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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
   
[  ] 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)

 

(IRS 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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Shares, par value $.001

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES [  ] NO [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES [  ] NO [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES [X] NO [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

[  ] Large Accelerated filer [  ] Accelerated filer

[  ] Non-accelerated filer

(Do not check if a smaller reporting company)

[X] Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): YES [  ] NO [X]

 

The aggregate market value of approximately 58,928,852 shares held by nonaffiliates of the registrant on June 30, 2011, based upon the average bid and asked price of the common shares on the OTC Bulletin Board of $0.08 per share on June 30, 2011, was approximately $4,714,316. Common Shares held by each officer and director and by each other person who may be deemed to be an affiliate of the registrant have been excluded.

 

As of March 31, 2012, the registrant had 104,321,861 common shares outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 
 

  

Table of Contents

 

FORWARD LOOKING STATEMENTS   3
EXPLANATORY NOTE    
PART I   3
Item 1.  Business.   3
Item 1A.  Risk Factors.   9
Item 1B.  Unresolved Staff Comments.   16
Item 2.  Properties.   16
Item 3.  Legal Proceedings.   17
Item 4.  Mine Safety Disclosures   17
PART II   17
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   17
Item 6.  Selected Financial Data.   19
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.   19
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.   26
Item 8.  Financial Statements.   26
Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.   26
Item 9A.  Controls and Procedures.   26
Item 9B.  Other Information.   27
PART III   28
Item 10.  Directors, Executive Officers and Corporate Governance.   28
Item 11.  Executive Compensation.   30
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   33
Item 13.  Certain Relationships and Related Transactions, and Director Independence.   34
Item 14.  Principal Accountant Fees and Services.   35
Item 15.  Exhibits and Financial Statement Schedules.   36

 

2
 

 

FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 10-K (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements can be identified by the use of forward-looking words such as “anticipate,”“estimate,”“project,”“likely,”“believe,”“intend,”“expect,” or similar words. These statements relate to our, and, in some cases, our clients’ or business partners’ future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. All forward-looking statements included in this Report are made as of the date hereof, based on information available to us as of such date, and we assume no obligation to update any forward-looking statements. It is important to note that such statements may not prove to be accurate and that our actual results and future events will differ, and could differ materially, from those anticipated in such statements. Among the factors that could cause actual results to differ materially from our expectations are those described under “Item 1A. Risk Factors.” You are also encouraged to review our other filings with the Securities and Exchange Commission (the “SEC”) describing other factors that may affect our future results. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section and other factors included elsewhere in this Report.

 

PART I

 

Item 1. Business.

 

Overview

 

Organization & Business Model

 

We are a Nevada corporation incorporated in April 2006, with our principal office at 1511 E. 2nd Street, Webster City, Iowa 50595. Our telephone number is (866) 851-7787. We are a development stage company and have minimal revenue to date from wholesale foodservice distribution of our product. We plan to increase our revenue-producing operations in 2012.

 

We use USDA-approved, custom-engineered, proprietary wood-burning oven technology to produce a complete line of fully cooked, Smoke-BakedTM meat and fish. We plan to sell our line of smoked foods under the Smoky Market brand through multiple channels of foodservice and retail distribution. These distribution channels include retail sales through point-of-sale display merchandising in both traditional and non-traditional high-traffic venues, over the Internet, and foodservice sales to wholesale distributors. Additionally, we intend to produce certified kosher smoked foods and to distribute this line of products under the “Smoky Kosher” brand through the same distribution channels. In the future, we intend to develop a national chain of fast-casual, gourmet barbecue restaurants under the name “BarBQ Diner” that would operate without having to handle and cook raw product on site. We produce our smoked foods at a centralized location and we expect to be able to deliver food of consistent size, taste and quality.

 

Our focus of operations at this time is the expansion of our wholesale foodservice distribution and the development of our retail channels through display merchandising and Internet operations. Once revenues from these primary distribution channels have gained traction, we intend to pursue development of the BarBQ Diner restaurant concept. We expect that operating dual channels of distribution for our smoked foods will enable us to maximize the operating and financial efficiencies of our production capacity.

 

3
 

  

Market Opportunity

 

Our goal is to build three nationally recognized gourmet-quality brands for sales of our wood-smoked meat and fish that are prepared authentically and without the use of sodium, sugar, and chemical preservatives. At this time, we believe the marketplace for our unique quality of Smoke-Baked food is largely untapped and without any major brand or national restaurant franchise company; our three brand concepts are “Smoky Market” and “Smoky Kosher” for sales into the retail packaged food sector, and “BarBQ Diner” representing our franchise concept to penetrate the fast casual restaurant sector.

 

We believe that our two retail brands and our restaurant concept will succeed where other food companies have not because of these principal aspects: (i) our quality of smoked food under USDA production is believed to be the most authentic and healthful of any commercial smoked food on the market; (ii) our regionalized operating organization should enable us to market our food to fit the regional demographic profiles of our customer audience, and (iii) we believe that for the quality and convenience of our smoked foods, our planned retail and restaurant prices are very competitive. As we begin to expand operations from our launch, we intend to recruit five regional presidents who are each familiar with the food demographic profile of the customers within their respective region relative to types or cuts of meat, sauces and other dining aspects. Each regional president will be charged with customizing the recipes, marketing program and other aspects of our business in order to meet the food profile demographics of that region.

 

Food Production & Distribution

 

Proprietary Smoking Technology and Ovens

 

The wood-burning smoker-oven system used to produce our line of wood-smoked foods uniquely “Smoke-Bakes”TMmeat and fish with a smoke-heat-vapor that is generated by the slow burning of hickory and apple timber, after which the fully-cooked smoked foods are portion-cut and vacuum-packaged for freshness. The smoke-heat-vapor infuses the meat and fish with an authentic smoky taste, but with delicate flavor that is not over-powering. No additives (water, sugar, high amounts of sodium, liquid smoke, etc.) and no preservatives are used in the process; only garlic, natural spices, and very little sea salt are applied as seasoning.

 

In July 2011, 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 equal of $240,000. 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 warrants have an exercise price of $0.50 per share, a five-year term and include 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.

 

4
 

  

USDA-Inspected Meat Production and Availability of Raw Materials

 

We presently outsource, and for the foreseeable future, expect to continue to outsource, our commercial smoked food processing to Mary Ann’s Specialty Foods (“Specialty Foods”). Specialty Foods is a USDA-approved contract food processing company located in Webster City, Iowa and operates an 80,000 square foot processing facility, which sits on 15 acres of family-owned land, and is expected to be responsible for our food production and distribution requirements. In order to establish production capability and complete the development of our smoked food products, we entered into an Amended and Restated Processing Agreement dated July 1, 2006 with Specialty Foods, which agreement was further modified by a Second Amended and Restated Processing Agreement dated October 30, 2009.

 

Pursuant to the processing agreement, Specialty Foods has agreed to process the smoked meats for our business in return for a processing fee based on its actual costs of production, labor costs, packaging materials costs, allocated overhead costs, and a set amount of profit based on the amount of packaged products produced. We agreed that Specialty Foods would be our exclusive processor for meat products, subject to certain limitations. The agreement is based upon a single oven capable of producing at least 100,000 pounds of smoked meat and/or fish per month or more depending upon the production item mix, and we have the option to construct an addition building adjacent to Specialty Foods’ processing facility to install additional smoker-oven systems. The term of the agreement is ten years from October 30, 2009, with an option to extend the agreement for three additional 10-year periods (subject to early termination in the event of default).

 

With respect to meat, fish and other raw materials used to make our products, we require that all of our raw beef, pork, lamb and poultry be raised without growth hormones, steroids and antibiotics, and our salmon is “open-pen” farmed naturally from Canadian rivers. Market prices for meat, fish and other food items are subject to constant fluctuation and frequent shortages of item availability, which we expect to mitigate through contract purchasing. We have established strategic supply relationships with Special Foods and Coast Seafood, a supplier of fish products, that we believe will enable lower market prices as we grow and achieve economies-of-scale.

 

Canadian & Kosher Meat & Fish Production

 

We intend to form two subsidiary companies to handle production of meat and fish for specific channels of distribution. We intend to install a smoker-oven system into the processing facility of a fish company located in Canada, which will enable us to produce and market “wild” salmon and other fish for distribution into the Canadian region as well as into Asia and Europe. We expect this Canadian processing arrangement to be consummated during 2012, subject to the availability of capital.

 

We have created the Smoky Kosher brand for production and marketing of a line of fully-certified kosher smoked foods, which will be distributed by in-store retail merchandising and Internet sales, as well as export sales to Israel and other international regions. To produce our kosher line, we plan to build an addition to the facility of Specialty Foods subject to our being able to raise sufficient capital to exercise our option to acquire the property.

 

Co-Pack Production

 

We plan to use co-packing affiliates to produce a selection of specialty gourmet items, including one-dish meals of smoked meat/fish pasta, casseroles, quiches, and pizzas. We have not entered into agreements with any co-packing facilities, but have entered into discussions with several and believe that suitable arrangements can be reached when we commence operations. Our plan is to cause Specialty Foods to bulk-ship smoked meat and fish ingredients to the co-packers. There, the various menu items will be packaged, and shipped to our planned regional distribution centers.

 

5
 

  

Process & Price Value

 

Our wood-smoking process is expensive. Costs include obtaining freshly cut timber, labor associated with the smoking process, and having to absorb a 25% to 30% cook shrinkage loss in the process. Consequently, Smoky Market brand smoked foods cost more to produce and have higher price points than many competing smoked food products. However, the existence of a market for higher-priced organic foods and other prepared foods that are advertised as 100% natural, low-sodium and/or free of additives suggests that customers will pay slightly more for products they know to be of premium quality, especially prepared foods that are natural, tasty, and convenient. Based upon our review of the nutritional labels of our competitors, we believe that the absence of any preservatives, brining solutions, liquid smoke and similar additives in Smoky Market brand smoked meats foods distinguishes our product from smoked meat products currently on the market.

