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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2010 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from __________ to |
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Commission file number 001-33446 |
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VAUGHAN FOODS, INC. |
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(Exact name of registrant as specified in its charter) |
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Oklahoma |
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73-1342046 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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216 N.E. 12th Street, Moore, OK |
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73160 |
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(Address of principal executive offices) |
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(Zip Code) |
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(405) 794-2530 |
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(Registrant’s telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
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Number of shares outstanding of the registrant’s common stock, as of May 14, 2010: |
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Class |
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Shares Outstanding |
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Common Stock, $0.001 par value per share |
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9,380,577 |
VAUGHAN FOODS, INC.
Form 10-Q
For the Quarterly Period Ended March 31, 2010
INDEX
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1 |
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1 |
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Consolidated Balance Sheets as of March 31, 2010 (unaudited), and December 31, 2009 |
2 |
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Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 |
3 |
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4 |
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Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 |
5 |
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6 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
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19 |
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20 |
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20 |
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20 |
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20 |
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20 |
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20 |
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21 |
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22 |
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Certification Pursuant to 18 U.S.C. Section 1350 |
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i
PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS.
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders
Vaughan Foods, Inc. and Subsidiary
We have reviewed the accompanying consolidated balance sheet of Vaughan Foods, Inc. and subsidiary (the “Company”) as of March 31, 2010, and the related consolidated statements of operations and cash flows for the three months ended March 31, 2010 and 2009, and the related statement of stockholders’ equity for the three months ended March 31, 2010. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the balance sheet of the Company as of December 31, 2009, and the related statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 19, 2010, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, and the accompanying statement of stockholders’ equity for the year ended December 31, 2009, are fairly stated, in all material respects, in relation to the financial statements from which they have been derived.
Oklahoma
City, Oklahoma
May 14, 2010
1
Vaughan Foods, Inc.
Consolidated Balance Sheets
March 31, 2010 & December 31, 2009
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March 31, 2010 |
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December 31, 2009 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
- |
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$ |
- |
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Cash receipts subject to account control agreement |
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433,119 |
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523,454 |
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Accounts receivable, net of allowance for credit losses of $157,692 at March 31, 2010 and $106,375 at December 31, 2009 |
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6,043,475 |
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5,311,989 |
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Inventories |
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2,969,791 |
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3,054,819 |
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Prepaid expenses and other assets |
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216,705 |
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210,516 |
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Deferred tax assets |
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350,615 |
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264,772 |
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Total current assets |
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10,013,705 |
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9,365,550 |
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Restricted assets: |
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Cash |
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528,000 |
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528,000 |
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Investments |
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723,789 |
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541,398 |
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Total restricted assets |
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1,251,789 |
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1,069,398 |
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Property and equipment, net |
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15,724,267 |
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15,797,007 |
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Other assets: |
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Loan origination fees, net of amortization |
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291,449 |
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421,791 |
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Intangible assets |
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69,378 |
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77,090 |
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Deferred tax assets, noncurrent |
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2,455,164 |
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2,655,925 |
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Total other assets |
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2,815,991 |
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3,154,806 |
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Total assets |
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29,805,752 |
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29,386,761 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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6,893,370 |
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8,431,570 |
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Disbursements in transit |
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1,391,601 |
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1,269,790 |
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Line of credit |
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1,984,461 |
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2,322,063 |
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Note payable to former owners of Allisons Gourmet Kitchens, LP |
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872,414 |
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875,617 |
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Accrued liabilities |
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1,944,785 |
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1,392,817 |
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Current portion of long-term debt |
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1,608,101 |
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1,138,602 |
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Current portion of capital lease obligation |
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40,839 |
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94,479 |
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Total current liabilities |
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14,735,571 |
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15,524,938 |
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Long term liabilities: |
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Long-term debt, net of current portion |
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6,316,000 |
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6,943,639 |
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Deferred gain on sale of assets |
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34,642 |
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43,607 |
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Total long-term liabilities |
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6,350,642 |
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6,987,246 |
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Stockholders’ equity: |
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Common stock, $0.001 par value; authorized 50,000,000 shares; 9,380,577 shares issued and outstanding at March 31, 2010 and 4,623,077 shares issued and outstanding at December 31, 2009 |
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9,381 |
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4,623 |
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Preferred stock, $0.001 par value; authorized 5,000,000 shares; 0 shares issued and outstanding at March 31, 2010 and December 31, 2009 |
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- |
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- |
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Paid in Capital |
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14,457,728 |
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12,734,115 |
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Retained Earnings (deficit) |
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(5,747,570 |
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(5,864,161 |
) |
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Total stockholders’ equity |
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8,719,539 |
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6,874,577 |
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Total liabilities and stockholders’ equity |
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$ |
29,805,752 |
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$ |
29,386,761 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
Vaughan Foods, Inc.
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 2010 and 2009
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Three Months Ended March 31, |
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2010 |
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2009 |
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(unaudited) |
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(unaudited) |
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Net sales |
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$ |
21,695,865 |
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$ |
22,319,004 |
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Cost of sales |
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18,933,711 |
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20,368,196 |
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Gross profit |
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2,762,154 |
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1,950,808 |
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Selling, general and administrative expenses |
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2,270,428 |
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2,149,736 |
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Operating income (loss) |
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491,726 |
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(198,928 |
) |
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Interest expense |
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(269,182 |
) |
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(226,530 |
) |
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Gain (loss) on sale of assets |
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8,965 |
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(3,789 |
) |
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Interest income |
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- |
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107 |
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Other income and expense, net |
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(260,217 |
) |
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(230,212 |
) |
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Net income (loss) before income taxes |
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231,509 |
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(429,140 |
) |
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Income tax expense (benefit) |
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114,918 |
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(163,197 |
) |
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Net income (loss) |
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$ |
116,591 |
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$ |
(265,943 |
) |
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Weighted average shares outstanding - basic and diluted |
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6,526,077 |
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4,623,077 |
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Net income (loss) per share - basic and diluted |
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$ |
0.02 |
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$ |
(0.06 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Vaughan Foods, Inc.
