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EX-31.1 - CERTIFICATION - SMOKY MARKET FOODS INCsmky_10q-ex3101.htm
EX-31.2 - CERTIFICATION - SMOKY MARKET FOODS INCsmky_10q-ex3102.htm
EX-32.2 - CERTIFICATION - SMOKY MARKET FOODS INCsmky_10q-ex3202.htm
EX-32.1 - CERTIFICATION - SMOKY MARKET FOODS INCsmky_10q-ex3201.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011

OR

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ TO _________________

Commission file number: 000-52158

Smoky Market Foods, Inc.

(Exact name of registrant as specified in its charter)

Nevada
 
20-4748589
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)

 
1511 E. 2nd St.
Webster City, IA 50595
(Address of principal executive offices, including zip code)
 
 
Registrant’s telephone number, including area code:  (866) 851-7787

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.
þ  Yes   o  No

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).
o  Yes   o  No

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 12b02 of the Exchange Act.  (Check one):

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):
o  Yes   þ  No

As of September 30, 2011, the registrant had 103,725,361 shares of common stock outstanding.
 


 
 

 
 
PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS
 
SMOKY MARKET FOODS, INC.
Balance Sheets

   
June 30,
2011
   
December 31,
2010
 
ASSETS:
           
Current Assets
           
Cash
  $ 1,158     $ 10  
Total Current Assets
    1,158       10  
Other Assets
               
Deposits
    -       183  
Total Other Assets
    -       183  
Total Assets
  $ 1,158     $ 193  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
               
Current Liabilities
               
Accounts payable
  $ 494,854     $ 501,960  
Accounts payable - related parties
    118,107       125,107  
Accrued payroll costs
    495,323       396,348  
Short-term advances
    83,150       91,500  
Other current liabilities
    -       -  
Total Current Liabilities
    1,191,434       1,114,915  
Long-term Liabilities
               
Promissory notes payable to a related party, including
accrued interest, less amortized discount
    2,295,007       2,137,819  
Total Liabilities
    3,486,441       3,252,734  
                 
Stockholders' Equity (Deficit)
               
Preferred Stock, par value $.001, 10,000,000 shares
authorized; no shares issued and outstanding
    -       -  
Common Stock, par value $.001, 200,000,000 shares authorized:
issued and outstanding 103,377,246 and 93,977,246
at June 30, 2011 and December 31, 2010, respectively
    103,378       93,978  
Deferred Stock-Based Compensation
    (41,900 )     (55,228 )
Other paid-in capital
    5,172,561       4,922,586  
Additional paid-in capital for warrants
    1,535,993       1,309,423  
Accumulated deficit
    (10,255,315 )     (9,523,300 )
Total Stockholders' Equity (Deficit)
    (3,485,283 )     (3,252,541 )
Total Liabilities and Stockholders' Equity (Deficit)
  $ 1,158     $ 193  
 
 
The accompanying notes are an integral part of these financial statements.

 
2

 

SMOKY MARKET FOODS, INC.
Statements of Operations

   
For the Three Months Ended June 30:
   
For the Six Months Ended June 30:
 
   
2011
   
2010
   
2011
   
2010
 
Sales
                       
Restaurant Sales, Net of Discounts
  $ -     $ -     $ -     $ 13,966  
Internet Sales
    -       -       -       44  
Total Sales
    -       -       -       14,010  
                                 
Restaurant Operating Costs
                               
Food, beverage and packaging
    -       -       -       20,896  
Labor and related costs
    -       -       -       28,959  
Occupancy
    -       -       -       19,887  
Other
    -       -       -       2,223  
Total Restaurant Operating Costs
    -       -       -       71,965  
                                 
Net Operating Loss
    -       -       -       (57,955 )
                                 
General & Administrative Expenses
                               
Impairment of assets
    -       255,853       -       653,529  
Salaries, wages & benefits
    49,170       76,061       98,340       143,845  
Depreciation/amortization
    13,844       30,485       27,689       61,470  
Professional fees
    2,143       34,685       2,393       78,257  
Rent
    1,560       37,364       2,820       47,772  
Stock based compensation
                               
Salaries, Wages & Benefits - related parties
    6,664       46,564       30,540       57,233  
Professional
    -       37,559       -       49,909  
Financing
    322,106       11,097       339,158       15,626  
Marketing
    5,559       -       5,559       11,993  
Other
    10,904       21,527       17,594       54,374  
                                 
Total General & Administrative Expenses
    411,950       551,195       524,093       1,174,008  
                                 
Operating Loss
    (411,950 )     (551,195 )     (524,093 )     (1,231,963 )
                                 
Other Income (Expense)
                               
Interest income
    -       2               53  
Loss on conversion of related party debt
    (70,000 )     -       (79,825 )     -  
Other income (loss)
    1,603       -       1,697       -  
Interest expense to a related party
    (65,045 )     (57,810 )     (129,795 )     (112,678 )
                                 
Other Expense - Net
    (133,442 )     (57,808 )     (207,923 )     (112,625 )
                                 
Loss before Income Taxes
    (545,392 )     (609,003 )     (732,016 )     (1,344,588 )
                                 
Income Taxes
    -       -       -       -  
                                 
Net (Loss)
  $ (545,392 )   $ (609,003 )   $ (732,016 )   $ (1,344,588 )
                                 
(Loss) per Share:
Basic and Diluted
  $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.02 )
                                 
Weighted Average
Number of Shares
    101,043,913       87,586,913       99,143,913       88,155,579  
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 

SMOKY MARKET FOODS, INC.
Statements of Stockhoder's Equity

               
Deferred
   
Other
   
Additional
             
   
Common Stock
   
Stock-Based
   
Paid-in
   
Paid-in
   
Accumulated
   
Total
 
   
Shares
   
Amount
   
Compensation
   
Capital
   
Capital
   
Deficit
   
(Deficit)
 
                                           
Balance, January 1, 2010
    86,963,746     $ 86,964     $ (81,885 )   $ 4,849,244     $ 1,030,077     $ (7,202,544 )   $ (1,318,144 )
Common stock issued for:
                                                       
Cash and cancellation of advances
    3,100,000       3,100               14,400                       17,500  
Consideration for employee services
    2,703,500       2,704               36,002                       38,706  
Consideration for professional services
    510,000       510               14,240                       14,750  
Consideration in financing
    700,000       700               8,700                       9,400  
Warrants issued in conjunction:
                                                       
Professional services
                                    58,603               58,603  
Financing
                                    220,743               220,743  
Amortization of stock-based compensation
                    26,657                               26,657  
Net (Loss) for the Year Ended December 31, 2010
                                            (2,320,756 )     (2,320,756 )
Balance, December 31, 2010
    93,977,246       93,978       (55,228 )     4,922,586       1,309,423       (9,523,300 )     (3,252,541 )
Common stock issued for:
                                                       
Cancellation of advances
    2,650,000       2,650               20,425                       23,075  
Employee compensation
    1,750,000       1,750               12,250                       14,000  
Warrants issued for:
                                                       
Employee compensation
                                    3,212               3,212  
Financing
                                    17,052               17,052  
Amortization of stock-based compensation
                    6,664                               6,664  
Net (Loss) for the three months ended March 31, 2011
                                            (186,623 )     (186,623 )
Balance, March 31, 2011
    98,377,246       98,378       (48,564 )     4,955,261       1,329,687       (9,709,923 )     (3,375,161 )
Common stock issued for:
                                                       
Cash
    3,000,000       3,000               139,300                       142,300  
Cancellation of advances
    2,000,000       2,000               78,000                       80,000  
Warrants issued for:
                                                       
Financing
                                    206,306               206,306  
Amortization of stock-based compensation
                    6,664                               6,664  
Net (Loss) for the three months ended June 30, 2011
                                            (545,392 )     (545,392 )
Balance, June 30, 2011
    103,377,246     $ 103,378     $ (41,900 )   $ 5,172,561     $ 1,535,993     $ (10,255,315 )   $ (3,485,283 )

The accompanying notes are an integral part of these financial statements.