 

Smoked Food Products

 

Below is our line of smoked foods that we expect to produce under the Smoky Market retail and foodservice brands, with certain of these items intended to also be featured in our BarBQ Diner concept and Smoky Kosher marketing operations.

 

Our line of wood-smoked foods presently includes the following:

 

Entrée Items (Individual serving portions that are ready to “heat’n serve”)

 

Pork Loin Baby Back Ribs
Pork Country-Style Ribs
Pork Loin Chop
Beef Spare Ribs
Carved Boneless Chicken Breast
Jumbo Chicken Thigh
Cornish Game Hen
Turkey Breast, Thigh & Leg
Rack Of Lamb & Lamb Chops
Duck
Salmon & Trout

 

Sliced, Pulled or Cut Smoked Foods(Sliced, pulled or cut from the bone and packaged in portion servings for sandwiches, or to add to salads, tacos, casseroles & soups)

 

Beef Sirloin Tri-Tip
Beef Brisket
Corned Beef Brisket
Pork Loin Roast
Pork Shoulder
Boneless Pork Leg
Carved Chicken Strips
Turkey Breast

 

Smoked Finger Foods (Delicate smoky treats for snacking fun & entertainment)

 

Beef & Pork Meatballs
Pork Country Rib Strips
Pork Ribletts
Carved Chicken Strips
Chicken Drummies (Regular & Teriyaki)
Lamb Ribletts Teriyaki

 

6
 

  

Side Order Foods

 

Hickory Smoke-BakedTM Beans
Creamy-Garlic Coleslaw Dressing & Veggie Dip
Southern-Style Barbecue Dipping Sauce

 

Marketing & Operations

 

Smoky Market Retail Distribution

 

We have completed a re-branding design of the Smoky Market logo and website, which depicts a more contemporary, gourmet quality appeal to the brand image. Our website, at www.smokymarket.com, is live for on-line ordering of our Smoke-Baked Salmon, which is our introductory product, and we expect to feature more items as our production capacity is expanded. We consider the smoked salmon to be the most unique product we produce and consumer market trends show the consumption of salmon to be growing substantially due to its healthful benefits.

 

Fulfillment &Distribution

 

Product produced at our Iowa facility is shipped to Neesvig, Inc., our fulfillment partner in Wisconsin, for fulfillment of orders placed on our website. We have no fixed expense relative to production of product and fulfillment of Internet orders, which serves to substantially limit our costs while revenues begin to grow. When we begin to establish distribution into retail store and chain venues, our plan is to ship product to regional distributors that will provide distribution services to these outlets.

 

In the months to come, we expect to place our attractive point-of-sale display merchandisers into selected traditional and non-traditional food buying venues that include supermarkets, chain beverage stores, truck stops, corporate office complexes, drug and convenience store chains, and fitness gyms.

 

Smoky Market Foodservice Distribution

 

In November 2011, we established a brokerage relationship with SYSCO Foodservice of Iowa for wholesale distribution of selected products to commercial and institutional end-users throughout the State of Iowa. Initially, SYSCO-Iowa is featuring three items of our Smoke-Baked Salmon including a 6 oz. entrée fillet, 6 oz. package of flaked salmon, and a 3 lb. whole fillet for buffet catering. In 2012, we expect to expand our offering of items through foodservice and, subject to financing, we further intend to affiliate with many more of the 150 SYSCO divisions in the US for distribution of our products. In particular, our foodservice marketing plan focuses on specialized licensed menu systems that are designed for the operations of caterers, convenience stores, coffee and deli shops, in addition to sales of product to general commercial and institutional end-users. We believe the healthcare segment offers substantial marketing opportunity for our products given the healthfulness of our Smoke-Baked quality.

 

7
 

  

General Information

 

Intellectual Property

 

We own the recipes for substantially all of our products, certain registered and unregistered trademarks and tradenames, including Smoky Market®, Smoke-Baked, Smoky Kosher™, and BarBQ Diner, along with design features related to the ovens used for smoking our products. We have not registered any patents, but we expect to be able to secure certain patent rights for the diffusing system attached to our smoker-oven from the firebox.

 

Government Regulation

 

As a distributor of food products and planned restaurant operator, we are subject to regulation by the U.S. Food and Drug Administration, or FDA, the U.S. Department of Agriculture, or USDA, and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other authorities. In addition, the operations of our food processor are subject to regulation under the Federal Food, Drug and Cosmetic Act, the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Nutrition Labeling and Education Act of 1990, and the rules issued under these laws. The FDA regulates standards of identity for specified foods and prescribes the format and content of information on food product labels. The USDA imposes standards for product quality and sanitation including the inspection, labeling and compliance of meat and poultry products and the grading and commercial acceptance of shipments from our suppliers.

 

Costs of compliance with such laws and regulations are presently insignificant. If we or our food processor were to be found to be out of compliance with such laws, particularly those related to the production, labeling and handling of food, we could be subject to significant fines and forced to discontinue our operations until all material violations were addressed. Were our relationship with our food processor to terminate, we would have to find another USDA-approved meat processor or qualify as such ourselves. There are a limited number of USDA-approved meat processors and barriers to entry are significant (with an estimated start-up cost of not less than $2 million dollars and required time of at least one year for qualification).

 

Environmental Laws

 

We are not required to obtain any environmental permits and do not use any hazardous materials in connection with the operation of our business. Accordingly, we have not incurred, and do not expect to incur, any material expenses associated with environmental compliance.

 

Competition

 

We plan to compete principally in the retail packaged food industry until such time as we launch our BarBQ Diner foodservice operations. In the retail packaged food segment, we expect our competitors will include the hundreds of established companies selling their smoked salmon over the Internet and in supermarkets. Our food will compete on the basis of price, flavor, healthfulness and brand recognition. We believe that our food will compete favorable with competing products in terms of flavor and healthfulness. With respect to price, we expect our prices to be competitive with those of specialty stores and Internet sellers, but slightly above that of major retail chains that sell typical smoked meats with high concentrations of sodium, sugar and additives. Many of our competitors will have stronger brand recognition than we do.

 

Research and Development

 

We do not have any historical research and development expenses. We plan to add products to our lines as our business develops and expect that research, developing and testing of new or improved recipes and products will be an ongoing part of our business.

 

8
 

  

Employees

 

We currently have a total of four paid full-time employees and two paid part-time contractors, which include two officers (Edward C. Feintech, our CEO and Marli Craig, our Secretary), a controller, a quality-control operator of our smoker-oven system, and two executives, our Chief Financial Officer and our Chief Information Officer, providing services on a part-time basis as consultants for which they are paid in cash and/or stock.

 

Execution of our business plan as set forth above would, we believe, require the hiring of approximately 30 people over the next three years to staff our corporate management team, our regional offices, and our expanded production facility operations. The actual number of employees we will hire in the next 12 months depends upon our success in obtaining capital and how rapidly we can expand our operations.

 

Item 1A. 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.

 

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.

 

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 experiencemake 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.

 

9
 

  

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 December 31, 2011, we had $17,614 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 April 16, 2012. 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.

 

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.

 

10
 

  

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.

 

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.

 

11
 

  

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 tosupply 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.

 

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.

 

12
 

  

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.

 

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.

 

13
 

  

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.

 

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 percentageof 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.

 

14
 

  

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.

 

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.

 

15
 

  

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:

 

obid and offer price quotes and volume information;
othe broker-dealer’s compensation for the trade;
othe compensation received by certain salespersons for the trade;
omonthly accounts statements; and
oa written statement of the customer’s financial situation and investment goals.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

We use office and cold storage warehouse space in the facility of Specialty Foods for free. We have no lease with respect to such space, and our informal arrangement could be terminated at any time.

 

Pursuant to an Option Agreement dated October 30, 2009, we have an option to purchase from Specialty Foods an approximately 15-acre parcel of real estate on which Specialty Foods is located in Webster City, Iowa during an approximately seven-year term at a purchase price equal to the greater of $3,000,000 (plus the cost of additional improvements) and the appraised value of property at the time the option is exercised. If we exercise the option, we would be required to lease back to Specialty Foods the buildings in which it conducts its operations in exchange for rent of $10,000 per month, subject to certain adjustments.

 

16
 

  

In January 2008, we entered into an agreement relating to the 29 East Main Cafe, located at 29 East Main Street, Los Gatos, California 95030. Under the terms of the purchase agreement, we acquired the existing leasehold improvements and equipment and assumed the existing lease. We remodeled this location and opened it as a Smoky Market restaurant, but in March 2010 we closed the restaurant. We have since ceased paying the rent payments on this property. We understand that the property was subsequently leased out by the fee owner effective February 2011. A liability for the remaining lease payments due under the lease agreement has been recorded in the financial statements as part of the impairment loss described below.

 

Item 3. Legal Proceedings.

 

We are not engaged in any legal proceedings, nor are we aware of any pending or threatened legal proceedings that, singly or in the aggregate, would reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.

 

Item 4. Mine Safety Disclosures

 

This item is not applicable.

 

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Price

 

The table below sets forth the high and low bid quotations for our common stock as reported on the OTC Bulletin Board and the Pink Sheets for the periods indicated. Until November 2010, our common stock was quoted on the OTC Bulletin Board under the symbol SMKY. Since that time, our common stock has been quoted on the Pink Sheets.

 

     High    Low 
Fiscal Year Ended December 31, 2011           
Quarter ended December 31, 2011   $0.33   $0.10 
Quarter ended September 30, 2011   $0.50   $0.10 
Quarter ended June 30, 2011   $0.08   $0.01 
Quarter ended March 31, 2011   $0.02   $0.01 
            
Fiscal Year Ended December 31, 2010           
Quarter ended December 31, 2010   $0.01   $0.005 
Quarter ended September 30, 2010   $0.08   $0.07 
Quarter ended June 30, 2010   $0.10   $0.01 
Quarter ended March 31, 2010   $0.05   $0.01 

 

The quotations set forth above reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Our common stock began quotation on the OTC Bulletin Board on September 11, 2007 and was removed from quotation thereon on November 16, 2010, but has since been up-listed back to quotation status.