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 31, 2009 and the Three Months Ended March 31, 2010
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Common Stock |
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Paid in |
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Retained |
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Total |
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Shares issued |
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Amount |
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Balance at January 1, 2009 |
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4,623,077 |
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$ |
4,623 |
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$ |
12,571,302 |
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$ |
(5,363,934 |
) |
$ |
7,211,991 |
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Issuance of stock options in connection with Equity Incentive Plan |
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- |
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- |
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88,352 |
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- |
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88,352 |
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Issuance of stock warrants in connection with refinancing revolving line of credit |
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74,461 |
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74,461 |
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Net (loss) |
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- |
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- |
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- |
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(500,227 |
) |
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(500,227 |
) |
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Balance at December 31, 2009 |
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4,623,077 |
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$ |
4,623 |
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$ |
12,734,115 |
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$ |
(5,864,161 |
) |
$ |
6,874,577 |
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Stock-based compensation expense (unaudited) |
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- |
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- |
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22,483 |
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- |
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|
22,483 |
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Issuance of common stock in connection with private placement transaction (unaudited) |
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|
4,757,500 |
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|
4,758 |
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|
1,701,130 |
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|
- |
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|
1,705,888 |
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Net income (unaudited) |
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- |
|
|
- |
|
|
- |
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|
116,591 |
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|
116,591 |
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Balance at March 31, 2010 (unaudited) |
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9,380,577 |
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$ |
9,381 |
|
$ |
14,457,728 |
|
$ |
(5,747,570 |
) |
$ |
8,719,539 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
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Vaughan Foods, Inc. |
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For the Three Months Ended March 31, 2010 and 2009 |
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Three Months Ended March 31, |
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2010 |
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2009 |
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(unaudited) |
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(unaudited) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
116,591 |
|
$ |
(265,943 |
) |
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Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
|
|
726,595 |
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|
454,977 |
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Provision for credit losses |
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|
51,317 |
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|
- |
|
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Loss (gain) on sale of assets |
|
|
(8,965 |
) |
|
3,789 |
|
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Stock option expense |
|
|
22,483 |
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|
27,496 |
|
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Deferred income taxes |
|
|
114,918 |
|
|
(163,197 |
) |
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Changes in operating assets and liabilities: |
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|
|
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Accounts receivable |
|
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(782,803 |
) |
|
(1,059,814 |
) |
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Inventories |
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|
85,028 |
|
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(164,478 |
) |
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Prepaid expenses and other assets |
|
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(6,190 |
) |
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(49,122 |
) |
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Accounts payable |
|
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(1,538,200 |
) |
|
1,373,795 |
|
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Disbursements in transit |
|
|
121,811 |
|
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(235,167 |
) |
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Accrued liabilities |
|
|
551,969 |
|
|
309,901 |
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Net cash provided (used by) by operating activities |
|
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(545,446 |
) |
|
232,237 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
|
|
(515,801 |
) |
|
(208,009 |
) |
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Investments in Restricted assets |
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(182,391 |
) |
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(598,268 |
) |
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Net cash (used by) investing activities |
|
|
(698,192 |
) |
|
(806,277 |
) |
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|
|
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Cash flows from financing activities: |
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|
|
|
|
|
|
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Payments of loan origination fees |
|
|
- |
|
|
(175,657 |
) |
|
Proceeds from stock issue |
|
|
1,705,888 |
|
|
- |
|
|
Proceeds from line of credit |
|
|
- |
|
|
2,777,857 |
|
|
Repayments of line of credit |
|
|
(337,602 |
) |
|
(1,000,000 |
) |
|
Cash receipts subject to account control agreement |
|
|
90,335 |
|
|
(837,584 |
) |
|
Repayments on notes payable to former owners of Allison’s Gourmet Kitchens, LP |
|
|
(3,203 |
) |
|
- |
|
|
Repayment of long-term debt and capital leases |
|
|
(211,780 |
) |
|
(190,576 |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,243,638 |
|
|
574,040 |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
- |
|
|
- |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
- |
|
$ |
- |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest |
