling $58,500 (the “July-August 2008 Loans”). Each of the July-August 2008 Loans accrues interest at the annual rate of 12% and is unsecured. As of August 8, 2009, each of the July-August 2008 Loans is in default for failure to pay the principal amount and accrued interest due at maturity. The Company is negotiating with the holder of the July-August 2008 Loans to pay the accrued interest due, and to extend its maturity. No assurances can be given that the lender of the July-August 2008 Loans will agree to any such terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
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. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No advertising or general solicitation was employed in offering the securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
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. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No advertising or general solicitation was employed in offering the securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
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. In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No advertising or general solicitation was employed in offering the securities. Transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.
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 sets the conversion price for all of the outstanding shares of the Series B Preferred. 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.
ITEM 6. EXHIBITS.
Exhibits filed with this report:
| |
No. | Description |
| |
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned thereunto duly authorized on this 21st day of May 2010.
THE ENLIGHTENED GOURMET, INC.
By:/s/ ALEXANDER L. BOZZI, III
Alexander L. Bozzi, III, President
(Principal Executive Officer and
Principal Financial Officer and Chief Accounting Officer)
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