 

17
 

  

Outstanding Shares and Number of Stockholders

 

As of March 31, 2012, there were 104,321,861 shares of common stock issued and outstanding, which were held by approximately 300 holders of record and no shares of preferred stock outstanding.

 

Dividends

 

We have never declared or paid dividends on any class of equity securities, and we currently intend to retain any future earnings for use in our business and do not anticipate paying any dividends on our outstanding common stock in the foreseeable future.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information with respect to compensation plans (including individual compensation arrangements) under which equity securities of the company are authorized for issuance as of December 31, 2011:

 

Plan Category 

Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights

  

Weighted-average

exercise price of

outstanding

options, warrants

and rights

  

Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

securities reflected in

column (a))

 
   (a)   (b)   (c) 
Equity compensation plans approved by security holders   1,887,500   $0.10    742,500 
Equity compensation plans not approved by security holders
   N/A    N/A    N/A 
Total   1,887,500    0.10    742,500 

 

Recent Sales of Unregistered Securities

 

Other than transactions previously reported, the Company offered and sold the following securities without being registered under the Securities Act.

 

In October 2011, (i) in exchange for services, we offered and sold to an entity a total of 10,000 shares of common stock with a fair market value of $3,000 (or $0.30 per share); (ii) in exchange for services, we offered and sold to an entity a total of 185,000 shares of common stock with a fair market value of $42,550 (or $0.23 per share); and (iii) in exchange for services, we offered and sold to an entity a total of 115,000 shares of common stock with a fair market value of $26,450 (or $0.23 per share).  The offer and sale of such shares of our common stock were 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) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors 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.

 

18
 

  

In November 2011,(i) in exchange for services, we offered and sold to an individual a total of 250,000 shares of common stock with a fair market value of $37,500 (or $0.15 per share); and (ii) in exchange for debt, we offered and sold to an individual warrants to purchase 250,000 shares of common stock at $0.25 per share, exercisable over three years.The offer and sale of such shares of our common stock and warrants to purchase shares of our common stock were 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) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors 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. Selected Financial Data.

 

Because we are a smaller reporting company, we are not required to provide the information called for by this item.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto. This section may include projections and other forward-looking statements regarding management’s expectations regarding our performance. You should not place undue reliance on such projections and forward looking statements, and, when considering such projections and forward-looking statements, you should keep in mind the risk factors noted throughout this prospectus. You should also keep in mind that all projections and 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. See “Item 1A. Risk Factors.”

 

Overview

 

We use proprietary, custom-engineered, USDA-approved wood-burning oven technology to produce a complete line of fully-cooked Smoke-BakedTM meat and fish, and special recipe dishes. 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 plan to sell our line of smoked foods through multiple channels of foodservice and retail distribution under the Smoky Market brand. These distribution channels include retail sales through point-of-sale display merchandising in traditional and non-traditional high-traffic venues, over the Internet, and foodservice sales to wholesale distributors. Additionally, we intend to produce certified kosher smoked foods and to distribute this line of products under the “Smoky Kosher” brand through the same marketing channels. In the future, we intend to develop a national chain of fast-casual, gourmet barbecue restaurants under the name “BarBQ Diner” that would operate without having to handle and cook raw product on site.

 

19
 

  

Our focus of operations at this time is the expansion of our wholesale foodservice distribution and development of our retail channels through display merchandising and Internet operations. Once revenues from our primary distribution channels have gained traction, we intend to pursue development of the BarBQ Diner restaurant concept. We expect that operating dual distribution channels for our smoked foods will enable us to maximize the operating and financial efficiencies of our production capacity.

 

We produce our smoked foods under an agreement with Specialty Foods, a commercial meat processor in whose USDA facility we placed out 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.

 

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, CASmoky Market restaurant, but subsequently closed the restaurant. As discussed in “Liquidity and Capital Resources” below, in June 2009 we received $1.5 million in capital financing, which we used toward debt repayment, the opening the Los Gatos restaurant to test our foodservice system, and for our website to launch our Internet business. We estimate that we will need up to $5 million of additional financing in order to accomplish our plans as follows: $1 million for expansion of Smoky Market foodservice operations and launch of retail merchandising, and $4 million for expansion of production capacity relative to Specialty Foods and the Canadian and kosher smoker oven systems to be installed. We expect such proceeds to be provided by our forthcoming private financing transaction.

 

Liquidity and Capital Resources

 

As of December 31, 2011, we had cash and cash equivalents of $17,614 and a working capital deficit of $1,381,738, as compared to cash and cash equivalents of $10 and a working capital deficit of $1,114,905as of December 31, 2010.

 

To finance the expansion of our wholesale, distribution, and Internet retail operations, we intend to seek additional financing in the first half of 2012. 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.

 

In a March 2010 transaction with 70 Limited LLC, we received $150,000 in cash for a promissory note in the amount of $150,000 together with a warrant to purchase up to 450,000 shares of our common stock. Under the terms of the promissory note, we were obligated to make payment on the full principal amount, plus interest accruing at 10% per year, by March 5, 2011, and we could prepay any amount of principal or interest at any time without penalty.

 

20
 

  

In August 2010, the Company and 70 Limited LLC agreed to refinance the note. Pursuant to the agreement, both loans were combined, along with accrued interest, forming a new loan with a maturity date of August 18, 2020. The note will accrue interest at a 10% annual rate until repaid. Prior warrants were revised to allow for exercise at $.05 per warrant as opposed to the previous $.15. The term for exercising the warrants was adjusted to ten years as opposed to five years on the cancelled warrants. The new warrants were valued based on the Black-Scholes method using a risk-free rate of return of .15% and volatility of 347%.

 

In July 2011, 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 equal of $240,000. 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.

 

In October and December 2011, the Company received an aggregate of $77,500 in cash from Asher Enterprises, Inc. in return for two promissory notes in the amounts of $42,500 and $35,000, respectively. The notes accrue interest at an annual rate of 8% until repaid and carry a maturity date of July 11, 2012 and September 15, 2012, respectively. The notes are convertible into shares of our common stock at conversion prices equal to a discount of 45% to the then current market price.

 

During 2011, principal uses of cash were approximately $340,000 to finance operating losses and approximately $3,200 for equipment.

 

There are no expected capital expenditures during the first part of 2012.

 

Assuming the success of our wholesale foodservice distribution and development of our retail channels through display merchandising and Internet operations, which are expected to utilize a substantial portion of our existing production capacity, we anticipate the need to invest as much as $1,500,000 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 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.

 

21
 

  

Results of Operations

 

Our revenues from operations and our operating expenses decreased in 2011. The revenue decrease was due primarily to a less revenue generated from wholesale and internet activities in 2011 than revenue generated from restaurant and internet activities in 2010. The operating expense decrease was due primarily to lower costs associated with wholesale and internet activities in 2011 (as compared to restaurant costs in 2010) and to decreases in depreciation and amortization, rent expenses, other expenses, and an impairment loss taken in 2010 with no corresponding loss in 2011, as summarized and discussed below. Also, our working capital deficiency increased from 2010 to 2011 as summarized and discussed below.

 

Revenues and Expenses. Our operating results for the years ended December 31, 2010 and 2009 are summarized as follows:

 

   For the years ended 
   December 31, 2011   December 31, 2010 
Sales  $10,669   $14,313 
Cost of Sales  $104,975   $180,803 
Gross Profit (loss)  $(94,306)  $(166,490)
General & Administrative Expenses          
Salaries, Wages & Benefits  $218,377   $235,047 
Professional Fees  $83,608   $227,181 
Marketing  $69,610   $12,143 
Depreciation/amortization  $66,793   $125,587 
Rent  $5,320   $71,846 
Impairment loss on assets   -   $995,493 
Stock based compensation          
Salaries, Wages & Benefits – related parties  $187,875   $72,562 
Professional  $324,222   $55,159 
Financing  $411,444   $39,561 
Other  $109,537   $82,392 
Total General & Administrative Expenses  $1,476,786   $1,916,971 
Operating Loss  $(1,571,092)  $(2,083,461)
Other Expense – Net  $(343,804)  $(237,295)
Net (Loss)  $(1,914,896)  $(2,320,756)

 

Sales decreased by $3,644, from $14,313 in 2010 to $10,669 in 2011, and costs of sales decreased by $75,827, from $180,802 in 2010 to $104,975. The decrease in costs of sales was due primarily to lower costs associated with wholesale and internet activities conducted in 2011 as compared to costs associated with our restaurant activities in 2010. Our general and administrative expenses decreased by $440,185, from $1,916,971 in 2010 to $1,476,786 in 2011. Our operating loss decreased by $512,369, from $2,083,461 in 2010 to $1,571,092 in 2011.

 

The decrease in general & administrative expenses was due primarily to an impairment loss on restaurant assets and decreases in salaries, wages and benefits, professional fees, depreciation and amortization, and rent expenses. We incurred an impairment of restaurant assets in the amount of $995,493 in 2010, with no such impairment in 2011. This impairment related to the closure of the Company’s restaurant in Los Gatos, California in 2010. Fees relating to salaries, wages and benefits decreased by $16,670, from $235,047 in 2010 to $218,377 in 2011, due primarily to decreases in staffing associated with the Company’s restaurant operations as such operations have ceased. Professional fees decreased by $143,573, from $227,181 in 2010 to $83,608 in 2011, primarily due to consulting fees incurred in 2010 with no similar fees incurred in 2011. Depreciation and amortization expenses decreased by $58,794, from $125,587 in 2010 to $66,793 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. Rent expenses decreased by $66,526, from $71,846 in 2010 to $5,320 in 2011, due primarily to the closing of our Los Gatos restaurant in 2010.