|
$ |
181,092 |
|
$ |
176,056 |
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options issued in connection with refinancing revolving line of credit |
|
$ |
- |
|
$ |
74,461 |
|
Issuance of warrants to placement agent in connection with private placement transaction |
|
$ |
219,661 |
|
$ |
- |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Vaughan Foods, Inc.
Notes to Unaudited Consolidated Financial
Statements
March 31, 2010 and 2009
|
|
|
|
|
(1) |
Nature of Operations |
|
|
|
|
|
|
Vaughan Foods, Inc. (the “Company”) is an Oklahoma-based specialty food processor serving customers in a multi-state region. The Company and its subsidiary operate from processing facilities in Moore, Oklahoma and Fort Worth, Texas. |
||
|
|
|
|
|
(2) |
Summary of Significant Accounting Policies |
|
|
|
|
|
|
|
(a) |
Basis of Reporting |
|
|
|
|
|
|
|
The accompanying consolidated financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures normally prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report filed on Form 10-K with the SEC on March 19, 2010. |
|
|
|
|
|
|
|
This summary of significant accounting policies is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management which is responsible for the integrity and objectivity of the consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. |
|
|
|
|
|
|
(b) |
Unaudited Interim Financial Information |
|
|
|
|
|
|
|
The financial information herein is unaudited; however, such information reflects solely normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the entire year. |
|
|
|
|
|
|
(c) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
For purposes of the consolidated statements of cash flows, the Company considers investments with maturities of three months or less at date of purchase to be cash equivalents. Cash subject to account control agreement represent unrestricted cash that results from collections of trade accounts receivable. Such amounts are generally applied the next business day to outstanding balances and accrued interest on the revolving credit agreement, and subject to availability and other terms of the agreement, can be re-borrowed immediately after being applied to the line of credit. |
|
|
|
|
|
|
(d) |
Disbursements in Transit |
|
|
|
|
|
|
|
Disbursements in transit as presented in the consolidated balance sheet and consolidated statement of cash flows, represent drafts for payment to the Company’s vendors in transit and in the process of being collected. |
|
|
|
|
|
|
(e) |
Accounts Receivable and Credit Policies |
|
|
|
|
|
|
|
Trade accounts receivable are customer obligations due under normal trade terms generally requiring payment within 15 to 21 days from the invoice date. Receivables are recorded based on the amounts invoiced to customers. Interest and delinquency fees are not included in income until realized in cash. Discounts allowed for early payment, if any, are charged against income when the payment is received. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are generally applied to the earliest unpaid invoices. |
|
|
|
|
|
|
|
The carrying amount of accounts receivable is reduced by an allowance for credit losses that reflects management’s estimate of the amounts that will not be collected. The allowance for credit losses is based on various factors including among other things, (a) our assessment of the collectibility of specific customer accounts, (b) our macro assessment of political and economic risk, (c) the overall aging of accounts receivable portfolio, and (d) the effects each of these and other factors have on the consolidated portfolio. Balances still outstanding after management has used reasonable collection efforts are charged off to the valuation allowance. Recoveries on accounts previously charged off are credited to the valuation allowance. |
|
|
|
|
|
|
|
A lien exists on certain receivables related to fresh produce under the Perishable Agricultural Commodities Act of 1930, which partially subordinates the lien placed by the line of credit. |
6
|
|
|
|
|
|
(f) |
Inventories |
|
|
|
|
|
|
|
Inventories consist principally of food products and are stated at the lower of average cost (which approximates first-in, first-out) or market. Costs included in inventories consist of materials, certain prepaid expenses related to materials, packaging supplies, and labor. General and administrative costs are not charged to inventories. |
|
|
|
|
|
|
(g) |
Property and Equipment |
|
|
|
|
|
|
|
Property and equipment are recorded at cost. Equipment classified as capital leases are recorded at the present value of the future minimum lease payments, and amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in other income and expense. |
|
|
|
|
|
|
|
Depreciation, including assets classified as capital leases, are provided using the straight-line method over the following estimated useful lives: |
|
|
|
|
Plant and improvements |
15 - 40 years |
|
Machinery and equipment |
2 - 15 years |
|
Transportation equipment |
3 - 10 years |
|
Office equipment |
2 - 7 years |
|
|
|
|
|
|
(h) |
Concentrations of Credit Risk |
|
|
|
|
|
|
|
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents. |
|
|
|
|
|
|
(i) |
Revenue Recognition |
|
|
|
|
|
|
|
The Company recognizes revenue, net of related sales discounts and allowances, when persuasive evidence of an arrangement exists (such as a customer purchase order), delivery has occurred, the price to the customer has been fixed or is determinable, and collectibility is reasonably assured. Revenues also include those amounts related to shipping and handling. Shipping and handling expenses are included in cost of sales. Consideration from the Company to a customer is presumed to be a reduction to the selling price of the Company’s products and accordingly, is characterized as a reduction of sales when recognized in the Company’s consolidated statements of operations. As a result, certain promotional expenses are recorded as a reduction of net sales, at the time in which the sale is recognized. |
|
|
|
|
|
|
(j) |
Accounting for Rebates |
|
|
|
|
|
|
|
The Company establishes liabilities for rebates to customers based on specific programs, expected usage and historical experience. |
|
|
|
|
|
|
(k) |
Income Taxes |
|
|
|
|
|
|
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. |
|
|
|
|
|
|
(l) |
Earnings (Loss) Per Share |
|
|
|
|
|
|
|
Basic earnings (loss) per share (“EPS”) excludes dilution and is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common shares (such as stock options) were issued during the period. Diluted EPS is not presented if the effect of the incremental shares is anti-dilutive. |
7
|
|
|
|
|
|
|
As of March 31, 2010, the Company has Class A and Class B warrants outstanding resulting from its initial public offering with exercise prices of $9.75 and $13.00, respectively. Both classes of warrants expire on June 27, 2012. The exercise price of both classes of warrants exceeds the Company’s stock price, therefore the Company has not included these warrants as shares in diluted earnings per share because the effects of inclusion would be anti-dilutive. |
|
|
|
|
|
|
|
On November 26, 2008 and March 12, 2009, the Company granted 605,000 and 14,120, respectively, stock options to certain employees, members of the board of directors and certain consultants to the Company, vesting over four years, with a weighted average exercise price of $0.70. The exercise price of the options is equal to the Company’s stock price on the date of issuance, which exceeds the Company’s average stock price, therefore the Company has not included these options as shares in diluted earnings per share because the effects of inclusion would be anti-dilutive. |
|
|
|
|
|
|
|
