UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended - December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from -
Commission file number - 333-113925
Kahiki Foods, Inc.
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(Exact name of small business issuer as specified in its charter)
Ohio
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(State or other jurisdiction or incorporation or organization)
31-1056793
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(I.R.S. Employer Identification No.)
1100 Morrison Blvd., Gahanna, Ohio 43230
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(Address of principal executive offices)
(614) 322-3180
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,627,848 common shares.
Transitional Small Business Disclosure Format (Check One): Yes [X] No [ ]
2
KAHIKI FOODS, INC.
INDEX PAGE
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Part I. Financial Information:
Item 1. Financial Statements 4-7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 8-12
Item 3. Controls and Procedures 12
Part II Other Information
Item 1. Legal Proceedings 13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matter to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits 15-17
Signatures 14
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
KAHIKI FOODS, INC.
BALANCE SHEETS
DECEMBER 31, 2004 MARCH 31, 2004
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(UNAUDITED)
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ASSETS
Cash $ 465,220 $ 1,073,901
Marketable Securities 30,000 585,032
Accounts Receivable 1,740,096 1,964,941
Inventories 1,832,532 1,565,863
Prepaid Expenses 88,336 16,055
Deferred Income Taxes 30,206 28,000
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Total current assets 4,186,389 5,233,792
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Land 114,485 114,485
Building & Improvements 2,499,262 2,499,262
Machinery & equipment 2,132,944 2,052,144
Furniture & fixtures 85,348 67,146
Vehicles 146,269 146,269
Construction in progress 6,767,853 3,776,366
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11,746,162 8,655,672
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less: accum depreciation (1,841,095) (1,475,370)
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Net property & equipment 9,905,067 7,180,302
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Deferred bond and loan fees 223,056 147,988
Deferred Taxes 27,000 27,000
Other 23,372 439,655
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Total other assets 273,428 614,643
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TOTAL ASSETS $ 14,364,884 $ 13,028,737
=============== =============
LIABILITIES & EQUITY
Current debt $ 496,802 $ 529,491
Current portion of bond 140,000 140,000
Line of credit - 1,000,000
Accounts Payable 2,208,855 1,905,171
Accrued expenses 251,173 545,027
Income taxes payable 11,333 413,000
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Total current liabilities 3,108,163 4,532,689
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Bond Obligation 3,888,333 4,002,546
Line of credit 1,000,000 -
Long-term debt 2,932,706 1,145,635
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Total Liabilities 10,929,203 9,680,870
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Stockholders' Equity
Common stock, no par value, 10,000,000
shares authorized; 3,627,848 and 2,964,888 2,769,756 2,770,123
issued
Retained earnings 665,926 577,744
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Total stockholders' equity 3,435,681 3,347,867
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 14,364,884 $ 13,028,737
=============== =============
See notes to the financial statements.
4
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
QUARTERS ENDED DECEMBER 31,
2004 2003
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Sales $ 4,404,813 $ 4,102,523
Cost of sales:
Cost of sales 3,250,974 2,784,067
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Total cost of sales 3,250,974 2,784,067
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Gross margin 1,153,839 1,318,456
Operating expenses:
General and administrative expenses 1,074,876 838,880
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Total operating expenses 1,074,876 838,880
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Income (loss) from operations 78,963 479,576
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Other income (expense):
Interest expense (37,547) (36,584)
Interest and dividend income 567 6,958
Net gain (loss) on marketable securities - 3,269
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Total other income (expense) (36,980) (26,357)
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Income (loss) before income taxes 41,983 453,219
Income tax expense (benefit) 16,792 167,000
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Net income (loss) $ 25,191 $ 286,219
=========== ===========
Weighted average shares outstanding:
Basic 3,627,848 2,964,888
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Diluted 4,917,317 3,172,803
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Net income (loss) per common share:
Basic $ 0.01 $ 0.10
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Diluted $ 0.01 $ 0.09
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See notes to the financial statements.
