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AHFP > SEC Filings for AHFP > Form 10-Q on 3-Oct-2013All Recent SEC Filings

Show all filings for ARTISANAL BRANDS, INC.



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis should be read in conjunction with the information contained in the Unaudited Condensed Consolidated Financial Statements and the Notes to the Unaudited Condensed Consolidated financial statements appearing elsewhere in this Form 10-Q. The Unaudited Condensed Consolidated Financial Statements for the nine month period ending February 28, 2013, 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

Three Months ending February 28, 2013 v. February 29, 2012

In the three month period ended February 28, 2013, we recorded sales of $975,004 versus $1,315,625 in the corresponding three month period in 2012. The sales reduction was due in part to our decision to discontinue Costco road shows due to the high sampling and salary cost. Instead, we focused our limited sales staff on expanding the Artisanal CheeseClock™ retail merchandising program. Another factor contributing to lower sales was low inventory which was tied to our lack of working capital. Much of our CEO's time in the second quarter was allocated to our capital raising project to reduce continued daily inventory shortages that caused set-backs in the roll-out of our new retail program and with foodservice and E-commerce customers. Although we were able to obtain additional working capital in late October (discussed below) we deployed as much capital as we could to meet holiday season sales demand, however we needed more time to begin the process of recruiting new people to our company and building our sales organization. We also had many retailers postpone decisions to stock the Artisanal CheeseClock™ retail merchandising program during the hectic holiday weeks in November and December which continued into January. February is a month where many of the wine retailers make significant inventory purchases on programs offered by the wine distributors and this too impacted our ability to close new accounts. In February we hired a Senior Sales Manager and consolidated our small retail and foodservice sales staffs into one unit giving us the chance to service more accounts within a territory for less cost and each sales person now having greater opportunities to earn higher sales commissions with the territories they cover. Having a Senior Sales Manager also brings a greater concentration of focus to sales and permits our CEO to focus on strategy, capital planning and pursuing only very large accounts.

We are continuing to work with our distributor KeHE, but our growth was still hampered by our need to complete a capital plan (described below) that will enable us to recruit experienced sales personnel to accelerate placement of our Artisanal CheeseClock™ retail program in stores located throughout the country. Until then, we are concentrating our sales efforts in the greater New York tri-state region.

Last spring the State of Connecticut passed new legislation allowing wine retailers to sell packaged food items in their stores. This opens up a whole new market for us and we have concentrated our sales expansion plans in this state. We have done extensive mailers to every wine store and we are working with three distributors and wine makers that service the state to identify the best prospects for the Artisanal CheeseClock™ retail program. We plan to recruit one full-time sales person to cover this region and work very closely with the territory sales representatives of wine distributors to secure as many stocking retailers as we can. As of this filing, we have successfully secured placement of our new retail program in over 40 retail stores by working with wine distributors and wine markers that want their products cross-marketed with Artisanal's cheeses using the 4-color CheeseClock™ program. The Connecticut laws now track the laws of New Jersey where we are also focusing on selling our program in Delaware. Currently we are working with the Delaware Alcohol and Beverage Counsel on ways to secure permits for qualifying stores to sell the CheeseClock™ program. As legislation becomes less stringent, Delaware will be another great state for us to pursue and we already have five stocking retailers. Because wine stores in New York are prohibited from selling food items, we are looking to partner with beer marketers that are interested in cross-merchandising their products with our new retail concept. We also continue to concentrate on the best specialty food stores that attract consumers seeking exceptional quality foods to expand our program in New York.

Our E-commerce division can be our fastest growing business short-term and the one that drives the highest margin. To achieve full potential, we need a deeper bench of more experienced personnel that can design a stronger customer acquisition plan and increase our daily online customer conversion rate. Our plan is to hire a new E-commerce Manager, just as we did to oversee and focus our territory foodservice and retail sales. We are also looking to partner with much larger e-commerce businesses in wine and food that don't directly compete with our company but can see the benefit of combining their marketing expertise with our brand, uniqueness and cheese quality. This December we started to cross-market with an online wine retailer by agreeing to include our respective catalogues in shipments to customers. While our ability to track the origin of new customers is not complete, we had 800 and 5,000+ new visitors to our website in November and December 2012, respectively.

In February we started to market a new web-to-web growth plan developed around the Artisanal CheeseClock™, where online wine merchants are being offered the opportunity to post the CheeseClock™ icon on wine product pages with a direct click-through to our site to buy cheeses best paired with the wines that were selected. We will share in the revenues of cheese sales with the sites that direct the traffic to our website.

We also started marketing the Artisanal Serving Set, which is a high-quality porcelain platter, with 4 serving plates and 4 cheese knives all designed around the 4-colors of the Artisanal CheeseClock™. This is a new gifting item we are offering on its own and in conjunction with sales of the Artisanal Cheese Club. We already have one of the largest and best luxury catalog companies interested in posting these products for sale on its website this Spring and in printed catalogs for mailings starting in September.