On March 6, 2009, the Company issued a seven year warrant to purchase 252,454 shares of common stock to its lender in connection with refinancing its revolving line of credit, as further described in Note 7. The exercise price of the warrant $0.59 per share, which is greater than the Company’s average stock price, therefore the Company has not included these options associated with the warrant in diluted earnings per share because the effects of inclusion would be anti-dilutive. |
|
|
|
|
|
|
|
On February 24, 2010, the Company issued five year warrants to purchase 1,903,000 shares of common stock to 71 accredited investors in connection with a private placement transaction. The exercise price of the warrants is $0.70 per share, which is greater than the Company’s average stock price, therefore the Company has not included these options associated with the warrants in diluted earnings per share because the effects of inclusion would be anti-dilutive. |
|
|
|
| On February 23, 2010, the Company issued five year warrants to purchase 475,750 shares of common stock to the placement agent in connection with a private placement transaction. The exercise price of the warrants is $0.625 per share, which is greater than the Company’s average stock price, therefore the Company has not included these options associated with the warrants in diluted earnings per share because the effects of inclusion would be anti-dilutive. | ||
|
|
|
|
|
|
(m) |
Use of Estimates |
|
|
|
|
|
|
|
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
|
|
|
|
|
|
(n) |
Fair Value of Financial Instruments |
|
|
|
|
|
|
|
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are measured at cost which approximates fair value because of the short-term nature of these instruments. The carrying amount of the Company’s borrowings under the line of credit and long-term debt approximates fair value because the interest rate on the instruments fluctuate with market interest rates or represents borrowing rates available with similar terms. |
|
|
|
|
|
|
(o) |
Investments |
|
|
|
|
|
|
|
All of the Company’s investments are classified as available for sale and are stated at fair value. Any related unrealized gains and losses are excluded from earnings and reported net of income tax as a separate component of stockholders’ equity until realized. There were no unrealized gains or losses for the three months ended March 31, 2010 and 2009. Realized gains and losses on sales of securities are based on the specific identification method. Declines in the fair value of investment securities below their carrying value that are other than temporary are recognized in earnings. As of March 31, 2010 and December 31, 2009, the Company’s investments consisted primarily of guaranteed investment contracts at a fixed interest rate of 2.25 percent. |
|
|
|
|
|
|
(p) |
Stock-Based Compensation Expense |
|
|
|
|
|
|
|
The Company measures stock-based compensation costs at the grant date based on the fair value of the award and recognize as expense ratably over the service period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock option awards. The Company awards stock options to employees, executive officers, directors and certain consultants. |
|
|
|
|
|
|
(q) |
Recently Issued Accounting Pronouncements |
|
|
|
|
|
|
|
In June 2009, the FASB issued Accounting Standards Codification ASC 105-10, which establishes the Codification as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). The Codification, which changes the referencing of the financial accounting standards, became effective and was adopted by the Company for interim and annual periods ending after September 15, |
8
|
|
|
|
|
|
|
2009. All existing accounting standards are superseded by the Codification, which is now the single official source of authoritative U.S. GAAP. All other accounting literature not included in the Codification is nonauthoritative. Updates to the ASC are issued in the form of Accounting Standards Updates (“ASU”). The Codification does not change U.S. GAAP, and its adoption did not have a material effect on the Company’s financial statements. |
|
|
|
|
|
(3) |
Operating Results and Liquidity |
|
|
|
|
|
|
|
|
The Company incurred a loss of $3.4 million in 2008, used cash of $2.7 million and experienced a decrease in working capital of $6.6 million. In 2009, the Company incurred a net loss of $0.5 million, and experienced a further decrease in working capital. During 2008 and 2009, management took several actions to provide assurance that the Company would continue as a going concern, including plans to enhance and conserve liquidity and capital resources. These plans included, among other things, (a) aggressive cost and cash management, including a moratorium on hiring of non-core personnel, compensation adjustments, and non-essential capital expenditures, (b) increased operational discipline, including the completion of the implementation of an Enterprise Resource Planning system designed to strengthen internal accounting and operational controls, and provide considerably more transparency and visibility into the business, (c) timely and adequate pricing adjustments to mitigate changes in input costs, (d) undertaking steps to mitigate the effects of changes in certain input and commodity costs, (e) continued aggressive management of the balance sheet, capital structure and working capital, (f) refinancing the revolving line of credit, which was completed during the first quarter of 2009, and (g) continuing to seek longer-term sources of capital. |
|
|
|
|
|
|
|
There can be no assurance that actions taken will be sufficient to enable management to mitigate the effects of continuing fragile economic conditions, and other external market conditions which are beyond the control of management. A further worsening of the economy in the United States of America could materially adversely affect the Company’s business, including its results of operations, financial condition and prospects. |
|
|
|
|
|
|
|
On February 24, 2010, the Company closed a private placement financing transaction, selling 951,500 Units at $2.00 per Unit, each Unit consisting of five shares of restricted Common Stock and two 5-year restricted warrants to purchase one share of Common Stock at $0.70 per share to 71 accredited investors. The total aggregate consideration of the transaction is $1,903,000, with net proceeds of $1,707,600 after underwriting discount and other fees. The Company issued 475,750 five-year warrants to purchase common stock to the placement agent with a strike price of $0.625. The fair value of these warrants is determined using the Black-Scholes option-pricing model with assumptions of 162.1 percent volatility, an expected term of 30 months, expected dividend yield of 0.0 percent and a risk free rate of 1.42 percent resulting in a fair value of $219,661. Although this additional equity strengthened the Company’s capital and liquidity position, economic conditions continue to be very challenging for most industries and many companies. |
|
|
|
|
|
|
|
During the three months ended March 31, 2010, the Company reported net income of $0.1 million. The Company decreased its short-term borrowings under its new revolving line of credit by $0.3 million and continues to aggressively manage its capital resources. |
|
|
|
|
|
(4) |
Inventories |
|
|
|
|
|
|
|
A summary of inventories follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
$ |
2,628,756 |
|
$ |
2,828,026 |
|
|
|
Finished goods |
|
|
324,341 |
|
|
226,793 |
|
|
|
Deferred production costs |
|
|
16,694 |
|
|
- |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
2,969,791 |
|
$ |
3,054,819 |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company has advanced certain monies related to growing costs to growers, pursuant to contracts and accounted for those advanced monies as “Deferred production costs”. The prepaid amounts represent raw materials that have yet to be harvested. |
|||||||
|
|
|
|||||||
|
(5) |
Restricted Assets |
|||||||
|
|
|
|||||||
|
|