 
4

 

SMOKY MARKET FOODS, INC.
Statements of Cash Flows

   
For the Three Months Ended June 30:
   
For the Six Months Ended June 30:
 
   
2011
   
2010
   
2011
   
2010
 
                         
Cash Flows from Operating Activities
                       
Net Income (Loss)
  $ (545,392 )   $ (609,003 )   $ (732,016 )   $ (1,344,588 )
Impairment loss on assets
    -       255,853       -       653,529  
Stock-based financing and compensation costs
    328,771       95,220       369,699       122,768  
Loss on conversion of related party debt
    70,000       -       79,825          
Depreciation and amortization
    13,845       30,485       27,690       61,470  
Accrued interest capitalized as debt
    64,750       -       129,500          
Adjustments to reconcile net loss to cash used in operating activities:
                               
(Increase) decrease in inventory
    -       46       -       8,431  
(Increase) decrease in other current assets
    -       5,961       -       11,609  
Increase (decrease) in accounts payable
    (14,915 )     49,153       (14,108 )     52,280  
Increase (decrease) in due to employees
    48,770       57,305       98,975       50,041  
Increase (decrease) in other accrued liabilities
    -       56,997       -       110,596  
                                 
Net Cash Provided (Used) by Operating Activities
    (34,171 )     (57,983 )     (40,435 )     (273,864 )
                                 
Cash Flows from Investing Activities
                               
(Deposits) refunds
    -       8,933       183       8,933  
Purchase of property and equipment
    -       (1,003 )     -       (4,853 )
                                 
Net Cash Provided (Used) by Investing Activities
    -       7,930       183       4,080  
                                 
Cash Flows from Financing Activities
                               
Proceeds from issuance of common stock
    26,500       -       26,500       -  
Proceeds from issuance of promissory notes
    -       -       -       150,000  
Proceeds from (payments on) short term advances - net
    8,800       10,500       14,900       10,500  
                                 
Net Cash Provided (Used) by Financing Activities
    35,300       10,500       41,400       160,500  
                                 
Net Increase (Decrease) in Cash
    1,129       (39,553 )     1,148       (109,284 )
                                 
Cash, Beginning of Period
    29       40,915       10       110,646  
                                 
Cash, End of Period
  $ 1,158     $ 1,362     $ 1,158     $ 1,362  
                                 
                                 
Supplemental Information:
                               
Interest paid
  $ -     $ -     $ -     $ -  
Income taxes paid
  $ -     $ -     $ -     $ -  
                                 
Non-cash Investing and Financing Activities
                               
Settlement of advances through issuance of common stock
  $ 10,000     $ -     $ 23,250     $ -  

The accompanying notes are an integral part of these financial statements.
 
5

 

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Smoky Market Foods, Inc., (the “Company”) was incorporated on April 18, 2006 under the laws of the State of Nevada.

The Company engages in sales of high-quality Smoke-Bakedtm meat and fish, and special recipe dishes, through two channels of distribution: sales of retail packaged product sold over the Internet and retail display merchandisers, and development of a chain of franchised fast-casual restaurants that are modular, pre-fabricated buildings.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  On an ongoing basis, management reviews those estimates, including those related to allowances for loss contingencies for litigation, income taxes, and projection of future cash flows used to assess the recoverability of long-lived assets.

Cash and Cash Equivalents

For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
Accounts Receivable
 
Management monitors the liquidity and creditworthiness of accounts receivable due from customers on an ongoing basis, considering industry and economic conditions and other factors.  These factors form the basis for calculating and recording an allowance for doubtful accounts, which is an estimate of future credit losses. The Company writes off individual accounts receivable against the bad debt allowance when the Company determines a balance is uncollectible.  Management has determined that the bad debt allowance is appropriately established at $-0- as of both June 30, 2011 and December 31, 2010, respectively.

Inventory

Inventory consists of Smoky Market food items and branded packaging.  It is valued at the lower of cost or market using the average cost method.  Due to the cessation of operations and doubt about the Company’s ability to return to operations, all inventory was written off as of December 31, 2010.  For this reason, inventory is reflected at $-0- as of June 30, 2011.

Property and Equipment

Property and equipment are stated at cost and are being depreciated using the straight-line method over the assets’ estimated economic lives, which range from 3 to 25 years.  Leasehold improvements are capitalized and amortized over the remaining term of the leased facility.


 
6

 

All property and equipment was determined by Management to be impaired as of December 31, 2010, and was therefore written off as an impairment loss for the year ended December 31, 2010.  For this reason, property and equipment is reflected at $-0- as of June 30, 2011.
 
Advances

As of June 30, 2011 and December 31, 2010, the Company was indebted to several individuals for non-interest bearing, unsecured advances in the amount of $83,150 and $91,500, respectively. $82,500 of the advances was past due and in default as of both June 30, 2011 and December 31, 2010.  2,035,000 shares of common stock and 150,000 warrants to purchase common stock were issued to the individuals as part of the advances still outstanding at June 30, 201.  Management intends to repay the advances upon the realization of additional debt/equity financing in 2011.  Accordingly, the advances have been classified as current obligations.

Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2011 and December 31, 2010.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature, or are receivable or payable on demand, and their carrying amounts approximate fair value.

Impairment of Long-Lived Assets

The Company periodically reviews the carrying amount of property and equipment and its identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value.  Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.

Management estimated and recorded an impairment loss at March 31, 2010 relating to the closure of a restaurant in Los Gatos, California. Impairment losses for the three months ended June 30, 2011 and 2010 were $-0- and $255,853, respectively.

During the year ended December 31, 2010, the Company recorded impairment losses for all operating assets due to the uncertainty of future operating cash flows from such assets. Accordingly, all operating assets are reflected at $-0- value as of June 30, 2011 and December 31, 2010.

Revenue Recognition

Revenue from restaurant sales is recognized when food and beverage products are sold. The Company sells gift cards which do not have an expiration date and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines that there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The Company will consider a reduction of the unredeemed gift card liability when more historical evidence will allow a reliable percentage of unredeemed and/or broken gift cards to be estimated. Revenue on internet sales is recognized at the time of shipment.


 
7

 

As discussed above, the Company wrote off all inventory as of December 31, 2010 as impaired because of uncertainty over its market value.  Subsequent to December 31, 2010, some of this inventory was sold.  Accordingly, $1,697 in sales of previously determined impaired inventory have been reflected as non-operating “other income” on the income statement for the six months ended June 30, 2011.

Shipping and Handling (Internet Sales)

Shipping and handling charged to customers can vary depending on pricing strategies, market conditions, etc., and is not necessarily based on the recovery of cost.   Accordingly, shipping and handling charges are recorded as a component of sales while the corresponding shipping and handling costs are reflected as a component of cost of goods sold.

Advertising Costs

All advertising costs are charged to expense as incurred or the first time the advertising takes place, unless it is direct-response advertising that results in probable future economic benefits.  Advertising expenses were $-0- and $-0- for the three months ended June 30, 2011 and 2010, respectively.
 
Segment Information

Certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance.  The Company currently operates in one business segment and will evaluate additional segment disclosure requirements if it expands operations.

Net (Loss) Per Common Share

Basic earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares, outstanding stock options, and the equivalent number of common shares that would have been outstanding had the convertible debt holders converted their debt instruments to common stock.  All potential dilutive securities have been excluded from the computation, as their effect is anti-dilutive.

Stock-Based Compensation

The Company has issued its common shares as compensation to directors, officers, and non-employees (“recipients”).  The Company measures the amount of stock-based compensation based on the fair value of the equity instrument issued or the services or goods provided as of the earlier of (1) the date at which an agreement is reached with the recipient as to the number of shares to be issued for performance, or (2) the date at which the recipient’s performance is complete.

Occasionally, the Company sells shares below market value to raise cash to fund operations. The discounts from market are treated as compensation for officers and directors.  For non-officers and directors, the discounts are netted against proceeds as a “cost of issue.”


 
8

 

Income Taxes

Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

Uncertainty in income taxes is recognized in the Company’s financial statements. Specifically, the accounting policy determines (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations. The Company has evaluated the presence of any such tax uncertainties and determined that they do not have a material impact on the financial statements. 

Recent Accounting Pronouncements

The Company’s management has reviewed recent accounting pronouncements issued through the date of the issuance of these financial statements. In management’s opinion, except for the pronouncement detailed below, no other pronouncements apply or will have a material effect on the Company’s financial statements. In May 2009, the FASB issued ASC 855 Subsequent Events, which establishes principles and requirements for subsequent events. In accordance with the provisions of ASC 855, the Company currently evaluates subsequent events through the date the financial statements are available to be issued. Effective for the Company’s interim and annual reporting periods beginning January 1, 2010, or for certain disclosures, January 1, 2011, new guidance from the FASB ASC 2010-06 will require additional disclosures about transfers between the various levels of the fair value hierarchy, as well as activity in Level 3 fair value measurements. The new guidance also requires the disaggregation of asset and liability classes as well as the inputs and valuation techniques used to measure Level 2 fair value measurements as well as Level 3. The adoption of this new guidance will not have an impact on the Company’s financial position or results of operations. However, additional disclosure may be required.

NOTE 2.  GOING CONCERN

Management believes that there is substantial doubt about the company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon its ability to commence profitable operations and/or obtain additional debt and/or capital financing.  Management is attempting to obtain additional financing with various parties, but the eventual success of such efforts cannot be assured.


 
9

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.

The Company has experienced $10,255,315 in losses since inception. The Company has had minimal revenue generating operations since inception.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

NOTE 3.  NOTES PAYABLE TO RELATED PARTY

The Company is obligated under a promissory note payable to an LLC. The LLC has acquired over 10% of the common stock of the Company, and is therefore now deemed a related party.  However, the LLC does not have management control.  The transaction is therefore considered at “arm’s length.”

The note accrues interest at a 10% annual rate until repaid on or before its maturity date of August 18, 2020.

The net promissory note obligation was as follows as of:

   
June 30,
2011
   
December 31,
2010
 
Face amount of note
  $ 2,568,900     $ 2,568,900  
Accrued interest
    224,503       95,004  
Less unamortized loan discount
    (498,396 )     (526,084 )
    $ 2,295,007     $ 2,137,819  
 
As discussed above, the LLC is considered a related party.  Related party expenses relative to these loans were as follows for the three months ended:

   
June 30,
2011
   
June 30,
2010
 
             
Interest expense
  $ 64,750     $ 57,810  
Amortization of loan discount
  $ 13,844     $ 23,642  
 
NOTE 4.  CAPITAL STOCK

Common Stock

On  April  18,  2006,  the  State  of  Nevada  authorized  the  Company  to  issue  a  maximum  of 200,000,000 shares of the Company’s common stock. The assigned par value was $.001.  On the same day, the Company issued 40,000,000 common shares to Smoky Systems, LLC, a Nevada LLC and related party, in exchange for certain assets.