 

22
 

  

The decreases described above were partially offset by increases in marketing expenses, stock-based compensation, and other expenses. Marketing expenses increased by $57,467, from $12,143 in 2010 to $69,610 in 2011, due primarily to a marketing initiative with Weight Watchers in 2011 to promote Internet sales, with no similar expense in 2010. Stock-based compensation for salaries, wages and benefits increased by $115,313, from $72,562 in 2010 to $187,875 in 2011, primarily due to the granting of warrants to staff in 2011 when salaries had to be accrued. Stock-based compensation in the category of professional services increased by $269,063, from $55,159 in 2010 to $324,222 in 2011, primarily due to the granting of warrants for professional services. Stock-based compensation in the category of financing activities increased by $371,883, from $39,561 in 2010 to $411,444 in 2011, primarily due to the granting of warrants for financing services. Overall, total stock-based compensation expense increased by $756,259, from a total of $167,282 in 2010 to a total of $923,541 in 2011. Other expenses increased by $27,145, from $82,392 in 2010 to $109,537 in 2011, due primarily to higher repairs and maintenance costs related to our smoker oven as well as increased travel costs.

 

In the opinion of our management, inflation has not and will not have a material effect on our operations in the immediate future. Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.

 

Working Capital. Our working capital for the years ended December 31, 2011 and 2010 is summarized in the table below. For the categories of current assets and current liabilities, the line items included in the table below represent selected components of each category that are material to an understanding of our working capital deficiency. For a complete listing of all components of each category please refer to the financial statements accompanying this Report.

 

   As of December 31: 
   December 31, 2011   December 31, 2010 
Current Assets          
Cash  $17,614   $10 
Inventory  $16,816    - 
Total Current Assets  $34,430    10 
           
Current Liabilities          
Accounts payable  $524,338   $501,960 
Accounts payable – related parties  $145,933   $125,107 
Due to employees  $602,489   $396,348 
Short-term advances  $94,700   $91,500 
Convertible debt  $48,708    - 
Total Current Liabilities  $1,416,168   $1,114,915 
           
Working Capital Deficiency  $(1,381,738)  $(1,114,905)

 

Our working capital deficiency increased by $266,833, from $1,114,905 in 2010 to $1,381,738 in 2011. The increase in our working capital deficiency was primarily due to (i) an increase in liabilities due to employees of $206,141, from $396,348 in 2010 to $602,489 in 2011, and (ii) an increase in convertible debt, with no convertible debt in 2010 and $48,708 in convertible debt in 2011. The increase in liabilities due to employees is due primarily to the accrual of unpaid salaries due to corporate officers, and the increase in convertible debt is due to our issuing a convertible note in 2011 with no corresponding note in 2010.

 

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Cash Flows. Our cash flows for the years ended December 31, 2011 and 2010 are summarized as follows:

 

   For the years ended 
   December 31, 2011   December 31, 2010 
Net Cash (Used) in Operating Activities  $(339,829)  $(301,217)
Net Cash (Used) by Investing Activities  $(3,017)  $6,581 
Cash Provided by Financing Activities  $360,450   $184,000 
Net Increase (Decrease) in Cash  $17,604   ($110,636)
           
Cash, Beginning of Year  $10   $110,646 
Cash, End of Year  $17,614   $10 

 

In 2011, we used $339,829 in cash in our operating activities, primarily relating to cover operating expenses while little revenue was earned; we used $3,017 in cash in our investing activities, primarily relating to obtain a motor vehicle; and we generated $360,450 in cash from financing activities, primarily due to the issuance of a new promissory note and advances from individuals.

 

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 $995,493 for the years ended December 31, 2011 and 2010, respectively.

 

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Revenue Recognition

 

Sales are recognized upon 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.

 

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.

 

25
 

  

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 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Because we are a smaller reporting company, we are not required to provide the information called for by this item.

 

Item 8. Financial Statements.

 

Our financial statements and associated notes are set forth following the signature page beginning on Page F-1.

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

 

The information required by this Item was previously reported.

 

Item 9A. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 as of December 31, 2011. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. This conclusion is based in part on the fact that the Company did not complete certain reports within required time periods.

 

Internal Controls

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that the records of the Company accurately and fairly reflect the transactions and dispositions of the Company’s assets; assets are safeguarded against loss from unauthorized use or disposition; and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with United States generally accepted accounting principles. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. Our management has concluded that, as of December 31, 2011, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Our management’s finding of ineffective internal control over financial reporting results primarily from the fact that the Company has only two full time employees, which is not a sufficient number to implement industry-standard internal controls. Subject to the Company’s ability to obtain financing and hire additional employees, the Company expects to be able to design and implement effective internal controls in the near future.

 

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Changes in Internal Controls

 

During the last fiscal quarter ended December 31, 2011, there has been no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Identification of Directors and Executive Officers

 

Certain information regarding our executive officers and directors is set forth below. Our executive officers are appointed by, and continue to serve at the will of, our board of directors. Our directors are elected or appointed for terms that continue, absent resignation, death or removal by our stockholders, until the later of the next annual meeting of stockholders or until a replacement is duly appointed or elected and qualified. Among our officers, Edward C. Feintech devotes substantially all of his time to our business, Shane A. Campbell devotes approximately 10% of his time to our business, and Dennis Harrison currently devotes less than 5% of his time to our business.

 

Name   Age   Position
Edward C. Feintech   65   Founder, Promoter, President, Chief Executive Officer and Chairman of the Board
Scott L. Bargfrede   55   Director
Shane A. Campbell   54   Director and Chief Financial Officer*
Dennis A. Harrison   65   Chief Information Officer*

* Such officer is not a full time employee of our company.

 

Edward C. Feintech has been the Chairman of our Board of Directors, and our President and Chief Executive Officer since our incorporation in April 2006. Mr. Feintech operated full-service barbecue restaurants and tested quick-service barbecue operations in Des Moines, Iowa (1977-1984) before closing his enterprise and moving on toward development of our custom-engineered, USDA-approved wood-burning oven system technology. Since organizing Smoky Systems, LLC, in December 2000, Mr. Feintech has been its manager and directed the development phase of the intellectual property that we license from Smoky Systems.

 

Mr. Feintech has been appointed as a director in light of his experience in the smoked-meat and restaurant industries, his role as our Chief Executive Office and his company-specific knowledge.

 

Scott L. Bargfrede has served as a director of our company since May 2006. Mr. Bargfrede has been the President and CEO of First American Bank in Webster City, Iowa since October 18, 1999. First American Bank is our primary bank. Mr. Bargfrede graduated from the University of Minnesota in 1979 with a Bachelor of Arts degree in Ag-Business Finance. In 1992, he graduated from the University of Wisconsin Graduate School of Banking.

 

Mr. Bargfrede has been appointed as a director in light of his experience in financial and banking industry.

 

Shane A. Campbell has been our Chief Financial Officer (acting as a consultant) since our incorporation in April 2006.  Mr. Campbell has served as a business advisor to numerous small and medium sized businesses over his twenty-two years of public and private practice. From April 2004 through the present, Mr. Campbell has functioned as the chief financial officer of Smoky Systems, LLC, and other small companies as chief financial officer on a consultant contract basis consultant contractor. Mr. Campbell worked from January 2001 to April 2004 as chief financial officer for MarketLive, Inc. (previously Multimedia Live, Inc.), an e-commerce software company located in Petaluma, California. Prior to that time, from January 1990 through January 2002, Mr. Campbell was an employee and then a partner at Jones, Schiller & Company, LLC, an accounting firm located in San Francisco. Mr. Campbell earned a Bachelor of Science degree from California State University, Chico in December 1981.

 

28
 

  

Mr. Campbell has been appointed as a director in light of his experience in financial, auditing and related business matters and his company-specific knowledge.

 

Dennis A. Harrison, PhD, has been our Chief Information Officer (acting as a consultant) since our inception in April 2006; however, he is expected to become a full-time employee when and as our financial situation permits. Since January 2000, Dr. Harrison has held senior level management positions as vice president of business development for CSF-Telequest from 2000 to 2003, vice president of business development for CallTech Communications from April 2003 to April 2004, and vice president of business development for Effective Teleservices from April 2004 to present. Dr. Harrison received a Bachelor of Arts degree in Philosophy & Classical Languages from the Seminary of St. Pius X, an affiliate of Catholic University, a Master of Arts degree in Counseling from Loyola College, and a Doctor of Philosophy degree in Human Development from the University of Maryland.

 

Audit Committee

Our entire board of directors presently serves as our audit committee. None of the members of the audit committee satisfy the independence requirements applicable to audit committees of listed companies. In addition, the board of directors has determined that the audit committee does not have a member qualifying as an audit committee financial expert, as defined in Item 401(d)(5) of Regulation S-K. To save limited capital over the last several years, we have chosen not to expand the size of our Board of Directors or to offer cash compensation to our directors. The absence of cash compensation makes recruiting persons who are not otherwise interested in our company more difficult. For these reasons, we do not have on our board of directors a person who would qualify as an audit committee financial expert.

 

We do not presently have a standing nominating committee or compensation committee, and we do not have a nominating committee charter or a compensation committee charter.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s officers and directors to file reports concerning their ownership of Common Shares with the SEC and to furnish the Company with copies of such reports. Based solely upon the Company’s review of the reports required by Section 16 and amendments thereto furnished to the Company, the Company believes that all reports required to be filed pursuant to Section 16(a) of the Exchange Act during 2010, were filed with the SEC on a timely basis except as follows: a Form 4 for Edward Feintech, an officer and director, was due on February 15, 2011, but was filed on August 26, 2011.