The Company is required to hold cash in reserve in separate trust accounts applicable to its $5.0 million Cleveland County Industrial Authority Industrial Development Revenue Bonds, issued December 2004. The project |
|||||||
9
|
|
|
|
|
construction account represents proceeds of the bond offering to be drawn for approved capital expenditures. The debt reserve account represents funds to be used for debt service in the event of default. The interest and principal accounts represent deposits to be used for debt service. Letters of credit are amounts placed in deposit with a lending institution for purposes of securing letters of credit. These assets are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, |
|
December
31, |
|
|||
|
|
|
(unaudited) |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
Debt reserve account |
|
$ |
493,534 |
|
$ |
483,834 |
|
|
Interest fund account |
|
|
96,922 |
|
|
24,231 |
|
|
|
|
Principal fund account |
|
|
133,333 |
|
|
33,333 |
|
|
Deposits related to letters of credit |
|
|
528,000 |
|
|
528,000 |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted assets |
|
$ |
1,251,789 |
|
$ |
1,069,398 |
|
|
|
|
|
|
|||||
|
|
|
|
(6) |
Property and Equipment |
|
|
|
|
|
Property and equipment, at cost, consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, |
|
December
31, |
|
|||
|
|
|
(unaudited) |
|
|
|
|||
|
|
Land |
|
$ |
238,162 |
|
$ |
238,162 |
|
|
Plant and improvements |
|
|
11,699,376 |
|
|
11,699,376 |
|
|
|
|
Machinery and equipment |
|
|
9,288,561 |
|
|
9,279,686 |
|
|
Transportation equipment |
|
|
485,159 |
|
|
485,159 |
|
|
|
|
Software and office equipment |
|
|
2,316,572 |
|
|
159,638 |
|
|
Software development |
|
|
128,765 |
|
|
1,769,898 |
|
|
|
|
Construction in progress |
|
|
17,766 |
|
|
26,641 |
|
|
|
|
|
|
|||||
|
|
|
|
24,174,361 |
|
|
23,658,560 |
|
|
|
|
Less accumulated depreciation |
|
|
(8,450,094 |
) |
|
(7,861,553 |
) |
|
|
|
|
|
|||||
|
Property and equipment, net |
|
$ |
15,724,267 |
|
$ |
15,797,007 |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
During the three months ended March 31, 2010 and 2009, depreciation expense, including depreciation on assets classified as capital leases, was $588,541 and $418,098, respectively. |
|
|
|
|
(7) |
Line of Credit |
|
|
|
|
|
On March 18, 2009, the Company closed on an asset-based line of credit of up to $3.0 million, secured by accounts receivable and inventories (the “revolving line of credit”). The revolving line of credit bears interest, floating at the Wall Street Journal Prime Rate plus 4.5 percent, and is subject to certain financial covenants, including minimum cash position and EBITDA, measured on a monthly and quarterly basis, respectively, which the Company was in compliance with or has obtained a waiver of compliance as of March 31, 2010. The maximum amount of the line of credit was increased to $3.5 million on September 30, 2009 in connection with a modification of terms used to calculate the available borrowing amount and a modification of the covenants. The revolving line of credit matured on May 1, 2010. On April 26, 2010, the Company entered into a second amendment to extend the maturity date to July 1, 2010 under on the same terms as those that currently exist, in order to provide additional time to consider mutually beneficial renewal terms targeted at extending the relationship. In connection with the revolving line of credit, the Company issued 252,454 warrants to purchase common stock of the Company. The exercise price of the warrants are equal to the weighted average price for the 30 trading days ending on the trading day immediately before delivery. The Company values the warrants using the Black-Scholes option-pricing model and amortizes to expense over the life of the loan. Cash receipts from customers are deposited into a bank account that is subject to an |
10
|
|
|
|
|
account control agreement, wherein the funds are held for collection – generally one-to-two days – before being applied to balances outstanding under the revolving line of credit. Once the funds are applied to balances outstanding, additional borrowing capacity is created, and funds can be immediately re-borrowed, subject to the other terms of the revolving line of credit agreement. The maximum availability under the line of credit on March 31, 2010 was $3.5 million of which there were short-term borrowings of $2.0 million. |
|
|
|
|
(8) |
Long-Term Debt and Capital Lease Obligations |
|
|
|
|
|
Long-term debt consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
March
31, |
|
December
31, |
|
||
|
|
|
(unaudited) |
|
|
|
||
|
6.75 - 7.10%
Cleveland County |
|
$ |
3,645,000 |
|
$ |
3,645,000 |
|
|
4.25% Real
estate loans |
|
|
3,063,999 |
|
|
3,093,666 |
|
|
6.50% Real
estate loans |
|
|
174,645 |
|
|
178,253 |
|
|
8.75% Equipment
loan |
|
|
869,999 |
|
|
978,478 |
|
|
Various
equipment and real estate loans |
|
|
170,458 |
|
|
186,844 |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
7,924,101 |
|
|
8,082,241 |
|
|
Less current portion |
|
|
1,608,101 |
|
|
1,138,602 |
|
|
|
|
|
|
||||
|
Net long-term debt |
|
$ |
6,316,000 |
|
$ |
6,943,639 |
|
|
|
|
|
|
||||
|
|
|
|
|
The Industrial Development Revenue Bonds issued by Cleveland County Industrial Authority contain certain financial covenants as follows: |
|
|
|
|
|
Debt Service Coverage Ratio: The Company is required to maintain a debt service coverage ratio of 1.50x to 1.00. The ratio will be reported to the Trustee and notice given to Beneficial Owners quarterly for each of the previous four quarters. If the Debt Service coverage ratio reported for each of the previous four quarters is less than 1.50x to 1.00 the Company is required to retain a consultant. The actual debt service coverage ratio as of March 31, 2010 is 1.67x to 1.00. |
|
|
|
|
|
Current Ratio: The Company is required to maintain a current ratio of 1.10x to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. The actual current ratio as of March 31, 2010 is 0.68x to 1.00. |
|
|
|
|
|
Debt to Equity Ratio: The Company is required to maintain a debt to equity ratio of not more than 4.00x to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. The actual debt to equity ratio as of March 31, 2010 is 0.72x to 1.00. |
|
|
|
|
|
Accounts Payable: The Company agrees that not more than 10 percent of its accounts payable shall be in excess of 75 days past due. The actual percentage as of March 31, 2010 is 0.59 percent. |
|
|
|
|
|
Accounts Receivable: The Company agrees that not more than 20 percent of accounts receivable will be in excess of 90 days past due. The actual percentage as of March 31, 2010 is 0.41 percent. |
11
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
8.95 - 9.19% Equipment leases |
|
$ |
40,839 |
|
$ |
94,479 |
|
|
|
Less current portion |
|
|
40,839 |
|
|
94,479 |
|
|
|
|
|
|
|
||||
|
|
Net long-term debt |
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
||||
|
|
|
|
|
Annual Debt Service Requirements |
|
|
|
|
|
The annual principal payment requirements to maturity, for long-term debt and capital lease obligations at March 31, 2010 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending |
|
|
Long-Term Debt |
|
Capital Lease |
|
Total |
|
|||
|
|
|
|
|
|
|
|||||||
|
|
2011 |
|
$ |
1,608,101 |
|
$ |
40,839 |
|
$ |
1,648,940 |
|
|
|
|
2012 |
|
|
549,331 |
|
|
- |
|
|
549,331 |
|
|
|
|
2013 |
|
|
585,136 |
|
|
- |
|
|
585,136 |
|
|
|
|
2014 |
|
|
621,233 |
|
|
- |
|
|
621,233 |
|
|
|
|
2015 |
|
|
657,641 |
|
|
- |
|
|
657,641 |
|
|
|
|
Thereafter |
|
|
3,902,659 |
|
|
- |
|
|
3,902,659 |
|
|
|
|
|
|
|
|
|
|||||||
|
|
Principal outstanding at |
|
$ |
7,924,101 |
|
$ |
40,839 |
|
$ |
7,964,940 |
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
During the the three months ended March 31, 2010 and 2009, total interest costs were $269,182 and $226,530, respectively. |
|
|
|
|
(9) |
Accrued Liabilities |
|
|
|
|
|
A summary of accrued liabilities follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
||
|
|
Rebates and commissions |
|
$ |
735,224 |