 
10

 
 
Preferred Stock

In June 2006, the State of Nevada authorized the Company to issue a maximum of 10,000,000 shares of the Company’s preferred stock with a $.001 par value.  Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated. All shares of any one series of the Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each such series, and the qualifications, limitations or restrictions  thereof,  if  any,  may  differ  from  those  of  any  and  all  other  series  at  any  time outstanding.  No preferred shares had been issued as of June 30, 2011.

Stock Transactions:

The Company has engaged in numerous transactions whereby shares of common stock (description above) were issued in exchange for cash and/or services.  The Statement of Stockholders’ Equity provides a summary of such transactions.

A reconciliation of stock based compensation issued during the three and six months June 30, 2011 is as follows:

   
For the Three
   
For the Six
 
   
Months Ended
   
Months Ended
 
   
June 30, 2011
   
June 30, 2011
 
 Per Statement of Operations
           
Stock based compensation
           
 Salaries, Wages & Benefits - related parties
  $ 6,664     $ 30,540  
 Financing
    322,106       339,158  
Loss on conversion of related party debt
    70,000       79,825  
    $ 398,770     $ 449,523  
                 
 Per Statement of Cash Flows
               
 Stock based compensation
  $ 328,771       369,699  
 Loss on conversion of related party debt
    70,000     $ 79,825  
 Rounding
    (1 )     (1 )
    $ 398,770     $ 449,523  
                 
 Per Statement of Shareholders Equity
               
Common stock issued for:
               
Stock based compensation- financing , which is included in the net loss for the period
  $ 115,800     $ 115,800  
Loss on conversion of related party debt, which is included in the net loss for the period
    70,000       79,825  
Amortization of stock-based compensation, which is included in the net loss for the period
    6,664       13,328  
Officer compensation, which is included in the net loss for the period
    -       14,000  
Warrants issued in conjunction:
               
Financing
    206,306       226,570  
    $ 398,770     $ 449,523  


 
11

 

NOTE 5.  RELATED PARTY TRANSACTIONS

As of both June 30, 2011 and December 31, 2010, the Company owed $118,107 and $125,107 to a related party for past due professional expenses, respectively.  Such debt was reflected as related party trade payables on the balance sheets, bears no interest and has no formal repayment terms.  The related party is the Company’s acting Chief Financial Officer who works on a subcontractor basis, and has agreed to be paid as funds become available.

NOTE 6. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitment

The Company has defaulted on a long-term operating lease of real property previously used as a restaurant operation in Los Gatos, California.  All amounts due under the lease have been recognized as a liability and included in accounts payable.  The liability was $187,307 at both June 30, 2011 and December 31, 2010.

Employment Contract

Chief Executive Officer

Effective May 1, 2007, the Company entered into a three-year employment contract with the Chief Executive Officer (“CEO”).  Terms of the agreement included annual compensation of $175,000, a potential 80% bonus, a stock award of 1,500,000 common shares, 425,000 options to purchase common stock at $.10 per share, and an additional contingent 1,000,000 shares assuming that certain operating performance metrics are achieved.  The employment contract expired and has not yet been renewed as of the date of these financial statements.  The CEO and the Company have continued under the same compensation structure subsequent to the expiration of the employment contract.

Real Estate Option and Consulting Agreement

The Company entered into an agreement with Mary Ann’s Specialty Foods, Inc. (“Supplier”) in October 2009.  Under the terms of the agreement, the Company issued the Supplier 1,500,000 warrants to purchase the Company’s common stock at a $.15 exercise price, expiring in five years, in exchange for certain real property rights to purchase and build production facilities located on property presently owned by the Supplier.  The transaction was valued at $75,000 using the Black-Scholes Method.  The Company also issued 1,000,000 common shares to the Supplier in exchange for a three-year real estate related consulting contract that the Company may require in subsequent years in order to build the new facility described above. The transaction was valued at $50,000, and based on the $.05 per share fair value of the Company’s common shares on the date of the agreement. The values of the assets were considered impaired by Management and written off as an impairment loss at December 31, 2010.

Dispute with Contractor

Smoky Market previously retained the services of an independent financial consultant contractor (the “Contractor”).  The Contractor was terminated in 2009 and Company Management believes that a settlement was agreed to between the parties.  The Contractor now disputes the agreement, claiming additional amounts are owed.  The Company plans to contest the Contractor’s claim, but has recognized and recorded a liability in these financial statements equal to the full amount claimed by the Contractor.  The amount in dispute is $123,720.


 
12

 

NOTE 7. COMMON STOCK OPTIONS AND WARRANTS

Common Stock Option Plan

The Company has reserved 6,500,000 common shares for the exercise of stock options to be issued pursuant to the 2006 Stock Option Plan.  Information relating to options issued under this plan is as follows:

   
Options and
Stock Awards
Available
for Grant
   
Number of
Shares
   
Weighted
Average
Option
Exercise
Price
 
Outstanding as of January 1, 2011
    742,500       5,757,500     $ 0.10  
Shares reserved
    -       -       -  
Options granted
    -       -       -  
Stock awards granted
    -       -       n/a  
Options exercised
    -       -       -  
Options canceled
    -       -       -  
Outstanding as of June 30, 2011
    742,500       5,757,500     $ 0.10  
 
The following table summarizes information about stock options outstanding and exercisable at June 30, 2011:

Stock Options Outstanding
 
Number of
Options
Outstanding
 
Weighted-Average
Remaining
Contractual
Life in Years
 
Weighted-
Average
Exercise Price
 
  1,887,500       2.08     $ 0.10  
 
Stock Options Exercisable
 
Number of
Options
Exercisable
 
Weighted-Average
Remaining
Contractual
Life in Years
 
Weighted-
Average
Exercise Price
 
  1,887,500       2.08     $ 0.10  

 
13

 

The assumptions in computing fair value options is as follows:

Expected stock price volatility
    186.0%  
Risk-free interest rate
    4.7%  
Expected term (years)
    7.00  
Weighted-average fair value of stock options granted
  $ 0.099  

Common Stock Warrants
 
The following is a summary of the status of all the Company’s stock warrants as of June 30, 2011:

   
Number
of
Warrants
   
Weighted
Average
Exercise
Price
 
Ouststanding, January 31, 2011
    10,202,500       0.06  
Granted
    7,250,000       0.08  
Exercised
    -       -  
Cancelled
    -       -  
Ouststanding, June 30, 2011
    17,452,500     $ 0.07  
                 
Warrants exercisable at June 30, 2011
    17,452,500     $ 0.07  
 
The following table summarizes information about stock warrants outstanding and exercisable at June 30, 2011:

Stock Warrants Outstanding
 
Number of
Warrants
Outstanding
 
Weighted-Average
Remaining
Contractual
Life in Years
 
Weigted-
Average
Exercise Price
 
  4,000,000       3.10     $ 0.15  
  13,452,500       4.03     $ 0.05  
 
Stock Warrants Exercisable
 
Number of
Warrants
Exercisable
 
Weighted-Average
Remaining
Contractual
Life in Years
 
Weighted-
Average
Exercise Price
 
  4,000,000       3.10     $ 0.15  
  13,452,500       4.03     $ 0.05  
 

 
14

 
 
 
Warrants issued in 2011 were valued and recorded pursuant to the Black-Scholes Method.  Assumptions used were an average risk-free rate of return of .09%, average expected stock price volatility of 333%, weighted average expected term of 3 years, and a weighted average fair value of $.03 per warrant.
 
NOTE 8. SUBSEQUENT EVENTS

Management has evaluated the period subsequent to June 30, 2011 up to and including the date of the issuance of the financial statements for material subsequent events to disclose.

In July 2011, in order to raise capital in order to resume operations, the Company entered into a Purchase and Lease Agreement (the “Sale/Lease Agreement”) with SMKY Asset Fund LLC (the “Lessor”, a related party) related to our smoker-oven system.  Pursuant to the Sale/Lease Agreement, the Company sold the smoker-oven system to the Lessor for a purchase price of $220,000.  In addition, Smoky Market is required to issue to the Lessor a warrant to purchase a share of common stock for each $1.00 in purchase price paid.  The warrant has an exercise price of $0.50 per share, a five-year term and includes net exercise provisions. Smoky Market leased back the smoker-oven system for rent equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000.  The Sale/Lease Agreement has a 10-year term, provided that the Company may repurchase the smoker-oven system at any time after July 25, 2014 that the market price for our common stock has exceeded $0.50 for thirty trading days.  The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000.
 

 


 
15

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
This Quarterly Report on Form 10-Q (this “Report”) contains various forward-looking statements. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend,” “expect,” “will” or similar words.   These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information.  When considering such forward-looking statements, you should keep in mind the risk factors noted in Part II – Other Information, “Item 1A. Risk Factors” and other cautionary statements throughout this Report and our other filings with the Securities and Exchange Commission.  You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect.  If one or more risks identified in this Report or any other applicable filings materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.
 