 

Code of Ethics

 

We have not adopted a code of ethics. Although we expect to adopt a code of ethics during 2011, we have not done so to date because we believe that, in light of our limited capital and operations, expending the resources on developing a formal code of ethics would not be in the best interest of shareholders. As we obtain the capital to establish more significant operations, we expect to begin developing more comprehensive policies and procedures appropriate to our size and stage.

 

29
 

  

Item 11. Executive Compensation.

 

Summary Compensation Table

 

The following table summarizes the compensation for the fiscal years ended December 31, 2009 and December 31, 2010 paid or accrued by us to or on behalf of our Chief Executive Officer, as well as our two most highly compensated executive officers, if any, whose aggregate compensation for fiscal years 2009 or 2010 exceeded $100,000 (collectively, the “Named Executive Officers”).

 

Name and
Principal Position
  Year   Salary
($)
   Bonus
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-Equity
Incentive
Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings
($)
   All
Other
Compensation
($)
   Total
($)
 
                                     
Edward C. Feintech, CEO,   2011    175,000        14,000    123,196                312,196 
President and Director   2010    175,000        31,500                    206,500 
                                              
Shane A. Campbell, CFO   2011    36,138(1)           60,008                96,146 
and Director(1)   2010    50,400(1)           30,027                80,427 

 

(1) Mr. Campbell is currently serving as a part-time Chief Financial Officer/Consultant; his services are provided on an as-needed basis. Compensation is accrued and then paid as cash becomes available.

 

30
 

  

On May 10, 2007, Mr. Feintech signed an executive employment agreement. The agreement is for a three-year term and calls for him to receive a minimum base salary of $175,000 per year. The employment agreement also grants to him: (i) a one-time stock issuance of 1,500,000 shares of common stock upon execution of the agreement; (ii) an award of non-statutory stock options of 425,000 shares of common stock at an exercise price of $0.10 per share; and (iii) a bonus equal to an additional 1,000,000 shares of common stock upon the achievement of each incremental level of $50,000,000 in revenue, provided that cumulative net after-tax income is being maintained at a level not less than 7.5% on total revenue.

 

In addition, in May 2006, Mr. Feintech was issued 50,000 shares of common stock in exchange for the assignment of any intellectual property rights related to our business and granted an option to purchase 325,000 shares of common stock pursuant to our stock incentive plan at an exercise price of $0.10 at any time prior to May 13, 2013. The options vested 25% on May 31, 2007 and have continued to vest 1/48th each month thereafter until fully vested.

 

On June 21, 2010, Mr. Feintech was granted 2,250,000 shares of common stock as additional compensation. Such shares were valued at $0.14, for total compensation of $31,500.

 

On February 11, 2011, Mr. Feintech was granted 1,750,000 shares of common stock as additional compensation. Such shares were valued at $0.008, for total compensation of $14,000.

 

On February 13, 2011, Mr. Feintech was granted 400,000 warrants to purchase common stock at a strike price of $0.05. The warrant term extends five years through February 12, 2016. The warrants were valued at $3,212 using the Black-Scholes method, assuming a risk-free rate of return of 0.13% and volatility of 347%.

 

On September 30, 2011, Mr. Feintech was granted 500,000 warrants to purchase common stock at a strike price of $0.25. The warrant term extends five years through September 29, 2016. The warrants were valued at $119,984 using the Black-Scholes method, assuming a risk-free rate of return of 0.02% and volatility of 317%.

 

On May 17, 2010, Mr. Campbell was granted 1,500,000 warrants to purchase common stock at a strike price of $0.05. The fair value per common share was $0.02. The warrant term extends five years through May 16, 2015. The warrants were valued at $30,027 using the Black-Scholes method, assuming a risk-free rate of return of .12% to .15% and a volatility of 347%.

 

On September 30, 2011, Mr. Campbell was granted 250,000 warrants to purchase common stock at a strike price of $0.25. The warrant term extends five years through September 29, 2016. The warrants were valued at $60,008 using the Black-Scholes method, assuming a risk-free rate of return of 0.02% and volatility of 317%.

 

31
 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information regarding equity awards held by the Named Executive Officers as of December 31, 2011:

  

    Option Awards   Stock Awards  
Name   Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
  Option
Exercise
Price
($)
  Option
Expiration
Date
   Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
  Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
   Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)
 
Edward C. Feintech, CEO, President and Director   325,000 (1)    N/A   $ 0.10   May 31, 2013    N/A   N/A   N/A   N/A  
Edward C. Feintech, CEO, President and Director   425,000 (1)    N/A   $ 0.10   May 31, 2014    N/A   N/A   N/A   N/A  
Shane A. Campbell, CFO and Director   162,500 (1)    N/A   $ 0.10   May 31, 2014    N/A   N/A   N/A   N/A  
Shane A. Campbell, CFO and Director   1,500,000 (2)    N/A   $ 0.05   May 16, 2015    N/A   N/A   N/A   N/A  

 

(1)Options vested 25% on May 31, 2007 and 1/48th each month thereafter until fully vested.
(2)No vesting requirement.

 

Compensation of Directors

 

Directors who are not officers of the Company do not receive any regular compensation for their service on the board of directors but are entitled to reimbursement of any actual expenses associated with the attendance of board meeting and other activities and to receive options and other awards under the Company’s stock incentive plan. Directors are entitled to receive compensation for services unrelated to their service as a director to the extent that they provide such unrelated services to the Company.

 

No directors received any compensation, including option awards, for their service as directors for the Company, during the fiscal year ended December 31, 2011. Information with respect to the compensation of Edward C. Feintech, our Chief Executive Officer and President, is set forth in the tables above.

 

Executive Employment Agreements, Termination of Employment and Change of Control Arrangements

 

Except as described in following paragraph, we have not entered into employment agreements with any of our executive officers and, other than provisions in our stock incentive plan that permit acceleration of vesting of awards in connection with a change of control, have no arrangements or plans which provide benefits in connection with retirement, resignation, termination or a change of control.

 

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Pursuant to his executive employment agreement dated May 10, 2007, Edward C. Feintech is entitled to receive, as severance and following execution of a release of liabilities in favor of the Company, (i) if the termination was by the Company without cause or by the employee with good reason (except in connection with a change of control), base salary and medical benefits (plus any pro-rated bonus for which he otherwise qualified) for a period of 12-months following the termination, or (ii) if the termination was by the Company without cause or by the employee with good reason and occurred 90days prior to or within one year after a change of control, base salary and medical benefits for a period of 24 months and acceleration of the vesting of any stock options granted under the employment agreement. Mr. Feintech is not entitled to such severance benefits if the termination is either by the Company for cause, by Mr. Feintech without good reason, or after May 10, 2010. A change of control includes (a) any capital reorganization, reclassification of the capital stock of Company, consolidation or merger of Company with another corporation in which Company is not the survivor (other than a transaction effective solely for the purpose of changing the jurisdiction of incorporation of Company), (b) the sale, transfer or other disposition of all or substantially all of the Company’s assets to another entity, and (c) the acquisition by a single person (or two or more persons acting as a group, as a group is defined for purposes of Section 13(d)(3) under the Exchange Act of 1934, as amended) of more than 40% of the outstanding shares of common stock of the Company.

 

Compensation Committee Interlocks and Insider Participation

 

The Company has no compensation committee or other board committee performing equivalent functions. Edward C. Feintech, an officer of the Company as well as chairman of the board of directors, participated in deliberations of the Company’s board of directors concerning executive officer compensation during 2011.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth information with respect to the beneficial ownership of our common stock as of February 29, 2012 and as adjusted to reflect the sale of the shares of our common stock offered hereby, by:

 

all persons known by us to beneficially own more than 5% of our common stock;
each of our named executive officers;
each of our directors; and
all directors and executive officers as a group.

 

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, and includes options and warrants that are currently exercisable or exercisable within 60 days. Except as indicated by footnote, and subject to community property laws where applicable, we believe the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

 

33
 

  

Name of Executive Officer or Director  Amount and Nature of
Beneficial Owner
    Percent (1) 
            
Edward C. Feintech
Chairman, President and CEO
   18,080,785(2)    16.74%
            
Scott L. Bargfrede, Director   1,278,916(3)     1%
            
Shane A. Campbell, Director and CFO   2,047,655(4)     2%
            
Dennis Harrison, CIO   2,519,442(5)     2%
            
All Officers and Directors as a Group
(4 persons)
   21,426,798(6)     19.84%
            
Name of 5% Stockholder           
            
70 Limited, LLC
3554 Wild Cherry Court, Las Vegas, NV 89121
   17,190,426(8)     14%

 

 


* Represents less than 1% of the outstanding shares of common stock.

 

(1) The percentages set forth above have been computed assuming the number of shares of common stock outstanding equals the sum of (a) 104,321,861, which is the number of shares of common stock actually outstanding on March 31, 2012, and (b) shares of common stock subject to options, warrants, convertible notes and similar securities exercisable or convertible for common stock within 60 days of such date held by the person with respect to percentage is computed (but not by any other person).

(2) Includes, in addition to outstanding shares held by Mr. Feintech,703,125 shares issuable upon exercise of non-statutory stock options. Also includes 257,521 shares of common stock held of record by Cheryl Feintech.

(3) Includes 152,344 shares issuable upon the exercise of non-statutory stock options.

(4) Includes 152,344 shares issuable upon the exercise of non-statutory stock options.

(5) Includes 457,031 shares issuable upon the exercise of non-statutory stock options.

(6) Includes 1,464,844 shares issuable upon the exercise of non-statutory stock options.

(7) Based on the Company’s internal records reflecting the stock ownership of Smoky Systems. Jeff Felts and Scott Peterson are co-managers of Smoky Systems, LLC, and, as such, have voting and investment control over these securities. Mr. Felts and Mr. Peterson disclaim beneficial ownership of the securities held by Smoky Systems, LLC.