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KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
NINE MONTHS ENDED DECEMBER 31,
2004 2003
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Sales $ 14,638,788 $ 8,658,571
Cost of sales:
Cost of sales 10,885,029 6,043,426
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Total cost of sales 10,885,029 6,043,426
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Gross margin 3,753,759 2,615,144
Operating expenses:
General and administrative expenses 3,414,087 2,063,056
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Total operating expenses 3,414,087 2,063,056
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Income (loss) from operations
339,672 552,088
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Other income (expense):
Interest expense (182,826) (102,331)
Interest and dividend income 12,542 27,519
Net gain (loss) on marketable securities (22,420) 13,095
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Total other income (expense) (192,704) (61,717)
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Income (loss) before income taxes 146,968 490,371
Income tax expense (benefit) 58,786 167,146
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Net income (loss) 88,182 323,225
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Weighted average shares outstanding:
Basic 3,602,265 2,964,888
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Diluted 4,889,592 3,172,803
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Net income (loss) per common share:
Basic $ 0.02 $ 0.11
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Diluted $ 0.02 $ 0.10
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See notes to the financial statements.
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KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED DECEMBER 31,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 88,182 $ 323,225
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 371,366 227,247
Unrealized (gain) loss on marketable securities 14,980 (15,086)
(Increase) decrease in operating assets:
Accounts Receivable 224,848 (683,569)
Inventories (266,669) (435,245)
Refundable income taxes - 56,000
Other assets 344,004 (14,948)
Increase (decrease) in operating liabilities:
Accounts Payable 303,683 655,646
Accrued Expenses (293,854) 52,925
Income taxes payable (403,873) 111,000
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Net cash provided by operating activities 382,667 277,195
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (99,003) (57,970)
Purchase of new facility improvements (2,991,486) (2,515,041)
Proceeds from the sale of marketable securities 540,052 516,298
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Net cash used in investing activities (2,550,437) (2,056,713)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit - (21,397)
Proceeds from long-term debt 2,275,992 433,236
Proceeds from stockholder note 150,000
Proceeds from the issuance of bond obligation - 1,850,282
Payments on long-term debt (521,610) (259,693)
Capitalized costs of financing (80,712) -
Costs from stock issuance (8,968) -
Proceeds from exercise of stock options 8,600
Payment of bond obligation (114,213) (416,683)
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Net cash provided by financing activities 1,559,089 1,735,745
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Net increase (decrease) in cash (608,681) (43,773)
Cash - beginning of period 1,073,901 182,672
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Cash - end of period $ 465,220 $ 138,899
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 277,013 $ 102,331
Income taxes $ 462,459 $ 146
See notes to the financial statements.
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1. ORGANIZATION AND NATURE OF OPERATIONS
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB of Regulation S-B. They do not include all
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The interim
unaudited financial statements should be read in conjunction with the financial
statements for the year ended March 31, 2004, which are included in the
Company's Form SB-2 filed with the Securities and Exchange Commission. In the
opinion of management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the three months and nine months ended December 31, 2004
are not necessarily indicative of the results that may be expected for the year
ending March 31, 2005.
Stock-based Compensation - In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123R), which requires entities to measure the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions). The
cost is recognized as an expense over the period during which the employee is
required to provide service in exchange for the award, which is usually the
vesting period.
As required by SFAS 123R, the Company will estimate the fair value of all stock
options on each grant date, using an appropriate valuation approach such as the
Black-Scholes option pricing model. The provisions of this Statement will be
effective for the Company beginning with its fiscal year ending March 31, 2006.
We are currently evaluating the impact of this new Standard will have on its
financial position, results of operations or cash flows.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
In December 2002, we arranged a state economic development bond with the State
of Ohio for 4.18 million dollars. The proceeds were used to purchase a 119,000
square foot food processing plant for 2.25 million dollars. The balances of the
bond, along with additional funds, are being used to purchase building
improvements and equipment needed to complete the project.
We believe that this facility will meet our needs for the foreseeable future
without having to expand the facility. If necessary, the property has an
additional 14 acres for possible sale or expansion. The lease on our present
22,000 square foot facility will terminate in April 2005.