Overview

We use proprietary, custom-engineered, USDA-approved wood-burning oven technology to mass produce a complete line of real Smoke-BakedTM meat and fish, and special recipe dishes, which we believe to be unique and of superior quality to other commercially produced smoked meat products.  Our meat and fish are prepared 100% naturally without the addition of additives (water, sugar, high sodium) or chemical preservatives, and are individually portion-packaged and vacuum-sealed for convenience and quality retention.  From a 15-acre food production campus located in central Iowa and owned by our exclusive meat processor, Mary Ann’s Specialty Foods, Inc. (“Specialty Foods”), we produce and ship our smoked foods to distribution facilities strategically established to support nationwide marketing.

We plan to generate revenue principally from sales of our smoked foods through the operations of two channels of distribution: sales of retail packaged product sold over the Internet and retail display merchandisers, and development of a chain of franchised fast-casual restaurants that are modular, pre-fabricated buildings.  A key operating element in our restaurant business model is the culinary systemization we have created – through mass production – designed for highly specialized and profitable foodservice operation within a very small footprint of space.    We are able to deliver food of consistent size, taste and quality without the need to install smoking ovens for on-site cooking or to train skilled cooks to handle raw product at numerous locations.  We believe this will permit our development of national chain operations with substantially reduced costs relative to investment, labor and product shrinkage.

We produce our smoked foods under an agreement with Specialty Foods, a commercial meat processor in whose USDA facility we placed our first wood-burning oven system, which is capable of producing a minimum of approximately 100,000 pounds of smoked meat and fish per month.  To demonstrate the systemization of our foodservice menu operation, we opened a 1,000 square foot Smoky Market restaurant in October 2009, which was located in Los Gatos, California and featured a selection of certain of our smoked meat and fish that was prepared within a kitchen area of 150 square feet.  However, after less than five months of testing, we chose to close the restaurant due to insufficient traffic in the area resulting from the down-turn in the economy.  As a result of this experience, we plan to launch our restaurant concept using only pre-fabricated modular buildings that can easily be relocated should a property venue not turn out to be a viable location.


 
16

 

We have commenced retail sales of our Smoke-Baked Salmon from our new Internet website, which enables food buyers from across the country to order our product on-line and to receive their order within just a few days.  Our Internet marketing and operating plan incorporates the use of national organizations with whom to affiliate for promotion of Smoky Market products on their Internet sites, and for which services we would pay monthly advertising fees or sales commissions in lieu of advertising fees.  On September 26th, we launched our first advertising campaign with WeightWatchers.com, which is running a total of five advertisements on their website that appear in rotation throughout their site, and for which we pay a monthly advertising fee of $25,000.  We will evaluate the results of this initial campaign for consideration to launch our ads on the Weight Watchers website in Canada, as our processing affiliate is approved for shipping our products into Canada.  A separate advertising agreement with a national e-mail advertising company is expected to be entered into shortly, with an advertising campaign anticipated to begin in October 2011.

We have generated net losses in each fiscal year since our inception in the development of our business model.  In October 2009, we began to generate initial revenue from food sales at our Los Gatos, CA Smoky Market restaurant, but subsequently closed the restaurant.  We estimate that we will need up to $5 million of additional financing in order to accomplish our plans for launch and expansion as follows:  $1 million for our Internet marketing affiliations and $4 million for expansion of production capacity relative to building an addition to the Specialty Foods property and to purchasing additional smoker-ovens for installation into the Specialty Foods facility and a fish processing facility to be established in Canada, which will produce Kosher smoked fish.    We expect such proceeds to be provided by our forthcoming private financing transaction.

Liquidity and Capital Resources

As of June 30, 2011, we had cash and cash equivalents of $1,158 and a working capital deficit of $1,190,276, as compared to cash and cash equivalents of $10 and a working capital deficit of $1,114,905 as of December 31, 2010.

To finance the expansion of our Internet retail operations and BarBQ Diner concept, we intend to seek additional financing in the second half of 2011.  Given that we are not yet in a positive cash flow or earnings position, the options available to us are fewer than to a positive cash flow company and generally do not include bank financing.  To raise additional capital, we expect to issue equity securities, including preferred stock, common stock, warrants and/or convertible securities. We do not have any commitments from any party to provide required capital and may, or may not, be able to obtain such capital on reasonable terms or at all.

During the three-month period ended June 30, 2011, principal uses of cash were approximately $34,000 for the Company to pay core essential operating expenses in order to stay in existence.

Expected minimum capital expenditures during the remainder of 2011 of $750,000 are required for the Company to launch its on-line sales operations and would include expenditures for advertising, inventories and general operating expenses.

Assuming the success of our initial Internet retail operations and our subsequent BarBQ Diner restaurant concept, which are expected to utilize a substantial portion of our existing production capacity, we anticipate the need to invest as much as $2,500,000 to create additional production capacity at Specialty Food’s production facility to support our expanded marketing operations.  This will most likely require the construction of an additional building adjacent to Specialty Food’s existing production space for more ovens and packaging equipment.  We have entered into agreements with Specialty Foods under which we were granted an option to construct an up to 80 thousand square foot building on its property to accommodate additional smoker ovens and equipment and an option to purchase the 15-acre campus on which Specialty Foods operates if needed to accommodate growth of the Company’s business (subject to an obligation to lease back to Specialty Foods its processing facility). We anticipate that the financing to pay for the proposed building addition will be generated from a combination of our sales and additional financing transactions involving debt or equity securities.  If we are able to generate sufficient financing, we would also consider constructing a building at the Specialty Foods location dedicated to the production of kosher meat and poultry.  If we are unable to obtain financing to construct the building addition as planned, we will be forced to significantly curtail our proposed expansion, and our ability to grow revenue will be halted until increased capacity can be created.


 
17

 

In July 2011, in order to raise capital in order to complete our 2010 audit, complete this report and continue our operations, we entered into a Purchase and Lease Agreement (the “Sale/Lease Agreement”) with SMKY Asset Fund LLC (the “Lessor”) related to our smoker-oven system.  Pursuant to the Sale/Lease Agreement, we sold the smoker-oven system to the Lessor for a purchase price of $220,000.   In addition, we are required to issue to Lessor a warrant to purchase a share of common stock for each $1.00 in purchase price paid.  The warrant has an exercise price of $0.50 per share, a five-year term and includes net exercise provisions. We leased back the smoker-oven system for rent equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000.  The Sale/Lease Agreement has a 10-year term, provided that we may repurchase the smoker-oven system at any time after July 25, 2014 that the market price for our common stock has exceeded $0.50 for thirty trading days.  The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000.

Results of Operations

We experienced decreases in general and administrative expenses during the three-month period ending June 30, 2011 as compared to the comparable period ending June 30, 2010.  We experienced no sales or operating costs during either of those periods.  Additionally, we experienced decreases in general and administrative expenses during the six-month period ending June 30, 2011 as compared to the same period in 2010.  We experienced no sales or operating costs during the six-month period ending June 30, 2011, whereas we experienced sales and operating costs during the same period in 2010.  The changes in revenues and expenses are summarized and discussed in the table below and in the discussion that follows.

Revenues and Expenses.  Our operating results for the three-month and six-month periods ended June 30, 2011 and the comparable periods in 2010 are summarized as follows:

   
For the three-month period ended
   
For the six-month period ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Sales
    -       -       -     $ 14,010  
Restaurant Operating Costs
    -       -       -     $ 71,965  
Net Operating (Loss)
    -       -       -     $ (57,955 )
General & Administrative Expenses
                               
Salaries, Wages & Benefits
  $ 49,170     $ 76,061     $ 98,340     $ 143,845  
Professional Fees
  $ 2,143     $ 34,685     $ 2,393     $ 78,257  
Rent
  $ 1,560     $ 37,364     $ 2,820     $ 47,772  
Depreciation/amortization
  $ 13,844     $ 30,485     $ 27,689     $ 61,470  
Stock based compensation
                               
Salaries, Wages & Benefits – related parties
  $ 6,664     $ 46,564     $ 30,540     $ 57,233  
Professional
    -     $ 37,559       -     $ 49,909  
Financing
  $ 322,106     $ 11,097     $ 339,158     $ 15,626  
Marketing
  $ 5,559       -     $ 5,559     $ 11,993  
Impairment loss on assets
    -     $ 255,853       -     $ 653,529  
Other
  $ 10,904     $ 21,527     $ 17,594     $ 54,374  
Operating Loss
  $ (411,950 )   $ (551,195 )   $ (524,093 )   $ (1,231,963 )
Other (Expense)
  $ (133,442 )   $ (57,808 )   $ (207,923 )   $ (112,625 )
Net (Loss)
  $ (545,392 )   $ (609,003 )   $ (732,016 )   $ (1,344,588 )


 
18

 

THREE-MONTH PERIODS ENDED JUNE 30, 2011 AND JUNE 30, 2010

We had no sales or restaurant operating costs for the three-month periods ended June 30, 2011 and June 30, 2010.  Consequently, we had no operating loss during these periods.

Our total general and administrative expenses decreased by $139,245, from $551,195 in the three-month period ended June 30, 2010 to $411,950 in the same period in 2011.  The decrease in general and administrative expenses was due primarily to an impairment of restaurant assets in 2010 without a similar impairment in 2011 and to decreases in salaries, wages and benefits expenses, professional fees, rent expenses, depreciation and amortization, stock-based compensation related to salaries, wages and benefits, stock-based compensation related to financing activities, and other expenses, all as described below.

