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 - September 30, 2005
[ ] 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.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio
-----------------------------------------------------------------
(State or other jurisdiction or incorporation or organization)
31-1056793
------------------------------------
(I.R.S. Employer Identification No.)
1100 Morrison Blvd., Columbus, Ohio 43230
-----------------------------------------
(Address of principal executive offices)
(614) 322-3180
-----------------------------------------------------------------
(Issuer's telephone number)
N/A
--------------------------------------------------------------------------
(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 [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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: 3,670,848 common shares.
Transitional Small Business Disclosure Format (Check One): Yes [X] No [ ]
KAHIKI FOODS, INC.
INDEX
PAGE
---------
Part I. Financial Information:
Item 1. Financial Statements 3-7
Notes to Financial Statements 8
Item 2. Arrangements, Discussion and Analysis or Plan of Operation 8-12
Item 3. Controls and Procedures 12-13
Part II Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Business
Issuer Purchases of Equity Securities 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 and Reports on Form 8-K 16-18
Signatures 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
KAHIKI FOODS, INC.
BALANCE SHEETS
SEPTEMBER 30, 2005
(unaudited) March 31, 2005
------------------ --------------
ASSETS
Cash $ 478,970 $ (10,568)
Accounts receivable 2,299,537 1,519,498
Inventories 1,924,723 1,891,985
Prepaid expenses 89,018 42,250
Refundable income taxes - 44,787
Deferred income taxes 160,000 75,000
------------------ --------------
Total current assets 4,952,248 3,562,952
------------------ --------------
Land 114,485 114,485
Building & improvements 10,187,272 2,499,262
Machinery & equipment 3,626,445 2,323,312
Furniture & fixtures 145,434 115,713
Vehicles 127,114 146,269
Construction in progress - 7,665,693
------------------ --------------
14,200,750 12,864,734
------------------ --------------
Less: accum depreciation (1,505,922) (1,981,442)
------------------ --------------
Net property & equipment 12,694,828 10,883,292
------------------ --------------
Deferred loan fees 205,773 219,992
Other 409,004 29,589
------------------ --------------
Total other assets 614,777 249,581
------------------ --------------
------------------ --------------
TOTAL ASSETS $ 18,261,853 $ 14,695,825
================== ==============
LIABILITIES & EQUITY
Current debt $ 692,954 $ 688,909
Current portion of bond 143,333 143,333
Related party note payable 150,000 150,000
Accounts payable 2,427,099 2,221,213
Accrued expenses 486,861 447,565
Income taxes payable - 5,350
------------------ --------------
Total current liabilities 3,900,247 3,656,370
------------------ --------------
Bond obligation 3,780,000 3,850,000
Related party debt 2,000,000 1,000,000
Line of credit 2,500,000 1,157,605
Long-term debt 2,480,255 1,609,822
------------------ --------------
Total liabilities 14,660,502 11,273,797
------------------ --------------
Stockholders' Equity
Common stock, no par value, 10,000,000
shares authorized; 3,670,848 and 3,649,848 2,789,186 2,780,756
issued
Retained earnings 812,165 641,272
------------------ --------------
Total stockholders' equity 3,601,351 3,422,028
------------------ --------------
------------------ --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 18,261,853 $ 14,695,825
================== ==============
See notes to the financial statements.
3
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
2005 2004
--------------------- ----------------------
Sales $ 5,217,817 $ 5,018,240
Cost of sales 4,289,923 3,951,981
--------------------- ----------------------
Gross margin 927,894 1,066,259
Operating, general and administrative expenses 1,195,852 1,117,086
--------------------- ----------------------
Loss from operations (267,958) (50,827)
--------------------- ----------------------
Other income (expense):
Interest expense (183,445) (91,092)
Interest and dividend income 7,690 5,227
Other income 750,000 -
--------------------- ----------------------
Total other income (expense) 574,245 (85,865)
--------------------- ----------------------
Income (loss) before income taxes 306,287 (136,692)
Income tax benefit (85,000) (54,677)
--------------------- ----------------------
Net income (loss) $ 391,287 $ (82,015)
===================== ======================
Weighted average shares outstanding:
Basic 3,670,848 3,590,098
===================== ======================
Diluted 3,998,731 4,862,907
===================== ======================
Net income (loss) per common share:
Basic $ 0.11 $ (0.02)
===================== ======================
Diluted $ 0.10 $ (0.02)
===================== ======================
See notes to the financial statements.