In May of 2003, we delivered a two-for-one split for all shareholders.
In February of 2004, we arranged the sale of 588,235 units ($1,000,000),
consisting of
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588,235 of our common shares and 588,234 of our warrants, to Barron Partners LP
of New York and 14,705 of our common shares ($25,000) to Bill Velmer of Salt
Lake City, Utah at $1.70 per share.
The transaction included 294,117 warrants with an exercise price of $2.25, and
294,117 warrants at exercise price of $3.00, all of which expire on February 27,
2009. The expenses associated with this offering included $70,000 to Laconia
Capital and 30,000 Warrants to Laconia Capital for services as our placement
agent. We are required to keep the common shares and warrants registered for a
period of two years.
In March of 2004, we sold a small warehouse for $110,000 and realized a gain of
$75,271 on the sale.
Currently, we have three marketing segments throughout the country; retail,
foodservices, and warehouse clubs. Key customers in retail supermarket segments
are: Wal-Mart
Supercenters, The Kroger Co., Albertson's, C & S Wholesale, Publix, Meijer,
Smart & Final, SuperValu, and Wakefern; in foodservice segments are: Gordon Food
Service, Best Express, Abbott Foods/Sysco, Magic Wok, Orlando Food Service, and
U.S. Food Service; and in warehouse clubs segments are: Sam's Club and Costco.
Our current activities include:
- Product research and development
- Development of markets and distribution
- Market search of strategic alliances
- Development of corporate infrastructure
- Production of high quality Asian products under USDA guidelines
DISCUSSION OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized when the goods are shipped.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the 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 periods. Actual results could differ from these estimates.
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RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2004
The following table contains certain amounts, expressed as a percentage of net
revenues, reflected in our statements of income for the quarters ended December
31, 2004 and 2003:
QUARTERS ENDED DECEMBER 31 (in %)
2004 2003
Revenues 100 100
Cost of Revenues 74 68
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Gross profit 26 32
Operating expenses 24 20
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Income from operations 2 12
Interest expense (1) (1)
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Income from continuing operations before
Income tax 1 11
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Income tax (0) 4
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Net Income 1 7
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REVENUES
Revenues for the quarter ended December 31, 2004 were $4,404,813 compared to
$4,102,523 for the comparable quarter ended December 31, 2003. The increase is
the result of a acquiring new customer accounts, increase in both retail and
club stores sales, and the introduction of new items, all of which contribute to
the offset of the loss of Sam's Club revenue.
COST OF GOODS
The gross margin on sales of products was $1,153,839 for the quarter ended
December 31, 2004 compared to $1,318,456 for the quarter ending December 31,
2003. Gross margins vary widely depending on factors such as the product
commodity prices and labor costs for the item produced. Cost of goods for the
quarter ended December 31, 2003 included a positive adjustment of approximately
$200,000 in depreciation expense which accounted for the largest part of the
variance in gross margins for the comparable quarters.
Cost of sales includes cost of food, freight, packaging, labor, and other
expenses related to the manufacturing and distribution of the products produced.
Depreciation related to manufacturing and distribution is expensed to cost of
goods sold, and depreciation and amortization related to sales, general, and
administration is expensed as an operating expense.
OPERATING EXPENSES
Operating expenses for the quarter ended December 31, 2004 were $1,074,876
compared to
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$838,880 for the comparable period in 2003, which is an increase of $235,997 or
28%. Most of the increase was attributable to marketing and advertising
expenses, which increased to $647,638 for the quarter ended December 31, 2004,
from $553,283 for the quarter ended December 31, 2003.
NET INCOME
Our net income for the quarter ended December 31, 2004 was $25,191, as compared
to a net income of $286,219 for the quarter ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
On June 1, 2004, we entered into a two year agreement with a bank for a
revolving loan facility. The borrowing base of the revolving loan facility is
limited to the lesser of (i) $2,500,000 or (ii) the sum of (A) 85% of eligible
accounts receivable, plus (B) 50% of eligible inventory. The line was used to
pay off a pre-existing $1,100,000 line, and to provide working capital. The
revolving loan matures on May 31, 2006.