We incurred an impairment loss of restaurant assets during the three-month period ended June 30, 2010, without any similar impairment loss during the same period in 2011.  This impairment loss on assets is due to the closure of our restaurant in Los Gatos, California in 2010.  Our expenses relating to salaries, wages and benefits decreased by $26,891, from $76,061 in the three-month period ended June 30, 2010 to $49,170 in the same period in 2011.  The decrease in expenses relating to salaries, wages and benefits is due primarily to the decrease in staffing associated with our restaurant operations as such operations have ceased.  Our professional fees expenses decreased by $32,542, from $34,685 in the three-month period ended June 30, 2010 to $2,143 during the same period in 2011, due primarily to less need for such services with the closing of our restaurant. Our rent expenses decreased by $35,804, from $37,364 in the three-month period ended June 30, 2010 to $1,560 in the same period in 2011.  The decrease in rent expense was due primarily to the termination of the lease on our restaurant property.    Depreciation and amortization expenses decreased by $16,641, from $30,485 in the three-month period ended June 30, 2010 to $13,844 in the same period in 2011, due primarily to the impairment loss recognition on restaurant and related assets, wherein such assets are immediately written off and depreciation is no longer recorded.  Stock-based compensation related to salaries, wages and benefits decreased by $39,900, from $46,564 in the three-month period ended June 30, 2010 to $6,664 in the same period in 2011, due primarily to a stock award given to the CEO in the three-month period ended June 30, 2010 and no similar award in the three-month period ended June 30, 2011.  Stock-based compensation related to professional activities decreased by $37,559, from $37,559 in the three-month period ended June 30, 2010 to $0 in the same period in 2011, due primarily to warrants to purchase common stock given to outsourced corporate officers in the three-month period ended June 30, 2010 and no similar award in the three-month period ended June 30, 2011. Our other expense decreased by $10,623, from $21,527 in the three-month period ended June 30, 2010 to $10,904 in the same period in 2011.  The decrease in other expense was due primarily to curtailed operating activity as a result of the closure of our restaurant.

The decreases in general and administrative expenses described in the previous paragraph were partially offset by increases in stock-based compensation related to financing activities.  Stock-based compensation relating to financing activities increased by $311,009, from $11,097 in the three-month period ended June 30, 2010 to $322,106 in the same period in 2011.  This increase was due primarily to warrants given to individuals who had advanced money to the Company in order for the Company to pay essential obligations in the three-month period ended June 30, 2011 and no similar award in the three-month period ended June 30, 2010.  Overall, the increases in stock-based compensation expenses were not as great as the decreases in the general and administrative expenses described in the previous paragraph.


 
19

 

SIX-MONTH PERIODS ENDED JUNE 30, 2011 AND JUNE 30, 2010

We had no sales or restaurant operating costs for the six-month period ended June 30, 2011.  Consequently, we had no operating loss during this period.  For the six-month period ended June 30, 2010, we had $14,010 in sales and $71,965 in restaurant operating costs.  Consequently, our operating loss for the six-month period ended June 30, 2010 was $57,955.  Our operating loss in the six-month period in 2010 was due to our restaurant operations in that period, with no comparable operation during the same period in 2011.

Our total general and administrative expenses decreased by $649,915, from $1,174,008 in the six-month period ended June 30, 2010 to $524,093 in the same period in 2011.  The decrease in general and administrative expenses was due primarily to an impairment of restaurant assets in 2010 without a similar impairment in 2011 and to decreases in salaries, wages and benefits expenses, professional fees, rent expenses, depreciation and amortization, stock-based compensation related to salaries, wages and benefits, stock-based compensation related to financing activities, and other expenses, all as described below.

We incurred an impairment loss of restaurant assets during the six-month period ended June 30, 2010, without any similar impairment loss during the same period in 2011.  This impairment loss on assets is due to the closure of our restaurant in Los Gatos, California in 2010.  Our expenses relating to salaries, wages and benefits decreased by $45,505, from $143,845 in the six-month period ended June 30, 2010 to $98,340 in the same period in 2011.  The decrease in expenses relating to salaries, wages and benefits is due primarily to the decrease in staffing associated with our restaurant operations as such operations have ceased.  Our professional fees expenses decreased by $75,864, from $78,257 in the six-month period ended June 30, 2010 to $2,393 during the same period in 2011, due primarily to less need for such services with the closing of our restaurant. Our rent expenses decreased by $44,952, from $47,772 in the six-month period ended June 30, 2010 to $2,820 in the same period in 2011.  The decrease in rent expense was due primarily to the termination of the lease on our restaurant property.    Depreciation and amortization expenses decreased by $33,781, from $61,470 in the six-month period ended June 30, 2010 to $27,689 in the same period in 2011, due primarily to the impairment loss recognition on restaurant and related assets, wherein such assets are immediately written off and depreciation is no longer recorded.  Stock-based compensation related to salaries, wages and benefits decreased by $26,693, from $57,233 in the six-month period ended June 30, 2010 to $30,540 in the same period in 2011, due primarily to a stock award given to the CEO in the six-month period ended June 30, 2010 and no similar award in the six-month period ended June 30, 2011.   Stock-based compensation related to professional activities decreased by $49,909, from $49,909 in the six-month period ended June 30, 2010 to $0 in the same period in 2011, due primarily to warrants to purchase common stock given to outsourced corporate officers in the six-month period ended June 30, 2010 and no similar award in the six-month period ended June 30, 2011. Our other expense decreased by $36,780, from $54,374 in the six-month period ended June 30, 2010 to $17,594 in the same period in 2011.  The decrease in other expense was due primarily to curtailed operating activity as a result of the closure of our restaurant.

The decreases in general and administrative expenses described in the previous paragraph were partially offset by increases in stock-based compensation related to financing activities.  Stock-based compensation relating to financing activities increased by $323,532, from $15,626 in the six-month period ended June 30, 2010 to $339,158 in the same period in 2011.  This increase was due primarily to warrants given to individuals who had advanced money to the Company in order for the Company to pay essential obligations in the six-month period ended June 30, 2011 and no similar award in the six-month period ended June 30, 2010.   Overall, the increases in stock-based compensation expenses were not as great as the decreases in the general and administrative expenses described in the previous paragraph.


 
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Working Capital.  Our working capital as of June 30, 2011 and as of December 31, 2010 are summarized in the table below.

   
As of
 
   
June 30, 2011
   
December 31, 2010
 
Current Assets
           
Cash
  $ 1,158     $ 10  
Total Current Assets
  $ 1,158     $ 10  
                 
Current Liabilities
               
Accounts payable
  $ 494,854     $ 501,960  
Accounts payable – related parties
  $ 118,107     $ 125,107  
Due to employees
  $ 495,323     $ 396,348  
Short-term advances
  $ 83,150     $ 91,500  
Total Current Liabilities
  $ 1,191,434     $ 1,114,915  
                 
Working Capital
  $ (1,190,276 )   $ (1,114,905 )

Our working capital deficiency increased by $75,371, from $1,114,905 at fiscal-year end 2010 to $1,190,276 as of June 30, 2011.  The increase in our working capital deficiency was primarily due to an increase in amounts due to employees of $98,975, from $396,348 at year end 2010 to $495,323 as of June 30, 2011.

Cash Flows.  Our cash flows for the three-month and six-month periods ended June 30, 2011 and the comparable periods in 2010 are summarized as follows:

   
For the Three-Month
Periods Ended
   
For the Six-Month
Periods Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Net Cash (Used) in Operating Activities
  $ (34,171 )   $ (57,983 )   $ (40,435 )   $ (273,864 )
Net Cash Provided by Investing Activities
    -     $ 7,930     $ 183     $ 4,080  
Cash Provided by Financing Activities
  $ 35,300     $ 10,500     $ 41,400     $ 160,500  
Net Increase (Decrease) in Cash
  $ 1,129     $ (39,553 )   $ 1,148     $ (109,284 )
                                 
Cash, Beginning of Period
  $ 29     $ 40,915     $ 10     $ 110,646  
Cash, End of Period
  $ 1,158     $ 1,362     $ 1,158     $ 1,362  

We utilized less cash in our operating activities in the three-month period ended June 30, 2011, from $57,983 in the three-month period ended June 30, 2010 to $34,171 in the same period in 2011, primarily due to diminished operating losses after the closure of the restaurant.  Our investing activities provided no cash during the three-month period ended June 30, 2011, compared to $7,930 in cash provided during the same period in 2010, primarily due to refunds on previous deposits during the three-month period ended June 30, 2011 .  We generated more cash from financing activities, from $10,500 provided during the three-month period ended June 30, 2010 to $35,300 provided during the same period in 2011, primarily due to the issuance of common stock.