|
$ |
906,481 |
|
|
|
Interest expense |
|
|
107,775 |
|
|
32,884 |
|
|
|
Compensation |
|
|
523,526 |
|
|
230,790 |
|
|
|
Workers’ compensation |
|
|
262,761 |
|
|
76,593 |
|
|
|
Promotions and incentives |
|
|
250,655 |
|
|
121,645 |
|
|
|
Property taxes |
|
|
70,286 |
|
|
24,424 |
|
|
|
Other |
|
|
(5,443 |
) |
|
- |
|
|
|
|
|
|
|
||||
|
|
Total accrued liabilities |
|
$ |
1,944,784 |
|
$ |
1,392,817 |
|
|
|
|
|
|
|
||||
|
|
|
|
(10) |
Intangible Assets |
|
|
|
|
|
The Company holds an intangible asset, a customer list acquired by the Company in the amount of $154,210. The Company began amortizing the asset to expense over a period of five years beginning July 1, 2007, resulting in amortization expense of $7,712 and $7,712 during the the three months ended March 31, 2010 and 2009, respectively, accumulated amortization expense of $84,832 and a net carrying amount at March 31, 2010 of $69,378. |
12
|
|
|
|
(11) |
Income Taxes |
|
|
|
|
|
Income tax expense (benefit) for the three months ended March 31, 2010 and 2009, consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
||||
|
|
|
|
2010 |
|
2009 |
|
||
|
|
|
|
(unaudited) |
|
||||
|
|
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
- |
|
$ |
- |
|
|
|
State |
|
|
- |
|
|
- |
|
|
|
|
|
||||||
|
|
|
|
|
- |
|
|
- |
|
|
|
|
|
||||||
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
102,817 |
|
|
(146,012 |
) |
|
|
State |
|
|
12,101 |
|
|
(17,185 |
) |
|
|
|
|
||||||
|
|
|
|
|
114,918 |
|
|
(163,197 |
) |
|
|
|
|
||||||
|
|
Total income tax expense (benefit) |
|
$ |
114,918 |
|
$ |
(163,197 |
) |
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
Net operating loss carryforward |
|
$ |
3,052,451 |
|
$ |
3,306,341 |
|
|
|
Depreciation |
|
|
(643,074 |
) |
|
(691,761 |
) |
|
|
Deferred gain on sale of assets |
|
|
13,164 |
|
|
16,571 |
|
|
|
Inventory capitalization |
|
|
98,767 |
|
|
95,319 |
|
|
|
Reserve for worker compensation expense |
|
|
99,849 |
|
|
29,105 |
|
|
|
Allowance for credit losses |
|
|
59,923 |
|
|
40,423 |
|
|
|
Work opportunity credit carryforward |
|
|
37,132 |
|
|
37,132 |
|
|
|
Oklahoma job and investment credits |
|
|
877,310 |
|
|
877,310 |
|
|
|
Allowance for state job and investment credits |
|
|
(789,743 |
) |
|
(789,743 |
) |
|
|
|
|
|
|
||||
|
|
Net deferred tax asset |
|
$ |
2,805,779 |
|
$ |
2,920,697 |
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
$ |
350,615 |
|
$ |
264,772 |
|
|
|
Non-current portion |
|
|
2,455,164 |
|
|
2,655,925 |
|
|
|
|
|
|
|
||||
|
|
|
|
$ |
2,805,779 |
|
$ |
2,920,697 |
|
|
|
|
|
|
|
||||
|
|
|
|
|
In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either the generation of future taxable income during the periods in which those temporary differences become deductible or the carryback of losses to recover income taxes previously paid during the carryback period. |
|
|
|
|
|
The Company is not currently subject to any specific audit by any federal, state or local taxing authority. The Company is no longer subject to income tax examinations by tax authorities before 2005. There are no tax positions previously taken which could give rise to uncertainty, and therefore there are no calculations or classifications of interest, penalties or effects on income tax rates related to such uncertainties |
13
|
|
|
|
|
As of March 31, 2010, the Company has a net operating loss carryforward of $8.0 million representing a tax asset of $3.1 million which, if unused, will commence expiring in 2023 and state new jobs/investment credit carryforwards totaling $877,000 of which the Company has elected to provide a realizability allowance of $789,000 resulting in a net carrying amount of $88,000. If unused, the credits will commence expiring on December 31, 2021. |
|
|
|
|
|
Actual income tax expenses differ from “expected” income tax, computed by applying the U.S. Federal corporate tax rate of 34 percent to earnings from operations before income taxes, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
||||
|
|
|
|
2010 |
|
2009 |
|
||
|
|
|
|
(unaudited) |
|
(unaudited) |
|
||
|
|
Computed “expected” income taxes |
|
$ |
78,713 |
|
$ |
(145,908 |
) |
|
|
State income taxes, net of federal income tax |
|
|
9,168 |
|
|
(17,289 |
) |
|
|
Other permanent differences |
|
|
27,037 |
|
|
- |
|
|
|
|
|
|
|
||||
|
|
|
|
$ |
114,918 |
|
$ |
(163,197 |
) |
|
|
|
|
|
|
||||
|
|
|
|
(12) |
Operating Leases |
|
|
|
|
|
The Company has noncancelable long-term operating leases for certain distribution equipment with various expiration dates, one lease for refrigerated warehouse space and one lease for office equipment. The equipment leases require the Company to pay a base rate plus specific mileage amounts. Future minimum annual lease payments for these long-term leases for the next five years ending March 31, |
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
2011 |
|
$ |
575,502 |
|
|
2012 |
|
|
330,653 |
|
|
2013 |
|
|
220,950 |
|
|
2014 |
|
|
39,942 |
|
|
2015 |
|
|
- |
|
|
|
|
|
||
|
|
|
$ |
1,167,047 |
|
|
|
|
|
|
|
|
|
(13) |
Stock Based Compensation |
|
|
|
|
|
In August 2006, the Company adopted the 2006 Equity Incentive Plan (the “Plan”) providing for potential awards of up to 1,000,000 options to purchase shares of common stock in the Company. On November 26, 2008, the Compensation Committee of the Board of Directors of the Company approved a proposal by management to issue stock options under the Plan to certain employees, directors and consultants of the Company or a Subsidiary. On March 12, 2009, 14,120 incentive stock options were issued on substantially the same terms as the incentive stock options issued on November 26, 2008. Except as noted below, options shall have a 10-year term, and shall vest at 25% per year, commencing on the first anniversary of the grant date. The grant date was November 26, 2008, and the exercise prices are equal to the closing market price on November 25, 2008 ($0.69), except for owners of 10% or more of the total shares of the Company. Exercise prices for the 10% and greater owners are 110% of the closing market price on November 25, 2008 ($0.76) and the options (i) have a term of five (5) years and (ii) vest at the rate of 25% per year. In all cases, the options shall immediately vest upon a Change in Control of the Company, as defined in the Plan. All options granted to employees are intended to qualify as Incentive Stock Options, as defined by Section 422 of the Internal Revenue Code of 1986, as amended, and the stock options granted to non-employee directors and consultants to the Company or a Subsidiary will be Nonqualified Stock Options as provided for in the Plan. The Company uses the Black-Scholes method of valuing the options and charges amounts to earnings using the straight-line method over the vesting period. The Company charged $22,483 and $22,075 against earnings during the three months ended March 31, 2010 and 2009, respectively, leaving a total of $235,365 of unrecognized expense in connection with the issuance of the stock options. |
14
|
|
|
|
(14) |
Major Customers |
|
|
|
|
|
The Company has supply arrangements with two certain distributors, representing 10 percent and 11 percent of its revenues. Both distributors are composed of numerous distinct purchasing units. No individual purchasing unit of either distributor represents greater than 4 percent of gross revenues. The Company derives 16 percent of its net sales from a certain retailer, servicing all of its distribution centers located within the United States of America. |
|
|
|
|
(15) |
Commitments and Contingencies |
|
|
|
|
|
The Company and its subsidiaries are subject to legal proceedings and claims which arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur, the Company is not aware of any proceeding at March 31, 2010, which would have a material adverse effect on its consolidated financial position, results of operations or liquidity. |
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATONS.