(8) Based on the Company’s internal records reflecting the stock ownership of 70 Limited, LLC. Includes 2,302,500 shares issuable upon the exercise of warrants. Tertia Dvorchak is the manager of 70 Limited, LLC and, as such, has voting and investment control over these securities. Tertia Dvorchak disclaims beneficial ownership of the securities held by 70 Limited, LLC.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information set forth above in Item 5 under “Securities Authorized for Issuance under Equity Compensation Plans” is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Arrangements with Officers, Directors and Promoters

 

Set forth below is a description of certain transactions entered into since January 1, 2011, or presently contemplated, with any officer, director, affiliate or other related person:

 

Our directors have set the initial salary or consulting fee of certain of our officers as follows (in each case pending availability of capital):

 

Name  

Base Salary or Consulting Fee

Per Annum

     
Edward C. Feintech, President & CEO   $175,000
Shane Campbell, CFO   as needed*
Dennis Harrison, CIO   as needed

 

*Currently serving as a part-time Chief Financial Officer/Consultant; services are provided on an as-needed basis and salary is being accrued and then paid as cash becomes available.

 

34
 

  

Relationships with Significant Stockholder

 

Smoky Systems, LLC beneficially owns approximately 5% of our common stock as of March 31, 2012, and its co-managers are Jeff Felts and Scott Peterson. The following affiliates of our company own the following percentage of the outstanding equity interests of Smoky Systems:

 

 

Name of Person  Equity Interest 
Edward C. Feintech, President,
CEO and Chairman
   30%
Shane A. Campbell, CFO and
Director
   * 
Scott L. Bargfrede, Director   * 
      
* Less than 1%      

 

Independence of Board of Directors and Committees

 

Our Board of Directors currently consists of Edward C. Feintech, our Chairman and Chief Executive Officer, Scott L. Bargfrede, and Shane A. Campbell, our Chief Financial Officer. The Board of Directors has determined that Mr. Bargfrede is independent, using the standards of independence applicable to companies listed on the NASDAQ Stock Market. We do not presently have a standing audit committee, nominating committee, or compensation committee, and we do not have a charter for any such committees. Our entire Board of Directors performs the functions generally performed by such committees. Mr. Bargfrede is independent using the standards of the NASDAQ Stock Market applicable to compensation and nominating committee but may not be independent for purposes of applicable audit committee standards because of the financial relationship disclosed below.

 

Mr. Bargfrede has been the President and CEO of First American Bank in Webster City, Iowa since October 18, 1999. First American Bank is our company’s primary bank.

 

Item 14. Principal Accountant Fees and Services.

 

Audit Fees

 

The Company’s independent auditor for the years ended December 31, 2010 and 2011 was Seale and Beers, CPAs, and the aggregate fee for auditing in those years was $20,758 and $14,115, respectively.

 

Audit Related Fees

 

The aggregate fees for professional services for assurance and other audit related services was $20,758 for the fiscal year ended December 31, 2010 and $14,115 for the fiscal year ended December 31, 2011.

 

Tax Fees

 

There were no fees paid to Seal and Beers, CPAs, for tax-related professional services for the year ended December 31, 2010 or the fiscal year ended December 31, 2011.

 

35
 

  

All Other Fees

 

Seale and Beers, CPAs, did not provide to the Company any other material services during the fiscal year ended December 31, 2010 or the fiscal year ended December 31, 2011.

 

Audit Committee Pre-Approval Policies

 

Under the pre-approval policies and procedures established by the Board of Directors, functioning as the Audit Committee, it would not permit engagement of accountants to render audit or non-audit services without prior approval of the Board of Directors, functioning as the Audit Committee. As a result, all engagements of the independent auditors to render audit or non-audit services were approved by the Board of Directors, functioning as the Audit Committee.

 

Item 15.Exhibits and Financial Statement Schedules.

 

Exhibit

No.

  Exhibit  

Incorporated by Reference/Filed

Herewith

3.1   Amended and Restated Articles of Incorporation   Incorporated by reference to Amendment No. 3 to Registration Statement on Form SB-2 filed on August 24, 2007, File No. 333-143008
         
3.2   Bylaws   Incorporated by reference to Amendment No. 3 to Registration Statement on Form SB-2 filed on August 24, 2007, File No. 333-143008
         
4.1   Form of Common Stock Certificate   Incorporated by reference to Amendment No. 3 to Registration Statement on Form SB-2 filed on August 24, 2007, File No. 333-143008
         
4.2   Series 2008A Warrant dated September 8, 2008   Incorporated by reference to the Current Report on 8-K filed on September 10, 2008, File No. 000-52158
         
4.3   Series 2009B Warrant dated May 29, 2009   Incorporated by reference to the Current Report on 8-K filed on June 4, 2009, File No. 000-52158
         
4.4   Series 2009C Warrant dated October 30, 2009   Incorporated by reference to the Current Report on 8-K filed on November 6, 2009, File No. 000-52158
         
4.5   Warrant dated March 5, 2010   Incorporated by reference to the Current Report on 8-K filed on March 19, 2010, File No. 000-52158

 

36
 

  

Exhibit

No.

  Exhibit  

Incorporated by Reference/Filed

Herewith

4.6   Series 2011C Warrant dated August 25, 2011   Incorporated by reference to the Company’s Annual Report on Form 10-K filed on September 1, 2011, File No. 000-52158
         
10.1   2006 Stock Incentive Plan   Incorporated by reference to Registration Statement on Form 10-SB filed on February 16, 2007, File No. 000-52158
         
10.2   Form of NonStatutory Stock Option Agreement   Incorporated by reference to Registration Statement on Form 10-SB filed on February 16, 2007, File No. 000-52158
         
10.3   Employment Agreement dated May 10, 2007 with Edward C. Feintech   Incorporated by reference to the Quarterly Report on Form 10-Q filed on May 14, 2007, File No. 000-52158
         
10.4   Consulting Agreement dated  May 1, 2008 with International Monetary   Incorporated by reference to the Current Report on 8-K filed on May 8, 2008, File No. 000-52158
         
10.5   Promissory Note dated September 8, 2008   Incorporated by reference to the Current Report on 8-K filed on September 10, 2008, File No. 000-52158
         
10.6   Note and Share Purchase Agreement dated January 27, 2009 with 70 Limited LLC   Incorporated by reference to the Current Report on 8-K filed on February 2, 2009, File No. 000-52158
         
10.7   Note, Share and Warrant Purchase Agreement dated May 28, 2009 with 70 Limited LLC and The Jimma Lee Beam Revocable Trust   Incorporated by reference to the Current Report on 8-K filed on June 4, 2009, File No. 000-52158
         
10.8   Promissory Note dated May 29, 2009   Incorporated by reference to the Current Report on 8-K filed on June 4, 2009, File No. 000-52158
         
10.9   License Termination and Asset Transfer Agreement dated June 30, 2009 with Smoky Systems, LLC   Incorporated by reference to the Current Report on 8-K filed on July 7, 2009, File No. 000-52158
         
10.10   Option Agreement dated October 30, 2009 with Mary Ann’s Specialty Foods, Inc.   Incorporated by reference to the Current Report on 8-K filed on November 6, 2009, File No. 000-52158

 

37
 

  

Exhibit

No.

  Exhibit  

Incorporated by Reference/Filed

Herewith

10.11   Second Amended and Restated Processing Agreement dated October 30, 2009 with Mary Ann’s Specialty Foods, Inc.   Incorporated by reference to the Current Report on 8-K filed on November 6, 2009, File No. 000-52158
         
10.12   Consulting Agreement dated October 30, 2009 with William Korleski   Incorporated by reference to the Current Report on 8-K filed on November 6, 2009, File No. 000-52158
         
10.13   Note and Warrant Purchase Agreement dated March 5, 2010 with 70 Limited LLC   Incorporated by reference to the Current Report on 8-K filed on March 29, 2010, File No. 000-52158
         
10.14   Secured Promissory Note dated March 5, 2010   Incorporated by reference to the Current Report on 8-K filed on March 29, 2010, File No. 000-52158
         
10.15   Security Agreement dated March 5, 2010   Incorporated by reference to the Current Report on 8-K filed on March 29, 2010, File No. 000-52158
         
10.16   Executive Consulting Agreement dated March 25, 2010 with Harvey Hoffenberg   Incorporated by reference to the Annual Report on Form 10-K filed on April 15, 2010
         
10.17   Purchase and Lease Agreement dated July 25, 2011 with SMKY Asset Fund, LLC   Incorporated by reference to the Company’s Annual Report on Form 10-K filed on September 1, 2011, File No. 000-52158
         
23.1   Consent of Independent  Registered Public Accountants   Filed herewith
         
24   Power of Attorney   Included on the signature page hereof
         
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   Filed herewith 
         
101.SCH   XBRL Taxonomy Extension Schema   Filed herewith 
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase   Filed herewith 
         
101.DEF   XBRL Taxonomy Extension Definition Linkbase   Filed herewith 
         
101.LAB   XBRL Taxonomy Extension Label Linkbase   Filed herewith 
         
101.PRE   XBRL Taxonomy Presentation Linkbase   Filed herewith 

 

38
 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SMOKY MARKET FOODS, INC.
     
  By:  /s/   Eddie Feintech
    Eddie Feintech
    Chief Executive Officer
     
  Date: April 16, 2012

 

POWER OF ATTORNEY AND ADDITIONAL SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person, whose signature to this Form 10-K appears below, hereby constitutes and appoints Eddie Feintech as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments and post-effective amendments to this Form 10-K, and any and all instruments or documents filed as part of or in connection with this Form 10-K or the amendments thereto and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue hereof.

 

Signature   Title   Date
         
/s/ Edward C. Feintech   Chief Executive Officer, President   April 16, 2012
Edward C. Feintech   and Chairman (Principal Executive Officer)    
         
/s/ Shane Campbell   Director, Chief Financial Officer   April 16, 2012
Shane Campbell   (Principal Financial and Accounting Officer)    
         
/s/ Scott L. Bargfrede   Director   April 16, 2012
Scott L. Bargfrede        

 

39
 

 

SMOKY MARKET FOODS, INC.