 
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We utilized less cash in our operating activities in the six-month period ended June 30, 2011, from $273,864 in the six-month period ended June 30, 2010 to $40,435 in the same period in 2011, primarily due to diminished operating losses after the closure of the restaurant.  Our investing activities provided $183 in cash during the six-month period ended June 30, 2011, compared to $4,080 in cash provided in the same period in 2010, primarily due to the refund of previous deposits offset by equipment purchases in the six-month period ended June 30, 2010.  We generated less cash from financing activities, from $160,500 provided during the six-month period ended June 30, 2010 to $41,400 provided during the same period in 2011, primarily due to  $150,000 in  loan proceeds received during the six-month period ended June 30, 2010.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon financial statements which have been prepared in accordance with generally accepted accounting principles in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to long-lived assets, share-based compensation, revenue recognition, overhead allocation, allowance for doubtful accounts, inventory, and deferred income tax.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting periods. Changes to these judgments and estimates could adversely affect the Company’s future results of operations and cash flows.

Impairment of Long-Lived Assets

           The Company periodically reviews the carrying amount of property and equipment and its identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value.  Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.  Management estimated and recorded an impairment loss at March 31, 2010 relating to the closure of a restaurant in Los Gatos, California. The loss calculation was based on a pending offer on the property.  During the three months ended June 30, 2010, the offer was rescinded, so Management recorded an additional impairment loss for the three months ended June 30, 2010.  During the last half of the year ended December 31, 2010, the Company recorded additional impairment losses for all operating assets due to the uncertainty of future operating cash flows from such assets.  Additionally, the Company sold certain items, receiving $9,125.  The total impairment loss was $0 and $255,853 for the three months ended June 30, 2011 and 2010, respectively.


 
22

 

Revenue Recognition

Revenue from restaurant sales is recognized when food and beverage products are sold. The Company sells gift cards which do not have an expiration date and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines that there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The Company will consider a reduction of the unredeemed gift card liability when more historical evidence will allow a reliable percentage of unredeemed and/or broken gift cards to be estimated. Revenue on internet sales is recognized at the time of shipment.

Net (Loss) Per Common Share
 
Basic earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares, outstanding stock options, and the equivalent number of common shares that would have been outstanding had the convertible debt holders converted their debt instruments to common stock.  All potential dilutive securities have been excluded from the computation, as their effect is anti-dilutive.

Stock-Based Compensation
 
The Company has issued its common shares as compensation to directors, officers, and non-employees (“recipients”).  The Company measures the amount of stock-based compensation based on the fair value of the equity instrument issued or the services or goods provided as of the earlier of (1) the date at which an agreement is reached with the recipient as to the number of shares to be issued for performance, or (2) the date at which the recipient’s performance is complete.

Occasionally, the Company sells shares below market value to raise cash to fund operations. The discounts from market are treated as compensation for officers and directors.  For non-officers and directors, the discounts are netted against proceeds as a “cost of issue.”

Income Taxes

Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.


 
23

 

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

Uncertainty in income taxes is recognized in the Company’s financial statements. Specifically, the accounting policy determines (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations. The Company has evaluated the presence of any such tax uncertainties and determined that they do not have a material impact on the financial statements.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Item 3.                 Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, the Company is not required to provide the information required by this Item, as per Item 305(e) of Regulation S-K promulgated under the Exchange Act of 1934.

Item 4T.                      Controls and Procedures

(a)           Under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2011.  Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective in ensuring that information required to be disclosed by the Company in its reports that it files or submits under the Securities Exchange Act of 1934 (as amended) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.  This conclusion is based in part on the fact that the Company did not complete this Report and related audits within required time periods.

(b)           There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
24

 

PART II
OTHER INFORMATION

Item 1A.  Risk Factors

Material Changes in Risk Factors

The Risk Factors set forth below do not reflect any material changes from the “Risk Factors” identified in our Annual Report on Form 10-K  for the fiscal year ended December 31, 2010. We have made immaterial edits and updated the financial and other data referenced in the risk factors as of a recent practicable date.
 
Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock.  In addition to historical information, the information in this prospectus contains forward-looking statements about our future business and performance.  Our actual operating results and financial performance may be different from what we expect as of the date of this prospectus.  The risks described in this prospectus represent the risks that management has identified and determined to be material to our company.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially harm our business operations and financial condition.

The delay in reporting our financial statements and related events has had, and will continue to have, a material adverse effect on us.

Because of the delay in completing our financial statements for the year ended December 31, 2010 and subsequent periods, we have been unable to timely file our required periodic reports with the SEC.  This report is being filed after it was due.  As a result of these events, we are unable to register securities for public offering and are out of compliance with the reporting requirements of the Securities Exchange Act of 1934.  In addition, many registered broker-dealers are not permitted to effect trades in our outstanding stock.   This is harming, and may continue to harm, the market for our common stock and our ability to raise capital.

We have generated only a nominal amount of revenue and may be unable to generate significant revenue in the future.

We were incorporated in April 2006 and are in the process of commencing operations.  As a result, we have generated only a nominal amount of revenue, and all of our plans are speculative.  We may be unable to generate or expand revenue at the rate anticipated.  If we do not generate significant revenue in the future, or if costs of expansion and operation exceed revenues, we will not be profitable.  We may be unable to execute our business plan, generate significant revenue or be profitable.

The inexperience of our key management, and our limited operating history and evolving business plan, make it difficult to evaluate our performance and forecast our future.


 
25

 

We were formed in April 2006.  Our key management individuals have experience in the restaurant industry, but have limited or no experience in internet retailing, establishing a national food service business (directly or through franchise arrangements) or operating a reporting issuer.  Our limited operating history and limited experience make it difficult to evaluate our ability to generate revenues, manage growth, obtain necessary capital, manage costs, create profits, and generate cash from operations.  Specifically, our ability to do the following may be impaired:

 
·
implement our business plan (which may be based upon faulty assumptions and expectations arising from our limited experience);
 
·
obtain capital necessary to continue operations and implement our business plan;
 
·
comply with SEC rules and regulations and manage market expectations;
 
·
differentiate ourselves from our competitors; and
 
·
establish a significant retail and restaurant customer base.

If we fail to successfully manage these risks, we may never expand our business or become profitable and our business may fail.
 
We will be unable to implement our business plan if we cannot raise sufficient capital and may be required to pay a high price for capital.

As of June 30, 2011, we had $1,158 in cash and cash equivalents.  We need to obtain a significant amount of additional capital to implement our business plan and meet our financial obligations as they become due.  We may not be able to raise the additional capital needed or may be required to pay a high price for capital.  Factors affecting the availability and price of capital may include the following:

 
·
the availability and cost of capital generally;
 
·
our financial results, including our liquidity situation;
 
·
the market price of our common stock;
 
·
the experience and reputation of our management team;
 
·
market interest, or lack of interest, in our industry and business plan;
 
·
the trading volume of, and volatility in, the market for our common stock;
 
·
our ongoing success, or failure, in executing our business plan;
 
·
the amount of our capital needs; and
 
·
the amount of debt, options, warrants and convertible securities we have outstanding.

We may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot raise sufficient capital.  If we are unable to obtain capital for an extended period of time, we may be forced to discontinue operations.

Our auditors have included an explanatory paragraph in our financial statements regarding our status as a going concern.

Our audited financial statements included in this prospectus were prepared on the assumption that we will continue as a going concern.  Our independent registered public accounting firm has stated that it substantially doubts our ability to continue as a going concern in a report dated September 30, 2011. This doubt is based on the fact that we have had losses since inception, have a stockholders’ deficit and have had no material revenue generating operations since inception.


 
26

 

The packaged food market is competitive, and we may be unable to successfully capture retail customers.

The market for packaged meat products, and competing packaged products, is highly competitive.  We propose to sell packaged meat products over the Internet and at retail locations.  We may be unable to differentiate ourselves in the marketplace and compete successfully against existing or future competitors of our business.  In order to succeed, we will be required to take customers away from established smoked meat and fish brands and alternative food products sold over the Internet or at retail stores.  Our retail products will be sold at higher prices than some of our competitor’s products, and consumers may not differentiate the quality of our products or may not be willing to pay higher prices.  If we fail to establish customers for our packaged food business, it is unlikely that we will generate significant revenue or become profitable, and in the long run our business will likely fail.

We may be unable to establish a significant number of restaurant-stores or kiosks.

Many factors may affect our ability to establish new restaurant-stores and kiosks, including:

 
·
identification and availability of suitable locations;
 
·
negotiation of favorable lease or purchase arrangements;
 
·
management of the costs of construction and development;
 
·
securing required governmental approvals and permits and complying with governmental regulations;
 
·
recruitment of qualified operating personnel;
 
·
labor disputes;
 
·
shortages of materials and skilled labor;
 
·
environmental concerns; and
 
·
other increases in costs, any of which could give rise to delays or cost overruns.

If we are not able to establish and expand our restaurant-store or kiosk business, our revenues will not grow as expected, which would inhibit our ability to continue operations in the long term.

The risk of product contamination and recall may harm our public image and result in decreased revenues and harm to our business.

There is a risk that our food processor could produce contaminated meat or other products that we would ship or serve at our restaurant-markets or kiosks.  If such an event occurs, we may be required to recall our products from retail stores, affiliate warehouses and from the restaurant outlets being served.  A product recall would increase costs, result in lost revenues and harm our public relations image, in addition to exposing us to liability for any personal injury resulting from such contamination.

The availability of raw meat, fish and other food products may change without notice, and the fluctuating cost of these products may unexpectedly increase our operating costs and harm our business.