Our cost of goods sold for the quarter was $822,166 versus $931,170 for the same quarter last year. We are continuing to work on ways to lower our cost of goods sold due to higher costs from fuel charges that impact prices on packaging, cheese transportation and surcharges from overnight carriers on home deliveries as well as higher fuel surcharges per delivery. With lower sales, our fixed overhead represents a greater percentage of total sales. Our gross margin for the three month period was 16% from 29% for the same three month period last year. We are still looking at competing shipping companies to control shipping costs better, assuming the new providers can offer more competitive rates. With the planned completion of our capital plans we will be able to make greater use of ocean carrier versus the more expensive airfreight which affords us some benefits and reduces the amount of capital tied up in inventory.

In this three month period, the Company recorded a net loss from operations of $683,076 versus a net loss from operations of $662,446 for the same period in 2012. Of this amount, $177,055, is attributable primarily to interest on the term loan, bridge loan, credit card loan facility and long-term debt.

Our selling, general and administrative expenses have decreased due to cost cutting measures such as reducing payroll, streamlining all expenses and reducing sales and marketing expenses.

The Company also incurred $16,040 and $21,000 of amortization charges relating to the intangible assets, respectively and $16,570 and $33,696 of depreciation on the fixed assets, respectively during the three months ended February 28, 2013 and February 29, 2012.

On February 28, 2013, the Company had $912,825 in current assets, which consisted primarily of cash of $157,681, inventory of $362,431, prepaid expenses of $113,975, advances to suppliers of $34,780 and accounts receivable of $243,958. The Company had leasehold improvements and equipment of $461,987, other assets of $36,017 and intangibles of $3,417,075 net of amortization.

Nine months ending February 28, 2013 v. February 29, 2012

In the nine month period ended February 28, 2013, we recorded sales of $2,063,289 versus $2,921,179 in the corresponding nine month period in 2012. Once again, our decision to discontinue Costco road shows ,focus on building a sales team and low inventory levels from prior periods contributed to lower sales. With new sales management, new territory representatives, more daily interaction with our customers in one targeted region of sales and continued work from our CEO on capital fund-raising, targeting major accounts and building a better management team, we believe the pieces are in place to achieve success with the Artisanal CheeseClock™ program--a proprietary marketing concept--leading us into untapped markets.

Our cost of goods sold analysis is the same as we described above in the analysis of the past three months ending February 28, 2013.

In this nine month period, the Company recorded a net loss from operations of $2,247,171 versus a net loss from operations of $3,435,682 for the same period in 2012. Of the latter amount, $976,628 was attributable to non-cash stock compensation expense relating to the vesting of 4,440,000 common stock options that had been granted to KeHE Distributors in connection with the marketing and distribution agreement entered in February 2011 and amended in May 2011. Management determined that it was in the Company's best interest to accelerate the vesting of these options during our first quarter and take the hit to income immediately, rather than over the three-year term of the agreement when the expense would increase with each potential uptick in our stock price. However, on February 28, 2013 we reached an agreement with KeHE to repay its loan in May 2013 and to terminate the 4,880,000 stock options. In this nine month period, the Company also incurred $517,010 in interest charges, which is attributable primarily to interest on the term loan, the bridge loan and long-term debt.

Our selling, general and administrative analysis is the same as we described above in the analysis of the past three months ending February 28, 2013.

The Company also incurred $51,634 and $51,634 of amortization charges relating to the intangible assets, respectively and $50,770 and $63,000 of depreciation on the fixed assets, respectively during the three and nine months ended February 28, 2013 and February 29, 2012.

Liquidity and Financial Resources at February 28, 2013

As of February 28, 2013, the Company had $4,085,045 in current liabilities, which includes $674,000 in notes payable to existing shareholders and $818,000 in current portion of long-term debt. The Company had accounts payable of $626,865, accrued payroll taxes of $1,293,879, and accrued expenses and other current liabilities totaling $530,676. The Company's current liabilities also include outstanding prepaid gift certificates and other deferred revenue totaling $141,625.

On or about February 22, 2010, we entered a loan agreement with one of our preferred shareholders and term loan participants (the "Lender") for a loan of $2.5 million. On specified dates since then, the Long Term Loan has been increased by a total of $1,382,000. The original loan was conditional upon the Lender obtaining a first security position on all of our assets. The loan was also conditional upon our repurchase from Lender and its affiliate 500,000 shares of redeemable convertible preferred stock they held collectively, repayment to the Lender of amounts Lender had previously advanced to Borrower under the Term Loan agreement and issuance to Lender of 9,275,000 shares of our common stock representing approximately twenty percent of our outstanding common stock on a fully-diluted basis. In October 2012, the maturity date of this loan was extended to September 2014. As of February 28, 2013, the total amount due under the Long Term Loan including accrued interest is $4,374,163.

