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| AHFP.OB > SEC Filings for AHFP.OB > Form 10-Q on 14-Jan-2009 | All Recent SEC Filings |
14-Jan-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the information contained in the Financial Statements and the Notes to the financial statements appearing elsewhere in this Form 10-Q. The Financial Statements for the six month period ending November 30, 2008, included in this Form 10-Q are unaudited; however, this information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to present a fair statement of the results for the interim period.
Results of Operations
Six months ending November 30, 2008 v. November 30, 2007
In the six month period ended November 30, 2008, the Company had sales of $2,470,084 versus $1,410,231 in the corresponding six month period in 2007. Cost of goods sold in this period was $1,785,648 which was 72% versus 75% for the same period in 2007.
In this six month period, the Company recorded a net loss from continuing operations before interest of $803,327 versus a net loss from operations before interest of $378,370 for the same period in 2007. The net loss to common shareholders during this period 2008 was $1,147,249 versus $56,274 during the same period in 2007. Of the net loss to common shareholders, $331,089 was attributable to non-cash stock dividends paid to preferred shareholders during the first two quarters of 2008 in the form of new shares of preferred versus $136,950 in 2007. In 2007, the Company generated a gain of $522,571 on the sale of its former intangible assets relating to the building material business and the discontinuation of its royalty-generating business. The net gain was attributable primarily to the sale of the Company's intangible assets relating to the building material business. In 2008, the Company incurred $12,833 in interest charges, which is attributable primarily to interest on long-term debt owed to the former members of Artisanal Cheese LLC. The Company also incurred $45,140 of amortization charges relating to the intangible assets and $63,226 of depreciation on the fixed assets.
On November 30, 2008, the Company had $1,306,788 in current liquid assets, which consisted primarily of cash of $13,689, inventory of $671,145 and accounts receivable of $470,254. The Company had leasehold improvements and equipment of $794,249 and intangibles of $3,794,873 net of amortization.
Liquidity and Financial Resources at November 30, 2008
As of November 30, 2008, the Company had $2,097,722 in current liabilities. The Company had accounts payable of $1,076,729, accrued taxes of $650,377 and accrued expenses and other current liabilities totaling $301,394. The Company's current liabilities also include outstanding prepaid gift certificates and other deferred revenue totaling $69,222.
In the last fiscal year, the Company undertook a $5.2 million private placement of redeemable convertible preferred stock. By mid-August 2007, the company had raised $3,900,000 of equity for which it issued 3,900,000 shares of preferred stock. The Company used most of these funds to acquire the membership interests of Artisanal Cheese, LLC, for a purchase price of $4,400,000. The members agreed to accept cash of $3,200,000 and sellers' notes totaling $1,200,000. By mid-December 2007, the company had raised an additional $1,300,000 and reduced the seller's notes by $700,000. The balance was used for additional operating capital.
By the end of the third quarter, the Company intends to complete its plan to close on a two-part senior
debt facility consisting of an asset-based revolving line of credit secured by the accounts receivable of the company and then a term loan in the range of $1 million secured by all of the other assets of the Company. This senior financing was contemplated as part of the acquisition of Artisanal Cheese LLC in August 2007. The Company has received a term sheet from a third-party asset-based lender for a revolving loan in an amount representing up to 80% of the company's accounts receivable and 50% of its inventories. The cost of this facility is at current prime rates.
In the interim the Company in October 2008 proposed to the existing preferred shareholders a $500,000 bridge financing. Four of the preferred shareholders participated in the bridge loan in an amount directly proportionate to their interest in the preferred shares for a total bridge loan of $187,000. The bridge loan bears interest at 12% per annum and matures on January 15, 2009. It is secured by the assets of the Company. The bridge loan will be paid with the proceeds of the aforementioned asset-based financing.
For so long as more than $1,500,000 of the Preferred stock is issued and outstanding, the Company shall require the prior written consent of holders representing two-thirds of the Preferred stock issued and outstanding to (a) sell, merge with, acquire or consolidate with another business entity, (b) incur additional leverage beyond the leverage contemplated by the Company and Holders as part of the Company's acquisition of Artisanal Cheese, LLC, or (c) issue any new shares of common stock or securities convertible or exercisable into Common Stock in excess of 2% of the shares of Common Stock issued and outstanding on a fully diluted basis as of August 14, 2007, excluding the Management Stock Option granted to Messrs. Dowe and Feeney. At no time shall such securities be sold or granted at a price less than the thirty cents ($.30) per share Conversion Price. If the Company cannot obtain the requisite two-thirds approval, these restrictions may affect our liquidity and our ability to execute our business plan.
The Company believes its cash flow will be sufficient to meet its fixed monthly expenses. The Company generates cash from the sales of its product. Wholesale customers purchasing on an open account basis have 30-day payment terms. All others sales pertaining to cheese and related items from our print catalog or website or sales relating to classes at the cheese center are paid through credit card which generally settle within three days of purchase.
All long-term liabilities are payable to the previous owners of Artisanal Cheese LLC and are being repaid in accordance with the terms of the two governing instruments. The short-term debt of $228,000 payable to the restaurants owned by former owners of Artisanal Cheese LLC was paid quarterly and retired in full in July 2008.
The cost to carry the preferred stock is a dividend of 12% payable in stock for the first two years. Thereafter the dividend is 12% if payable in cash or 15% if payable in stock, at the Company's election. Where the Company elects to pay the dividend in shares, this will not present a drain on the company's capital resources.
Inflation and Changing Prices
The Company does not foresee any risks associated with inflation or substantial price increases in the near future. In addition, the cheeses that are selected by the Company in its affinage process are often available from various sources. As such, while the Company has exposure to inflation, it does not believe that inflation will have any materially significant impact on its operations in the near future.
The Company does not foresee any increase in costs that cannot be passed on to its customer in the ordinary course of business. The company adjusts its wholesale and online prices throughout the year to reflect increase costs attributable to increases in energy prices. Under very limited circumstances, the Company has entered into agreements with certain customers for which the Company provides third-party drop-ship fulfillment
with contracted pricing for various cheese collections. The Company, in turn, usually has a corresponding agreement with the cheese suppliers whose products are incorporated into these collections for fixed prices to ensure that the company achieves its anticipated gross margin.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes that its critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 3 to our financial statements.
Long-Lived Assets (including Tangible and Intangible Assets)
We acquired businesses in recent years, which resulted in intangible assets being recorded. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairment to the intangible and tangible assets on a quarterly basis or when evidence of events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators, if any, and future cash flows related to these assets are based on operational performance of our business, market conditions and other factors.
Accounting for Income Taxes
As part of the process of preparing our financial statements we are required to estimate our income taxes. Management judgment is required in determining our provision of our deferred tax asset. We recorded a valuation for the full deferred tax asset from our net operating losses carried forward due to the Company not demonstrating any consistent profitable operations. In the event that the actual results may differ from these estimates or we adjust these estimates in future periods we may need to adjust such valuation recorded.
Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. SFAS 123(R) is a new and very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. SFAS 123(R) requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each
respective reporting period.
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