The costs of obtaining the meat, fish and other food products required for our products are subject to constant fluctuations and frequent shortages of item availability.  Adequate supplies of raw meat, fish and other food products may not always be available, and the price of raw meat, fish and other food products may rise unexpectedly, resulting in increased operating costs, potential interruptions in our supply chain, and harm to our business.


 
27

 

Adverse publicity regarding fish, poultry or beef could negatively impact our business.

Our business can be adversely affected by reports regarding mad cow disease, Asian bird flu, meat contamination within the U.S. generally or food contamination generally.  In addition, concerns regarding hormones, steroids and antibiotics may cause consumers to reduce or avoid consumption of fish, poultry, or beef.  Any reduction in consumption of fish, poultry, or beef by consumers, would harm our revenues, financial condition and results of operations.

Our supply chain may be subject to shipping losses, various accidents, or spoilage, which would decrease revenues and potentially lead to a loss of customers.

We have contracted with a food processor that will be responsible for shipping our processed products, restaurant-stores or consumers to distribution centers or marketing affiliates.  Shipping losses, various accidents and product spoilage during this process may lead to decreased sales, potentially disgruntled commercial customers and possible shortages at our distribution centers and retail locations.  Repeated or extensive problems of this nature would harm our reputation and revenues.

We may lose our processor affiliation or experience a breakdown in our single processing oven system, substantially harming our ability to generate revenues until another processor is located.

We are completely dependent upon Mary Ann’s Specialty Foods, Inc., and upon a single oven-system located at Specialty Foods, to produce our smoked foods in order to operate the business and generate revenue.  If our oven system breaks down, becomes contaminated or is removed from Specialty Foods’ facility, we would experience an interruption in our ability to supply products to customers.  This would harm our relationships with our customers and internet affiliates, and harm our revenues in the short run.  Any long-term interruptions in our ability to produce smoked foods would significantly limit our ability to continue operations.

We have entered into a sale/leaseback transaction with respect to our smoker-oven, which creates risk of loss if we default and may inhibit our cash flow.

In July 2011, we entered into a Purchase and Lease Agreement with SMKY Asset Fund LLC, or the Lessor, related to our smoker-oven system.  Pursuant to this Purchase and Lease Agreement we sold the smoker-oven system to the Lessor and are required to pay rent equal to the lesser of (a) $0.20 per pound of product produced using the smoker-oven, or (b) the amount necessary to generate a 30% return on the sum of the purchase price and $5,000.  This rent will diminish our cash flow as we begin to generate revenue, and there is some risk that we will default under the lease and forfeit any right to use the smoker-ovens that are the foundation of our business.

We cannot repurchase the smoker-oven system until the first date after July 25, 2014 that the market price of our common stock has exceeded $0.50 for thirty trading days.  The repurchase price is a number of shares of common stock with a fair market value equal to 20 times the sum of (a) the purchase price, plus (b) $5,000.  If our market price does not exceed $0.50 for thirty trading days we will be unable to repurchase our smoker-oven system (and will be required to continue to pay rent), and any repurchase of the smoker-oven system will be dilutive to our shareholders.

We are dependent upon key personnel to manage business, and the loss of such personnel could significantly impair our ability to implement our business plan.


 
28

 

We are highly dependent upon the efforts of management, particularly Edward C. Feintech, our Chairman, President and Chief Executive Officer.  The number of qualified managers in the smoked-food industry is limited.  As our business grows, we will need to recruit executive and regional managers who are capable of implementing our business plan.  The e-commerce and restaurant industries are highly competitive, and we may be unable to attract qualified management personnel.  If we are unsuccessful in retaining or attracting such employees, our ability to grow and service capacity will be harmed.

In addition, as we expand into different geographic regions the success of our BarBQ Diner fast casual concept will be largely dependent upon the efforts of our regional presidents and local management.  We may be unable to locate qualified persons willing to be regional presidents or to manage local stores under the terms we expect to offer.  We may be required to increase salaries, benefits, and ownership beyond that anticipated, or management personnel we hire may have limited qualifications and may not perform as anticipated.  We may also experience rapid turnover and unexpected legal and other costs associated with our compensation and/or ownership programs for local management.  If we are unable to hire and maintain qualified, capable regional presidents and local management, we may experience lower revenues and higher costs than expected.

We expect to be dependent on third party affiliates to provide design, advertising, foodservice operations management, and franchising assistance in relation to our BarBQ Diners and to assist in development of our general operating and marketing plan.

We intend to engage well-established consulting firms for design, advertising, operations management and franchising to assist us in the development and execution of our BarBQ Diner plan.  If we are unable to engage and sustain long-term agreements with these operating affiliate firms, our ability to generate revenue will be delayed or reduced, and we may incur substantial costs in obtaining the necessary services to execute the roll out for our restaurants and kiosks.

Labor disputes affecting common carriers and foodservice distributors may hamper our ability to deliver our product to customers and harm our business.

We will be dependent upon UPS and other package delivery contractors and foodservice distributors to ship internet orders to customers and products to our foodservice concept outlets.  Labor disputes involving package delivery contractors, or other events creating delays, unpredictability or lost increases in the express delivery market may significantly damage our shipping and delivery capability.  This would increase our costs, likely cause us to fail to comply with delivery commitments to our customers, and eventually harm our ability to generate revenues.

Our business may be affected by increased compensation and benefits costs.

We expect labor costs to be a significant expense for our business.  We may be negatively affected by increases in workers’ wages and costs associated with providing benefits, particularly healthcare costs.  Such increases can occur unexpectedly and without regard to our efforts to limit them.  If such increases occur, we may be unable to pass them along to the consumer through product price increases, resulting in decreased operating results.

Changes in general economic and political conditions affect consumer spending and may harm our revenues and operating results.
 
Our country’s economic condition affects our customers’ levels of discretionary spending.  A decrease in discretionary spending due to a recession or decreases in consumer confidence in the economy could affect the frequency with which our customers choose to purchase smoked-foods or dine out or the amount they spend on smoked-food or meals while dining out.  This would likely decrease our revenues and operating results.


 
29

 

Failure to comply with governmental regulations could harm our business and our reputation.

We will be subject to regulation by federal agencies and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of our proposed BarBQ Diners. These regulations include matters relating to:

 
·
the environment;
 
·
building construction;
 
·
zoning requirements;
 
·
worker safety;
 
·
the preparation and sale of food and alcoholic beverages; and
 
·
employment.
 
Our facilities will need to be licensed and will be subject to regulation under state and local fire, health and safety codes. The construction of modular BarBQ Diners will be subject to compliance with applicable zoning, land use, and environmental regulations. We may not be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop modular BarBQ Diners in the future.

If we elect to serve alcohol to our customers, we will be required to comply with the alcohol licensing requirements of the federal, state, and municipal governments having jurisdiction where our BarBQ Diners are located.  Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages.  Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulations relate to numerous aspects of the daily operations of BarBQ Diners, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.  If we fail to comply with federal, state, or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our BarBQ Diners.
 
The Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment.  We will likely be required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.
 
Failure to comply with these and other regulations could increase our cost structure, slow our expansion, and harm our reputation, any of which would harm our operating results.

Compliance with existing and new regulations of corporate governance and public disclosure may result in additional expenses.
 
Compliance with changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and other SEC regulations, requires large amounts of management attention and external resources.  This may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.


 
30

 

Our directors, executive officers and principal stockholders have effective control of the company, preventing non-affiliate stockholders from significantly influencing our direction and future.

Our directors, officers, and 5% stockholders and their affiliates control a significant percentage of our outstanding shares of common stock and are expected to continue to control a significant percentage of our outstanding common stock following any financing transactions projected for the foreseeable future.  These directors, officers, 5% stockholders and affiliates effectively control all matters requiring approval by the stockholders, including any determination with respect to the acquisition or disposition of assets, future issuances of securities, declarations of dividends and the election of directors.  This concentration of ownership may also delay, defer, or prevent a change in control and otherwise prevent stockholders other than our affiliates from influencing our direction and future.

There is a public market for our stock, but it is thin and subject to manipulation.
 
The volume of trading in our common stock is limited and can be dominated by a few individuals.  The limited volume can make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time.  An investor may find it difficult to dispose of shares of our common stock or obtain a fair price for our common stock in the market.

The market price of our common stock may be harmed by our need to raise capital.
 
We need to raise additional capital in order to roll out our business plan and expect to raise such capital through the issuance of preferred stock, common stock and/or convertible debt.  Because securities in private placements and other transactions by a company are often sold at a discount to market prices, this need to raise additional capital may harm the market price of our common stock.   In addition, the re-sale of securities issued in such capital-raising transactions, whether under Rule 144 or a re-sale registration statement, may harm the market price of our common stock.

The market price for our common stock is volatile and may change dramatically at any time.

The market price of our common stock, like that of the securities of other early-stage companies, is highly volatile.  Our stock price may change dramatically as the result of announcements of our quarterly results, the rate of our expansion, significant litigation or other factors or events that would be expected to affect our business or financial condition, results of operations and other factors specific to our business and future prospects.  In addition, the market price for our common stock may be affected by various factors not directly related to our business, including the following:

 
·
intentional manipulation of our stock price by existing or future stockholders;
 
·
short selling of our common stock or related derivative securities;
 
·
a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares;
 
·
the interest, or lack of interest, of the market in our business sector, without regard to our financial condition or results of operations;
 
·
the adoption of governmental regulations and similar developments in the United States or abroad that may affect our ability to offer our products and services or affect our cost structure;
 
·
developments in the businesses of companies that purchase our products; or
 
·
economic and other external market factors, such as a general decline in market prices due to poor economic indicators or investor distrust.