Forward-looking Statements
Certain written and oral statements set forth below or made by the Company with the approval of an authorized executive officer constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which convey the uncertainty of future events and generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to the business, expansion and marketing strategies of the Company, industry projections or forecasts, the impact on our financial statements of inflation, legal action, future debt levels, sufficiency of cash flow from operations and borrowings and statements expressing general optimism about future operating results, are forward-looking statements. Such statements are based upon our management’s current estimates, assumptions and expectations, which are based on information available at the time of the disclosure, and are subject to a number of factors and uncertainties, including, but not limited to:
|
|
|
|
|
|
• |
our future operating results and the future value of our common stock; |
|
|
|
|
|
|
• |
our ability to obtain financing to fund our operations; |
|
|
|
|
|
|
• |
whether our assumptions turn out to be materially correct; |
|
|
|
|
|
|
• |
our ability to attain such estimates and expectations; |
|
|
|
|
|
|
• |
our ability to execute our strategy; |
|
|
|
|
|
|
• |
further material changes in market conditions in any industry, including the economic state of the food industry; |
|
|
|
|
|
|
• |
the effects of, or further material changes in, economic and political conditions in the United States of America and the markets in which we serve; |
|
|
|
|
|
|
• |
our ability to reasonably forecast prices of the commodities we purchase; |
|
|
|
|
|
|
• |
our ability to timely forecast and meet customer demand for fresh-cut salads and refrigerated prepared salads; |
|
|
|
|
|
|
• |
our ability to respond to changing consumer spending patterns, |
|
|
|
|
|
|
• |
our ability to attract and retain quality employees and control our labor costs; and |
|
|
|
|
|
|
• |
our ability to provide products that are safe for human consumption |
Any of the foregoing factors and uncertainties, as well as others, could cause actual results to differ materially from those described herein. We undertake no obligation to affirm, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with the unaudited consolidated financial statements of the Company and the related notes thereto appearing elsewhere in this report.
General
We are an integrated processor and distributor of value-added, refrigerated foods. We are uniquely able to distribute fresh-cut produce items along with a full array of value-added refrigerated prepared food multiple times per week. We sell to both food service and retail sectors. Our products consist of fresh-cut vegetables, fresh-cut fruits, salad kits, prepared salads, dips, spreads, soups, sauces and side dishes.
Comparison of Three Months Ended March 31, 2010 and 2009
We recorded net income for the first quarter of 2010 of $117,000 or $0.02 per share compared to a net loss of $266,000 or $0.06 per share in the same period of 2009.
Net sales. Net sales decreased 2.8 percent to $21.7 million from $22.3 million in the same period of 2009 due to what management believes to be slower restaurant sales as a result of abnormal winter weather conditions, primarily in the month of January, in the regions in which we serve. Consistent with slower restaurant sales, our product mix shifted in favor of items sold at the retail level.
Gross profit. Our gross profit margin increased to 12.7 percent in the first quarter of 2010 compared to 8.7 percent in the
16
first quarter of 2009. Cost of sales in the first quarter of 2009 were higher than our historical experience due to higher commodity costs such as corn, wheat and soybeans. Those commodity costs have since stabilized and continue at normal levels. We also experienced excessive labor costs in the first quarter of 2009 due to labor shortages as a result of what management believes to be effects of immigration enforcement legislation in the State of Oklahoma. We have previously undertaken several different steps to mitigate the effects of the reduced labor supply, and subsequently experienced an improvement in our retention and labor efficiency. However, we expect our labor costs to remain higher than our historical labor costs.
Selling, general and administrative expenses. Our selling, general and administrative expenses increased to $2.3 million in the first quarter of 2010 compared to $2.1 million in same period of 2009, primarily as a result of establishing accruals for employee incentive programs to align employee and company objectives.
Other income and expense. Other income and expense resulted in a net expense of $260,000 in the first quarter of 2010 compared to a net expense of $230,000 in the same period of 2009. We recorded a gain on sale of assets as a result of recognition of deferred benefit from the sale and lease back of certain transportation equipment in 2008 in the amount of $9,000 compared to a loss on disposal of certain transportation assets in the first quarter of 2009.
Interest expense increased to $269,000 in the first quarter of 2010 from $227,000 in the same period of 2009, primarily due to borrowings on our revolving line of credit. We completed the refinancing of our revolving line of credit on March 18, 2009, increasing the outstanding balance to $2.8 million at March 31, 2009. Prior to March 18, the outstanding balance on our previous revolving line of credit was $1.0 million. Borrowings on our revolving line of credit at March 31, 2010 was $2.0 million.
Income tax expense (benefit). We recognized an income tax expense of $115,000 in the first quarter of 2010 compared to a benefit of $163,000 in the first quarter of 2009, primarily due to utilization of net operating loss carryforwards, which consists of applying previous operating losses for tax purposes against future tax liabilites and resulting in tax expense for book purposes and calculation of net income. The primary cause of the income tax benefit in the first quarter of 2009 is due to the creation of net operating loss carryforward tax assets.