4
KAHIKI FOODS, INC.
STATEMENT OF OPERATIONS (unaudited)
SIX MONTHS ENDED SEPTEMBER 30,
2005 2004
--------------------- ----------------------
Sales $ 10,315,823 $ 10,233,975
Cost of sales 8,578,576 7,634,055
--------------------- ----------------------
Gross margin 1,737,247 2,599,920
Operating, general and administrative expenses 2,154,127 2,339,211
--------------------- ----------------------
Income (loss) from operations (416,880) 260,709
--------------------- ----------------------
Other income (expense):
Interest expense (255,305) (145,279)
Interest and dividend income 8,078 11,975
Net loss on marketable securities - (22,420)
Other income 750,000
--------------------- ----------------------
Total other income (expense) 502,773 (155,724)
--------------------- ----------------------
Income before income taxes 85,893 104,985
Income tax expense (benefit) (85,000) 41,994
--------------------- ----------------------
Net income $ 170,893 $ 62,991
===================== ======================
Weighted average shares outstanding:
Basic 3,666,028 3,589,473
===================== ======================
Diluted 3,993,911 4,875,729
===================== ======================
Net income per common share:
Basic $ 0.05 $ 0.02
===================== ======================
Diluted $ 0.04 $ 0.01
===================== ======================
See notes to the financial statements.
5
KAHIKI FOODS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Retained Treasury
Common Stock Earnings Stock Total
------------ ---------- -------- -----------
BALANCE AT MARCH 31, 2005 $ 2,780,756 $ 641,272 $ - $ 3,422,028
Stock options exercised 8,430 8,430
Net profit 170,893 170,893
------------ ---------- -------- -----------
BALANCE AT SEPTEMBER 30, 2005 (UNAUDITED) $ 2,789,186 $ 812,165 $ - $ 3,601,351
============ ========== ======== ===========
See notes to the financial statements.
6
KAHIKI FOODS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED SEPTEMBER 30,
2005 2004
--------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $ 170,893 $ 62,991
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation and amortization 409,795 268,397
Unrealized loss on marketable securities - 14,980
Receivable for Officer's Life insurance proceeds (750,000)
Net loss on disposal of property and equipment 1,263 -
(Increase) decrease in operating assets:
Accounts receivable (411,319) 21,316
Inventories (40,424) (74,375)
Refundable income taxes 44,787 (2,206)
Deferred income taxes (85,000)
Other assets (44,903) 381,236
Increase (decrease) in operating liabilities:
Accounts payable 205,886 1,003,150
Accrued expenses 39,296 (211,487)
Income taxes payable (5,350) (413,000)
--------------------- --------------------
Net cash used in operating activities (465,076) 1,051,002
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (1,156,937) (95,392)
Purchase of new facility improvements (1,051,701) (2,969,678)
Proceeds from the disposal of property and equipment 200
Proceeds from the sale of marketable securities - 540,052
--------------------- --------------------
Net cash used in investing activities (2,208,438) (2,525,018)
--------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 1,342,395 685,672
Proceeds from long-term debt 2,282,810 48,805
Payments on long-term debt (408,333) (162,505)
Capitalized cost of financing 7,750 (8,968)
Payments of bond obligation (70,000) (79,213)
Proceeds from the exercise of stock options 8,430 500
--------------------- --------------------
Net cash provided by (used in) financing activities 3,163,052 484,291
--------------------- --------------------
Net increase (decrease) in cash 489,538 (989,725)
Cash - beginning of period (10,568) 1,073,901
--------------------- --------------------
Cash - end of period $ 478,970 $ 84,176
===================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 230,690 $ 182,277
Income taxes paid (refunded) $ (1,057) $ 457,200
See notes to the financial statements.
7
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, 2005, which is 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 six months ended September 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2006.
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
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 operation, or cash flows.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
In December 2002, we acquired an existing approximately 119,000 square foot
building on approximately 14.1 acres of land in Gahanna, Ohio a suburb of
Columbus. We renovated and equipped this facility to meet USDA regulations for
the manufacture of food products. The facility is used to prepare, freeze,
package, store and ship our products, and house our administrative offices.
Currently, we have three marketing segments throughout the country; retail,
foodservices, and warehouse clubs.
8
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
Revenue from the sale of products is generally recognized at the time of
shipment to the customer. Pursuant to EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Products, certain
promotional payments paid to wholesalers or retailers by a vendor for the sale
of its products must be shown as a reduction of the revenues in the period they
are provided.