 
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Our ability to issue preferred stock and common stock may significantly dilute ownership and voting power, negatively affect the price of our common stock and inhibit hostile takeovers.

Under our Articles of Incorporation, as amended, we are authorized to issue up to 10 million shares of preferred stock and 200 million shares of common stock without seeking stockholder approval. Our board of directors has the authority to create various series of preferred stock with such voting and other rights superior to those of our common stock and to issue such stock without stockholder approval. Any issuance of such preferred stock or common stock would dilute the ownership and voting power of existing holders of our common stock and may have a negative effect on the price of our common stock. The issuance of preferred stock without stockholder approval may also be used by management to stop or delay a change of control, or might discourage third parties from seeking a change of control of our company, even though some stockholders or potential investors may view possible takeover attempts as potentially beneficial to our stockholders.

We are unlikely to pay dividends on our common stock in the foreseeable future.

We have never declared or paid dividends on our stock.  We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business.  We do not anticipate paying any cash dividends in the foreseeable future, and it is unlikely that investors will derive any current income from ownership of our stock.  This means that your potential for economic gain from ownership of our stock depends on appreciation of our stock price and will only be realized by a sale of the stock at a price higher than your purchase price.

Our common stock is a “low-priced stock” and subject to regulation that limits or restricts the potential market for our stock.

Shares of our common stock are “low-priced” or “penny stock,” resulting in increased risks to our investors and certain requirements being imposed on some brokers who execute transactions in our common stock.  In general, a low-priced stock is an equity security that:

 
·
Is priced under five dollars;
 
·
Is not traded on a national stock exchange;
 
·
Is issued by a company that has less than $5 million in net tangible assets (if it has been in business less than three years) or has less than $2 million in net tangible assets (if it has been in business for at least three years); and
 
·
Is issued by a company that has average revenues of less than $6 million for the past three years.

We believe that our common stock is presently a “penny stock.” At any time the common stock qualifies as a penny stock, the following requirements, among others, will generally apply:

 
·
Certain broker-dealers who recommend penny stock to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to a transaction prior to sale.
 
·
Prior to executing any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers a disclosure schedule explaining the risks involved in owning penny stock, the broker-dealer’s duties to the customer, a toll-free telephone number for inquiries about the broker-dealer’s disciplinary history and the customer’s rights and remedies in case of fraud or abuse in the sale.
 
·
In connection with the execution of any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers the following:
 
 
o
bid and offer price quotes and volume information;
 
o
the broker-dealer’s compensation for the trade;
 
o
the compensation received by certain salespersons for the trade;
 
o
monthly accounts statements; and
 
o
a written statement of the customer’s financial situation and investment goals.


 
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Item 2.  Unregistered sales of Equity Securities and Use of Proceeds

Other than as previously reported, the Company offered and sold the following securities in reliance upon exemptions from the registration requirements of the Securities Act:

In January 2011, (i) in exchange for debt, we offered and sold to a related party 650,000 shares of common stock with a fair market value of $4,875 (or $0.0075 per share) and warrants to purchase 650,000 shares of common stock at $0.05 per share, exercisable over three years; (ii) as a retirement of debt, we offered and sold to an individual 100,000 shares of common stock with a fair market value of $750 (or $0.0075 per share) and warrants to purchase 100,000 shares of common stock at $0.05 per share, exercisable over three years; and (iii) in exchange for debt, we offered and sold to an individual 250,000 shares of common stock with a fair market value of $3,750 (or $0.015 per share) and warrants to purchase 250,000 shares of common stock at $0.05 per share, exercisable over three years.   The offer and sale of such shares of our common stock and warrants is being effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act, based upon the following: (a) each investor confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to each offering; (c) each investor was were provided with certain disclosure materials and all other information requested with respect to our company; (d) each investor acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

In February 2011, (i) in exchange for debt, we offered and sold to a related party 400,000 shares of common stock with a fair market value of $3,200 (or $0.008 per share) and warrants to purchase 400,000 shares of common stock at $0.05 per share, exercisable over three years; (ii) as retirement of debt owed, we offered and sold to a related party 750,000 shares of common stock with a fair market value of $6,000 (or $0.008 per share) and warrants to purchase 750,000 shares of common stock at $0.05 per share, exercisable over three years; (iii) in exchange for debt, we offered and sold to an individual 500,000 shares of common stock with a fair market value of $4,500 (or $0.009 per share) and warrants to purchase 500,000 shares of common stock at $0.05 per share, exercisable over three years; and (iv) as compensation owed to a related party, we offered and sold 1,750,000 shares of common stock with a fair market value of $14,000 (or $0.008 per share).  The offer and sale of such shares of our common stock and warrants is being effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act, based upon the following: (a) each investor confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to each offering; (c) each investor was were provided with certain disclosure materials and all other information requested with respect to our company; (d) each investor acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.


 
33

 

In April 2011, (i) in exchange for $500 in cash, we offered and sold to an individual 100,000 shares of common stock with a fair market value of $2,500 (or $0.025 per share) and warrants to purchase 100,000 shares of common stock at $0.05 per share, exercisable over three years; and (ii) in exchange for $1,000 in cash, we offered and sold to an individual 400,000 shares of common stock with a fair market value of $14,800 (or $0.037 per share).  The offer and sale of such shares of our common stock and warrants is being effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act, based upon the following: (a) each investor confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to each offering; (c) each investor was were provided with certain disclosure materials and all other information requested with respect to our company; (d) each investor acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

In May 2011, (i) in exchange for debt, we offered and sold to an individual 1,250,000 shares of common stock with a fair market value of $50,000 (or $0.04 per share) and warrants to purchase 1,250,000 shares of common stock at $0.05 per share, exercisable over three years; (ii) as retirement of debt, we offered and sold to an individual 400,000 shares of common stock with a fair market value of $16,000 (or $0.04 per share) and warrants to purchase 400,000 shares of common stock at $0.05 per share, exercisable over three years; and (iii) as retirement of debt, we offered and sold to an individual 350,000 shares of common stock with a fair market value of $14,000 (or $0.04 per share) and warrants to purchase 350,000 shares of common stock at $0.05 per share, exercisable over three years.  The offer and sale of such shares of our common stock and warrants is being effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act, based upon the following: (a) each investor confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to each offering; (c) each investor was were provided with certain disclosure materials and all other information requested with respect to our company; (d) each investor acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

In June 2011, (i) in exchange for $10,000 in cash, we offered and sold to an individual 1,000,000 shares of common stock with a fair market value of $50,000 (or $0.05 per share) and warrants to purchase 1,000,000 shares of common stock at $0.15 per share, exercisable over three years; (ii) in exchange for $6,183 in cash, we offered and sold to an individual 618,300 shares of common stock with a fair market value of $30,915 (or $0.05 per share) and warrants to purchase 618,300 shares of common stock at $0.15 per share, exercisable over three years; (iii) in exchange for $3,817 in cash, we offered and sold to an individual 381,700 shares of common stock with a fair market value of $19,085 (or $0.05 per share) and warrants to purchase 381,700 shares of common stock at $0.15 per share, exercisable over three years; and (iv) in exchange for $5,000 in cash, we offered and sold to an individual 500,000 shares of common stock with a fair market value of $25,000 (or $0.05 per share) and warrants to purchase 500,000 shares of common stoc at $0.15 per share, exercisable over three years.  The offer and sale of such shares of our common stock and warrants is being effected in reliance upon the exemptions for sales of securities not involving a public offering, as set forth in Section 4(2) of the Securities Act, based upon the following: (a) each investor confirmed to us that the investor was an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to each offering; (c) each investor was were provided with certain disclosure materials and all other information requested with respect to our company; (d) each investor acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

Item 6.  Exhibits

See the Exhibit Index attached hereto following the signature page.


 
34

 


SIGNATURES

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.


     
Smoky Market Foods, Inc.
       
       
 
September 30, 2011
 
By:  /s/  Edward C. Feintech
 
Date
 
Edward C. Feintech, President &
Chief Executive Officer
       
 
September 30, 2011
 
By: /s/ Shane Campbell
 
Date
 
Shane Campbell
Chief Financial Officer
       
 
 
 
 

 
35

 

 
 
EXHIBIT INDEX
         
Exhibit No.
 
Exhibit
 
Incorporated by Reference/ Filed Herewith
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 
Filed herewith
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 
Filed herewith
32.1
 
Section 1350 Certification of Chief Executive Officer
 
 
Filed herewith
32.2
 
Section 1350 Certification of Chief Financial Officer
 
 
Filed herewith
101.INS
 
XBRL Instance Document
 
   
101.SCH
 
XBRL Schema Document
 
   
101.CAL  
XBRL Calculation Linkbase Document
 
   
101.DEF
 
XBRL Definition Linkbase Document
 
   
101.LAB
 
XBRL Label Linkbase Document
 
   
101.PRE
 
XBRL Presentation Linkbase Document
 
   
 
 
 
 
 
 
 
 36