 

Financial Statements

December 31, 2011 and 2010

 

40
 

 

SEALE AND BEERS, CPAs

PCAOB & CPAB REGISTERED AUDITORS

www.sealebeers.com

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Smoky Market Foods, Inc.

 

We have audited the accompanying balance sheets of Smoky Market Foods, Inc. as of December 31, 2011 and 2010, and the related statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2011 and 2010. Smoky Market Foods, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smoky Market Foods, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that eh Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has had minimal revenues, has negative working capital at December 31, 2011, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Seale and Beers, CPAs,

 

Seale and Beers, CPAs

Las Vegas, Nevada

April, 16 2012

 

50 S. Jones Blvd. Suite 202 Las Vegas. NV 89107 Phone: (888)727-8251 Fax: (888)782-2351

 

F-1
 

  

SMOKY MARKET FOODS, INC.

Balance Sheets

 

   As of December 31: 
   2011   2010 
ASSETS:          
Current Assets          
Cash  $17,614   $10 
Inventory   16,816    - 
Total Current Assets   34,430    10 
Property and Equipment, net of depreciation   2,844    - 
Deposits   -    183 
Total Assets  $37,274   $193 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT):          
Current Liabilities          
Accounts payable  $524,338   $501,960 
Accounts payable - related parties   145,933    125,107 
Accrued payroll costs   602,489    396,348 
Short-term advances   94,700    91,500 
Convertible debt, including accrued interest, less amortized discount   48,708    - 
Total Current Liabilities   1,416,168    1,114,915 
Long-term Liabilities          
Convertible debt to a related party, less amortized discount   196,384    - 
Promissory notes payable to a related party, including accrued interest, less amortized discount   2,452,196    2,137,819 
Total Liabilities   4,064,748    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 104,213,527 and 93,977,246          
at December 31, 2011 and December 31, 2010, respectively   104,214    93,978 
Deferred Stock-Based Compensation   (28,571)   (55,228)
Other paid-in capital   7,335,079    6,232,009 
Accumulated deficit   (11,438,196)   (9,523,300)
Total Stockholders’ Equity (Deficit)   (4,027,474)   (3,252,541)
Total Liabilities and Stockholders’ Equity (Deficit)  $37,274   $193 

 

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

 

F-2
 

  

SMOKY MARKET FOODS, INC.

Statements of Operations

 

   For the Years Ended December 31: 
   2011   2010 
Sales          
Wholesale  $7,008   $- 
Internet   3,661    347 
Restaurant, net of discounts   -    13,966 
Total Sales   10,669    14,313 
           
Cost of Sales          
Wholesale and internet   7,900    - 
Restauarant   -    63,579 
Write-off of obsolete inventory   97,075    117,224 
Total Cost of Sales   104,975    180,803 
           
Gross Profit (loss)   (94,306)   (166,490)
           
General & Administrative Expenses          
Salaries, wages & benefits   218,377    235,047 
Professional fees   83,608    227,181 
Marketing   69,610    12,143 
Depreciation and amortization   66,793    125,587 
Rent   5,320    71,846 
Loss on impairment of assets   -    995,493 
Stock based compensation          
Salaries, wages & benefits - related parties   187,875    72,562 
Professional   324,222    55,159 
Financing   411,444    39,561 
Other   109,537    82,392 
Total General and Administrative Expenses   1,476,786    1,916,971 
           
Operating Loss   (1,571,092)   (2,083,461)
           
Other Income (Expense)          
Other income (loss)   5,206    (776)
Interest income        52 
Loss on conversion of related party debt   (83,017)   - 
Interest expense to related parties   (259,000)   (236,370)
Interest expense   (6,993)   (201)
           
Other Expense - Net   (343,804)   (237,295)
           
Loss before Income Taxes   (1,914,896)   (2,320,756)
           
Income Taxes   -    - 
           
Net (Loss)  $(1,914,896)  $(2,320,756)
           
(Loss) per Share:          
Basic and Diluted  $(0.02)  $(0.03)
           
Weighted Average Number of Shares   101,529,382    90,480,413 

 

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

 

F-3
 

  

SMOKY MARKET FOODS, INC.

Statements of Stockhoder’s Equity

 

           Deferred   Other         
   Common Stock   Stock-Based   Paid-in   Accumulated   Total 
   Shares   Amount   Compensation   Capital   Deficit   (Deficit) 
                               
Balance, January 1, 2010   86,963,746   $86,964   $(81,885)  $5,879,321   $(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)   6,232,009    (9,523,300)   (3,252,541)
Common stock issued for:                              
Cash   3,000,000    3,000         139,300        $142,300 
Settlement of advances   4,650,000    4,650         98,425         103,075 
Employee compensation   1,750,000    1,750         12,250         14,000 
Professional services   560,000    560         108,940         109,500 
Financing   255,000    255         21,995         22,250 
Settlement of accounts payable balances   21,281    21         7,427         7,448 
Convertible debt financing                  38,750         38,750 
Warrants issued for:                              
Employee compensation                  147,218         147,218 
Professional services                  214,723         214,723 
Financing                  273,394         273,394 
Convertible debt financing                  40,648         40,648 
Amortization of stock-based compensation             26,657              26,657 
Net (Loss) for the Year Ended December 31, 2011                       (1,914,896)   (1,914,896)
Balance, December 31, 2011   104,213,527   $104,214   $(28,571)  $7,335,079   $(11,438,196)  $(4,027,474)

 

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

 

F-4
 

  

SMOKY MARKET FOODS, INC.

Statements of Cash Flows

 

   For the Years Ended December 31: 
   2011   2010 
Cash Flows from Operating Activities          
Net Income (Loss)  $(1,914,896)  $(2,320,756)
Impairment loss   -    995,493 
Stock-based financing and compensation costs   923,542    165,282 
Loss on sale of assets   -    875 
Proceeds from sale of assets   -    9,125 
Loss on conversion of related party debt   83,017    - 
Financing costs paid directly from loan proceeds   5,000    - 
Depreciation and amortization   66,793    125,587 
Current year interest capitalized as debt   259,930    236,370 
Adjustments to reconcile net loss to cash used in operating activities:          
(Increase) decrease in inventory   (16,816)   117,270 
(Increase) decrease in other current assets   -    11,609 
Increase (decrease) in accounts payable   47,460    208,001 
Increase (decrease) in due to employees   206,141    151,811 
Increase (decrease) in other accrued liabilities   -    (1,884)
           
Net Cash Provided (Used) by Operating Activities   (339,829)   (301,217)
           
Cash Flows from Investing Activities          
(Deposits) refunds   183    11,433 
Purchase of property and equipment   (3,200)   (4,852)
           
Net Cash Provided (Used) by Investing Activities   (3,017)   6,581 
           
Cash Flows from Financing Activities          
Proceeds from issuance of common stock   26,500    17,500 
Proceeds from convertible debt to a related party   235,000    - 
Proceeds from issuance of convertible debt   72,500    150,000 
Proceeds from (payments on) short term advances - net   26,450    16,500 
           
Net Cash Provided (Used) by Financing Activities   360,450    184,000 
           
Net Increase (Decrease) in Cash   17,604    (110,636)
           
Cash, Beginning of Year   10    110,646 
           
Cash, End of Year  $17,614   $10 
           
Supplemental Information:          
Interest paid  $391   $- 
Income taxes paid  $-   $- 
           
Non-cash Investing and Financing Activities          
Common stock issued in settlement of advances  $23,250   $- 
Warrants issued in connection with convertible debt  $40,648   $- 

 

The interest disclosed in the cash flow from operating activities section above was interest accrued but unpaid on promissory notes as more fully disclosed in the notes to the financial statements. The accrued but unpaid interest is added to the principal balance of the promissory notes. This non-cash expense is added back in the cash flows from operating activities section above in order to arrive at cash flows from operating activities.

 

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

 

F-5
 

 

Smoky Market Foods, Inc.

Notes to Financial Statements

December 31, 2011 and 2010

 

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 the manufacture and sale of smoked meat products using a proprietary cooking technology which enables preservative-free production. Sales and distribution are presently accommodated through retail (internet) and whole sale distribution strategies intended to exploit the Smoky Market brand.The Company also intends to create a chain of franchised restaurants which also utilize the branded Smoky Market products.

 

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- and $-0-, as of December 31, 2011 and December 31, 2010, respectively.

 

F-6
 

  

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. Inventory was as follows at:

 

   December 31,
2011
   December 31,
2010
 
         
Raw materials   -    - 
Finished goods   16,816    - 
   $16,816   $- 

 

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. Property and equipment were as follows as of:

 

   December 31,
2011
   December 31,
2010
 
         
Transportation Equipment   3,200    - 
Accumulated depreciation   356    - 
   $2,844   $- 

 

Leasehold improvements are capitalized and amortized over the remaining term of the leased facility. The Company recorded $356 and $-0- in depreciation expense relating to the assets above for the years ended December 31, 2011 and 2010, respectively.

 

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. Accordingly, $698,806 of net property and equipment was considered impaired and written off during the year ended December 31, 2010. See “Impairment of Long-Lived Assetsdisclosure below.

 

Advances

 

As of December 31, 2011 and December 31, 2010, the Company was indebted to several individuals for non-interest bearing, unsecured advances in the amounts of $94,700 and $91,500, respectively. $82,500 of the advances are past due and in default as of December 31, 2011 and 2010, respectively. 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 December 31, 2011. Management intends to repay the advances upon the realization of additional debt/equity financing in 2012. Accordingly, the advances have been classified as current obligations.

 

F-7
 

 

Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2011 and 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.