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.
9
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005
The following table contains certain amounts, expressed as a percentage of net
revenues, reflected in our statements of income for the quarters ended September
30, 2005 and 2004:
QUARTERS ENDED SEPTEMBER 30
(in %)
2005 2004
Revenues 100 100
Cost of revenues 82 79
---- ----
Gross profit 18 21
Operating expenses 23 22
---- ----
Income from operations (5) (1)
Interest expense and other income 11 (2)
---- ----
Income from continuing operations before
income tax 6 (3)
----
Income tax 2 1
---- ----
Net income 8 (2)
==== ====
REVENUES
Revenues for the quarter ended September 30, 2005 were $5,217,817 compared to
$5,018,240 revenues for the comparable quarter ended September 30, 2004, due to
new customers being added.
COST OF GOODS
The gross margin on sales of products was $927,894 for the quarter ended
September 30, 2005 compared to $1,066,259 for the quarter ending September 30,
2004. The primary reason for the decline in gross margins for the quarter ended
September 30, 2005 was the inefficiencies related to the start up of the new
plant in May 2005. We expect margins to improve each quarter, but anticipate
improvements happening gradually over several months as we implement process
improvements and work out start up issues related to a new facility.
Cost of sales include 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.
10
OPERATING EXPENSES
Operating expenses for the quarter ended September 30, 2005 were $1,195,852
compared to $1,117,086 for the comparable period in 2004, which is an increase
of $78,766 or 7%, due to higher quarterly sales.
OTHER INCOME
During the quarter ended September 30, 2005 $750,000 was recorded as other
income for life insurance proceeds to be paid related to the passing of our
founder Michael Tsao.
RESEARCH AND DEVELOPMENT
Expenditures on research and development were $58,131 for the quarter ended
September 30, 2005 compared to $17,093 for the quarter ended September 30, 2004,
an increase of 240%. The increase was due to developing new food products, and
research and development spending is anticipated to remain at this pace.
NET INCOME
Our net income for the quarter ended September 30, 2005 was $391,287, as
compared to net loss of $82,015 for the quarter ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCE
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, 2007. $2,500,000 was outstanding on the
revolving loan as of September 30, 2005. On September 30, 2005 we were in
compliance with our bank covenants. The financial covenants included the
incorporation of the $750,000 insurance proceeds received in October, a
non-operating source of income.
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. In October 2005,
$750,000 was received by the state related to a life insurance policy for
Michael Tsao. The proceeds of this policy had been assigned to the state as part
of the original bond agreement. These proceeds will be held in deposit and will
be used to pay the monthly bond payments for twelve months, beginning October,
2005.
11
On December 21, 2004, we completed a $4.227 million dollar financing package.
Under the terms of the agreements, $2.227 million was 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 was available for working capital. The final $2 million
was received on June 3, 2005. The financing package also provides for a poultry
supply and co-pack and storage agreement.
We are currently negotiating a $429,000 equipment lease arrangement to be
completed in the third quarter, and used to fund additional capital equipment
needs. We have not yet recorded $500,000 proceeds from a second life insurance
policy related to the passing of our founder Michael Tsao. This claim has not
yet been finalized as of November 14, 2005, but we anticipate receiving the
proceeds to this policy in the quarter ended December 31, 2005. As of November
7, 2005, $456,082 in accounts payable were over 90 days past invoice date, with
$263,000 of these invoices related to a construction vendor currently disputed
by us.
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 September 30,
2005. This evaluation was carried out under the supervision and with the
participation of our Acting President and CFO. Based upon that evaluation, our
Acting President 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 changes in our internal controls or in other factors that materially affect,
or are reasonably likely to materially affect, our internal controls over
financial reporting subsequent to the date we carried out our evaluation.
12
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 Acting President and
CFO, to allow timely decisions regarding required disclosure.
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 Matters to a Vote of Security Holders. - Not
Applicable.
ITEM 5. Other Information.
ITEM 6. Exhibits and Reports on Form 8.K.
(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).
(b) Reports on Form 8-K. - not applicable
13
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.
(Registrant)
Date: November 14, 2005 /s/ Alan L. Hoover
--------------------------------------
Alan L. Hoover, Acting President
Date: November 14, 2005 /s/ Julia A. Fratianne
--------------------------------------
Julia A. Fratianne, Treasurer and CFO
14
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.
15