In December 2002, we arranged a state economic development bond with the State
of Ohio for $4.18 million. Principal payments commenced in December 2003. The
bond matures December 1, 2022, and with interest rates and maturity dates as
follows: $1,100,000 matures December 1, 2010 at an interest rate of 4.55%;
$1,040,000 matures December 1, 2015, at an interest rate of 5.25%; and
$2,040,000 matures December 1, 2022, at an interest rate of 5.85%. The proceeds
were used to purchase a large production facility in the form of 14 acres of
land and an 119,000 square foot food processing plant for 2.25 million dollars.
The balance of the bond, along with additional funds, was used for building
improvements and equipment needed to complete the project.
On December 21, 2004, we completed a $4.227 million dollar financing package.
Under the terms of the agreements, $2.227 million is immediately available to
fund the completion of construction of our new 119,000 square foot plant in
Gahanna, Ohio, and for working capital. Upon start-up of the new plant, an
additional $2 million will be available for working capital. The financing
package also provides for a poultry supply and co-pack and storage agreement.
During the fiscal quarter ended December 31, 2004, we spent $59,517 in building
improvements and equipment and anticipate an additional $2,000,000 to complete
the new plant for occupancy.
We received notification in October of 2004 that Sam's Club has discontinued our
product in their stores. Our product has always been sold as an "in and out"
item in Sam's. This means it is only sold for a time period of several weeks up
to several months. We have enjoyed several months of recent Sam's sales, and are
optimistic that we will have an opportunity to sell our current and new products
to Sam's, possibly as early as May 2005.
Sam's Club represented 20% of sales for the first six months of fiscal 2005.
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During the nine months ended December 31, 2004, we sold marketable securities,
providing $540,052 in cash.
FORWARD LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements. Such statements are
not based on historical facts and are based on current expectations, including,
but not limited to statements regarding our plan for future development and the
operation of our business. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and similar expressions identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or forecasted. Among
the factors that could cause actual results to differ materially are the
following: a lack of sufficient capital to finance our business plan on
commercially acceptable terms; changes in labor, equipment and capital costs;
our inability to attract strategic partners; general business and economic
conditions; and the other risk factors described from time to time in our
reports filed with the Securities and Exchange Commission. You should not rely
on these forward-looking statements, which reflect only Kahiki Food's opinion as
of the date of this Quarterly Report. We do not assume any obligation to revise
forward-looking statements.
ITEM 3. Controls and Procedures
As required by Rule 15d-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of December 31, 2004.
This evaluation was carried out under the supervision and with the participation
of our CEO and CFO. Based upon that evaluation, our CEO and CFO concluded that
our disclosure controls and procedures are effective in timely alerting
management to material information relating to us that is required to be
included in our periodic SEC filings. There have been no significant changes in
our internal controls or in other factors that could significantly affect
internal controls subsequent to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our CEO and CFO, to allow
timely decisions regarding required disclosure.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - Not Applicable.
ITEM 2. Change in Securities and Small Business Issuer Purchases of Equity
Securities - Not Applicable.
ITEM 3. Defaults Upon Senior Securities - Not Applicable.
ITEM 4. Submission of Matter to a Vote of Security Holders - Not
applicable.
ITEM 5. Other Information - Not applicable.
ITEM 6. Exhibits.
(a) Exhibits.
Exhibits filed with this Quarterly Report on Form 10-QSB are attached
hereto. For a list of our exhibits, see "Index to Exhibits" (following the
signature page).
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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.
KAHIKI FOODS, INC.
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(Registrant)
Date: February 14, 2005 /s/ Michael C. Tsao
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Michael C. Tsao, President and CEO
Date: February 14, 2005 /s/ Julia A. Fratianne
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Julia A. Fratianne, Treasurer and CFO
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
31.1 Certification of the Chief Executive Officer Filed herewith.
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Filed herewith.
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32 Certification pursuant to Rule 13a-14(b) and Filed herewith.
Section 1350 of Chapter 63 of Title 18 of the
United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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