In or about February 2011, Artisanal entered into a three-year marketing and distribution agreement granting KeHE Distributors LLC the exclusive rights to distribute into retail outlets all Artisanal products with primary focus on our 16-cheese CheeseClockTM program. KeHE's exclusivity is dependent upon KeHE meeting specific minimum annual sales. Under the agreement, KeHE earns a commission of five percent (5%) on all net sales to accounts serviced by KeHE and could also earn up to 4,880,000 of common stock options upon meeting specified sales thresholds over the term of the agreement The agreement further provided that KeHE would loan Artisanal up to $520,000 to facilitate the purchase of inventory required for the KeHE accounts and that KeHE would advance up to an additional $100,000 of marketing funds to be used for in-store demonstrations and related marketing costs. The loan bears interest at a rate of 3-Month LIBOR plus 5% to be paid quarterly and is secured by our accounts receivable and inventory. In May 2011, we borrowed an additional $250,000 from KeHE to be repaid within 60 days. As an inducement for making this additional loan, we modified the vesting terms of KeHE's 4,880,000 options, which were to be earned based on certain product purchase thresholds. Upon the execution on May 9, 2011, of the amended Marketing and Distribution Agreement, KeHE became fully vested in 440,000 three year options exercisable at $.30 a share. The remaining 4,880,000 of options were to become fully vested on August 22, 2011, if the $250,000 was not repaid. As the additional funds were not repaid on that date, the remaining options vested. Pursuant to a second addendum to the Marketing and Distribution Agreement, the parties agreed that effective February 28, 2013, KeHE would no longer be obligated to maintain on its staff a salesperson dedicated to the Artisanal line of products or to advance any additional funds under the Agreement. In exchange, KeHE agreed to the cancellation of the 4,880,000 stock options. The addendum further provides that the Company will repay on or before May 31, 2013, all amounts advanced by KeHE under the Agreement, failing which a penalty of $50,000 shall apply. As of February 28, 2013, the total amount due under the KeHE Agreement, as amended, including accrued interest is $838,430.

Over the twelve-month following the KeHE agreement, we raised additional sums of capital from our current lender and shareholders in the form of additions to the Long Term Loan (as described above) and the sold the final outstanding 1,135,000 shares of Series A Preferred Stock that the board had authorized in 2007 in connection with the acquisition of Artisanal's operations but that were not sold at that time.

In June 2012, we filed with the Securities and Exchange Commission a registration statement with the purpose of raising as much as $8,000,000 to pay down debts and afford our company greater working capital to build out our sales organization. Our planned use of proceeds will be to retire the shareholders loans of approximately $1.1 million and pay off all accrued taxes leaving approximately $6 million in working capital. This level of working capital will help us make senior and junior hires to accelerate our growth plans in the 3 business lines - retail, foodservice, E-commerce and lower our cost of goods sold by purchasing more merchandise in larger quantities and relying less on air freight for international shipments of cheese.

In October 2012, two private lenders agreed to loan to the Company a total of $1,700,000 secured and to be paid down by using the Company's credit card receipts for online purchases. The loan bears interest of 6% per annum and matures on October 14, 2014. The lenders each received one share of the Company's common stock for each dollar they loaned, respectively. The proceeds are being used to pay down tax liabilities and for operating capital. One of the lenders had previously loaned the Company $150,000 under the term loan which matured on December 31, 2011. As part of this transaction, he agreed to postpone repayment of that loan and all accrued interest thereon until the $1,700,000 has been repaid or October 14, 2014, whichever is earlier. As part of this transaction, the Long-Term Lender extended the maturity date of the Long Term Loan from February 2013 to September 2014. As of February 28, 2013, the total amount due under the Credit Card Facility Loan including accrued interest is $1,637,765.

We generate cash from the sales of our products. Wholesale and retail 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. While we believe our cash flow will be sufficient to meet our fixed monthly expenses, the Offering described above is critical to advancing our business plan as stated above.

As long as more than $1,500,000 of the Preferred Stock is issued and outstanding, we will need 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 we contemplated upon acquiring Artisanal Cheese, LLC in 2007, 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. If we cannot obtain the requisite two-thirds approval for any future transaction, these restrictions may affect our liquidity and our ability to execute our business plan.

Inflation and Changing Prices

We do not foresee any risks associated with inflation or substantial price increases in the near future. In addition, the cheeses that we select for our affinage process are often available from various sources. As such, while we have exposure to inflation, we do not believe that inflation will have any materially significant impact on our operations in the near future.

We do not foresee any increase in costs that cannot be passed on to our customer in the ordinary course of business. We adjust our wholesale and online prices throughout the year to reflect increase costs attributable to increases in energy prices. Under very limited circumstances, Artisanal has entered into agreements with certain customers for which we provide third-party drop-ship fulfillment with contracted pricing for various cheese collections. We, in turn, usually have a corresponding agreement with the cheese suppliers whose products are incorporated into these collections for fixed prices to ensure that we achieve our 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. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to our Unaudited Condensed Consolidated 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.

Equity-Based Compensation

The Company accounts for equity-based compensation in accordance with guidance issued by the FASB, Share-Based Payment. The Company records compensation expense using a fair-value-based measurement method for all awards granted. In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company's forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company's actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the equity-based compensation expense could be significantly different from what we have recorded in the current period.

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