Liquidity and Capital Resources
Our Form 10-K filed with the U.S. Securities and Exchange Commission on March 19, 2010, includes a detailed discussion of our liquidity and capital resources. The following is an update and should be read in conjunction with the Liquidity and Capital Resources discussion on our Form 10-K.
We incurred a loss of $3.4 million in 2008, used cash of $2.7 million and experienced a decrease in working capital of $6.6 million. In 2009, the Company incurred a net loss of $0.5 million, and experienced a further decrease in working capital. During 2008 and 2009, management took several actions to provide assurance that the Company would continue as a going concern, including plans to enhance and conserve liquidity and capital resources. These plans included, among other things, (a) aggressive cost and cash management, including a moratorium on hiring of non-core personnel, compensation adjustments, and non-essential capital expenditures, (b) increased operational discipline, including the completion of the implementation of an Enterprise Resource Planning system designed to strengthen internal accounting and operational controls, and provide considerably more transparency and visibility into the business, (c) timely and adequate pricing adjustments to mitigate changes in input costs, (d) undertaking steps to mitigate the effects of changes in certain input and commodity costs, (e) continued aggressive management of the balance sheet, capital structure and working capital, (f) refinancing the revolving line of credit, which was completed during the first quarter of 2009, and (g) continuing to seek longer-term sources of capital.
There can be no assurance that actions taken will be sufficient to enable management to mitigate the effects of continuing fragile economic conditions, and other external market conditions which are beyond the control of management. A further worsening of the economy in the United States of America could materially adversely affect the Company’s business, including its results of operations, financial condition and prospects.
On February 24, 2010, the Company closed a private placement financing, in which it raised $1.9 million in equity capital. Although this additional equity strengthened the Company’s capital and liquidity position, economic conditions continue to be very challenging for most industries and many companies.
During the three months ended March 31, 2010, the Company reported net income of $0.1 million. The Company decreased its short-term borrowings under its new revolving line of credit by $0.3 million and continues to aggressively manage its capital resources.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. We base our estimates
17
and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and our estimates, assumptions and judgments routinely require adjustment. The amounts of our assumptions regarding assets and liabilities reported in our consolidated balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by the critical estimates and assumptions which are used for, but not limited to, the accounting for inventory, customer rebates, allowance for credit losses, impairment of long-lived assets, intangible assets, income taxes and stock-based compensation. Actual results could differ from these estimates and such differences could be material.
Inventory. Inventory purchases and purchase commitments are based upon forecasts of demand. Our inventory is stated at the lower of average cost (which approximates first-in, first-out) or market. Inventory turns rapidly due to the nature of our fresh products and, accordingly, we do not generally experience material inventory valuation issues. However, in the instance where we may believe that demand no longer allows us to sell certain inventory above cost or at all, then we revalue that particular inventory to market or charge-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory revaluations and charge-offs could differ from our estimates. We have not historically experienced any material inventory revaluations or charge-offs and manage inventory levels of both perishable and non-perishable supplies to minimize the effects of any revaluations.
Customer Rebates. Estimates and reserves for rebates are based on specific rebate programs, expected usage and historical experience. Actual results could differ from these estimates. With respect to some programs, we make a provision for rebates based on anticipated purchase volume. Greater than anticipated volume under a program would result in an additional charge to earnings. We have not historically experienced any material charges to earnings under our rebate programs; however, we could experience such charges in the future.
Allowance for Credit Losses. The allowance for credit losses is based on various factors including among other things, (a) our assessment of the collectibility of specific customer accounts, (b) our macro assessment of political and economic risks, (c) the overall aging of our accounts receivable portfolio, and (d) the effects each of these and other factors have on the consolidated portfolio. If there is a change in a customer’s creditworthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us will be affected. We continually monitor customer accounts for indications of a customer’s inability to pay. Our recent losses on charged-off accounts have not been material.
Long-lived Assets. Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its ultimate disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time. We have not experienced any write downs due to impairment for equipment in use. The depreciation lives of these assets are short (generally 5 to 7 years), resulting in relatively low net book values. Equipment not in use is depreciated in full or held for sale at its estimated recovery value.
Intangible Assets. We evaluate the recoverability of intangible assets annually or more frequently if impairment indicators arise. Under FASB ASC 350, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time. We believe that accounting for intangible assets is a critical accounting policy due to the requirement to estimate the value in accordance with FASB ASC 350. Our intangible assets consist primarily of customer relationship intangibles of purchased entities.
Income taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either (a) the generation of future taxable income during the periods in which those temporary differences become deductible, or (b) the carryback of losses to recover income taxes previously paid during the carryback period. As of March 31, 2010, we have net operating loss carryforwards of $8.0 million, representing a deferred tax asset of 3.1 million which, if unused, will commence expiring in 2023 and state new jobs/investment credit carryforwards totaling $877,000 of which we have elected to provide a realizability allowance of $790,000, resulting in a net carrying amount of $88,000. If unused, the credits will commence expiring on December 31, 2021.
Stock-Based Compensation. We measure stock based compensation costs at the grant date based on the fair value of the award and recognize as expense ratably over the requisite service period, net of estimated forfeitures. We use the Black-Scholes option-pricing model to determine the fair-value of stock option awards. We have awarded stock options to employees, executive officers, directors and certain consultants.
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ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2010.
(b) Changes in internal control over financial reporting
Effective in 2010, we began utilizing a new Enterprise Resource Planning (“ERP”) system, which we believe has further strengthened our internal accounting and operating controls. We continue to evaluate the effects the new ERP system has on our internal controls and make adjustments as necessary.
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We are not a party to any material legal proceedings. We could become involved in litigation from time to time relating to claims arising out of our ordinary course of business.
Our Form 10-K filed with the U.S. Securities and Exchange Commission on March 19, 2010, includes a detailed discussion of our risk factors. Since that time, there have been no material changes to our risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None.
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The following exhibits are filed herewith or incorporated by reference as indicated as required by Item 601 of Regulation S-K.
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Exhibit No. |
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Description |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 14, 2010
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Vaughan Foods, Inc. |
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By: |
/s/ Herbert B. Grimes |
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Herbert B. Grimes |
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Chairman of the Board of Directors and |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Dated: May 14, 2010 |
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Vaughan Foods, Inc. |
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By: |
/s/ Gene P. Jones |
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Gene P. Jones |
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Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit No. |
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Description |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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