 

It was determined during 2010 that all assets other than cash and deposits, both tangible and intangible, were a part of the same asset group. That asset group involved the utilization of the smoker oven technology, and included the smoker oven, leased restaurant property, a real estate option to build another smoker oven, and a consulting contract with an individual who would assist the Company in deploying the smoker oven technology. Future cash flows from this asset group could not be assured. Accordingly, management decided to completely write-off these impaired assets during the year ended December 31, 2010.

 

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 impairments losses for all operating assets due to the uncertainty of future operating cash flows from such assets. Additionally, certain of these were sold, receiving $9,125. The total impairment loss was $-0- and $995,493 for the years ended December 31, 2011 and 2010, respectively.

 

F-8
 

 

Detail of the impairment losses were as follows for the years ended December 31:

 

Description  2011   2010 
         
Property and equipment  $-   $698,806 
Rent on abandoned restaurant lease   -    175,853 
Real estate option   -    75,000 
Prepaid consulting contract   -    45,834 
Total Impairment Loss  $-   $995,493 

 

Revenue Recognition

 

Sales are recognized upon shipment.

 

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 $25,200 and $-0- for the years ended December 31, 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.

 

F-9
 

  

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.

 

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.

 

F-10
 

  

The provision for (benefit from) income taxes was comprised of the following for the years ended December 31:

 

   2011   2010 
Federal          
Current, less Federal benefit for State  $(603,000)  $(741,000)
Deferred   -    - 
State:          
Current   (191,000)   (205,000)
Deferred          
    (794,000)   (946,000)
Less Valuation Allowance   794,000    946,000 
   $-   $- 

 

The differences between Smoky Market’s effective tax rate and the U.S. federal statutory regular tax rate are as follows:

 

   2011   2010 
         
Expense (benefit) at U.S. federal statutory rate   35.0%   35.0%
Expense (benefit) at state statutory rate   10.0%   8.8%
Other   -3.5%   -3.1%
Valuation allowance   -41.5%   -40.7%
    0.0%   0.0%

 

Reclassifications

 

Certain balances as reported in previous periods have been reclassified. Elements of cost of goods sold in the 2010 presentation were combined in the statements of operations. Additionally, all additional paid-in capital accounts are now combined for financial reporting in the balance sheets and statements of shareholder’s equity. These reclassifications had no effect on reported losses.

 

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.

 

F-11
 

  

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 can not be assured.

 

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 $11,438,196 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. NOTE 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 note accrues interest at a 10% annual rate until repaid on or before its maturity date of August 18, 2020.

 

F-12
 

  

The net promissory note obligation was as follows as of:

 

   December 31,
2011
   December 31,
2010
 
Face amount of note  $2,568,900   $2,568,900 
Accrued interest   354,003    95,004 
Less unamortized loan discount   (470,707)   (526,084)
   $2,452,196   $2,137,819 

 

As discussed above, the LLC is considered a related party. Related party expenses relative to this loan were as follows for the years ended:

 

   December 31,
2011
   December 31,
2010
 
         
Interest expense  $258,999   $236,370 
Amortization of loan discount  $55,377   $74,969 

 

NOTE 4. CONVERTIBLE DEBT – RELATED PARTY

 

The Company entered into a Purchase and Lease Agreement in June 2011 with SMKY Asset Fund LLC (the “Lender,” a related party) relating to the Company’s smoker-oven system. The substance of the transaction more closely resembles a convertible debt instrument and for that reason the Company has recorded this transaction as a convertible debt borrowing. Pursuant to the agreement, the Company received $210,000 in the third quarter of 2011, subject to increase prior to January 25, 2012, with a maximum borrowing of $500,000.

 

In addition, Smoky Market was required to issue warrants to the Lender to purchase a share of common stock for each $1.00 in debt provided. The warrants have an exercise price of $0.50 per share, a five-year term and include net exercise provisions. The warrants were valued using the Black-Scholes method assuming a risk-free annual rate of return of .02%, volatility of 317%, an exercise price of $.50 and a current stock price of $.24. The resulting value is reflected in the financial statements as a discount on the convertible debt and is being amortized over the ten-year life of the debt. Payments due on the debt are 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 agreement has a 10-year term, provided that the Company must repay the debt at any time after July 25, 2014 that the market price for the Company’s 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. The conversion feature of the note was valued based on the same criteria as the warrant described above, and resulted in a calculation of $2,063,114. Since the conversion is contingent, the conversion feature was not recognized in the calculation of the debt discount.

 

F-13
 

  

The debt was as follows at December 31:

 

   2011   2010 
Face amount of debt  $235,000   $- 
Accrued interest          
Less unamortized loan discount   (38,616)   - 
   $196,384   $- 

 

As discussed above, the Lender is considered a related party. Related party expenses relative to this loan was as follows for the years ended December 31:

 

   2011   2010 
           
Amortization of loan discount  $2,032   $- 

 

NOTE 5. CONVERTIBLE DEBT – UNRELATED PARTY

 

The Company entered into two convertible debt arrangements with an unrelated financier (“Financier”) in the fourth quarter of 2011. The promissory notes carry interest at an 8% annual rate and are due nine months from the transaction date. The first note was in the principal amount of $42,500 and is due July 11, 2012. The second note was in the principal amount of $35,000 and is due September 15, 2012. Both notes have a conversion option which allows the Financier to convert the principal and accrued interest into common shares based on the average of the lowest three closing prices of the Companies stock over the prior ten days. That price is then discounted by 42% to arrive at the conversion price. The Company has the right to repurchase the notes during the first 180 days at a price which includes accrued interest plus the original principal amount multiplied by 150%.

 

The Company has recorded the conversion options as loan discounts using the Black-Scholes method. Since the number of shares is variable, the calculation of the discount assumed the stock price as of the transaction date as the base for calculations, a nine month term, risk-free discount rate of .01%, and stock volatility of 314%.

 

F-14
 

  

The outstanding combined debt was as follows as of December 31:

 

   2011   2010 
Face amount of debt  $77,500   $- 
Accrued interest   930    - 
Less unamortized loan discount   (29,722)   - 
   $48,708   $- 

 

NOTE 6. 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.

 

 

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 a like 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 December 31, 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.

 

F-15
 

  

The following is a reconciliation of stock based compensation for the years ended December 31:

 

   2011   2010 
         
Per Statement of Operations          
Salaries, Wages & Benefits - related parties  $187,875   $72,562 
Professional   324,222    55,159 
Financing   411,444    39,561 
    923,541    167,282 
Less director amount reflected as salaries   -    (2,000)
Warrant modification on debt   -    203,576 
   $923,541   $368,858 
           
Per Statement of Cash Flows          
Stock based compensation  $923,542   $165,282 
Modification of warrants capitalized as loan discount (non-cash)   -    203,576 
Rounding   (1)     
   $923,541   $368,858 
           
Per Statement of Shareholders Equity          
Common stock issued for:          
Consideration for employee services  $14,000   $38,706 
Consideration for professional services   109,500    14,750 
Consideration for financing services   22,250    9,400 
Financing expense recognized on stock sold at price per share that was less than fair value   115,800    - 
Warrants issued in conjunction:          
Consideration for employee services   147,218      
Consideration for professional services   214,723    58,603 
Consideration for financing services   273,394    220,743 
Amortization of stock-based compensation   26,657    26,657 
Rounding   (1)   (1)
   $923,541   $368,858 

 

NOTE 7. RELATED PARTY TRANSACTIONS

 

As of December 31, 2011 and 2010, the Company owed $145,933 and $125,107 to related parties, respectively, relating to professional services and vendor services. Such debt was reflected as related party trade payables on the balance sheets, bears no interest and has no formal repayment terms.

 

During the year ended December 31, 2011, the Company purchased an automobile from a related party (the CEO). The cost of the automobile was $3,200.

 

NOTE 8. 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 is reflected at $187,307 as of both December 31, 2011 and 2010, respectively.

 

F-16
 

  

Employment Contracts

 

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 the same compensation structure subsequent to the expiration of the employment contract.

 

Chief Marketing Officer

 

Effective March 25, 2010, the Company retained an outsourced Chief Marketing Officer (“CMO”) under a cancelable five-year Executive Consulting Agreement. Under the terms of the agreement, the CMO was entitled to 350,000 common shares as a signing bonus and variable monthly compensation based on a percentage commission on internet sales. Other than the signing bonus, no compensation was earned or paid under this agreement prior to being cancelled in March 2011.

 

Real Estate Option and Consulting Agreement

 

The Company entered into an agreement with Mary Anne’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.

 

F-17
 

  

NOTE 9. 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, 2010   742,500    5,757,500   $0.10 
Shares reserved   -    -    - 
Options granted   -    -    - 
Stock awards granted   -    -    n/a 
Options exercised   -    -    - 
Options canceled   -    -    - 
Outstanding as of December 31, 2010   742,500    5,757,500   $0.10 
Shares reserved   -    -    - 
Options granted   -    -    - 
Stock awards granted   -    -    n/a 
Options exercised   -    -    - 
Options canceled   -    -    - 
Outstanding as of December 31, 2011   742,500    5,757,500   $0.10 

 

The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:

 

Stock Options Outstanding
Number of
Options
Outstanding
  Weighted-
Average
Remaining
Contractual
Life in Years
   Weighted-
Average
Exercise
Price
 
1,887,500   1.57   $0.10 

 

Stock Options Exercisable
Number of
Options
Exercisable
  Weighted-
Average
Remaining
Contractual
Life in Years
   Weighted-
Average
Exercise
Price
 
1,887,500   1.57   $0.10 

 

F-18
 

  

The assumptions used in computing fair value of 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 to 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 December 31, 2011:

 

    Number
of
Warrants
   Weighted
Average
Exercise
Price
 
Outstanding, January 1, 2010    1,000,000    0.15 
Granted    8,702,500    0.05 
Exercised    -    - 
Cancelled    -    - 
Outstanding, December 31,2010    9,702,500   $0.06 
Granted    9,246,834    0.13 
Exercised    -    - 
Cancelled    -    - 
Outstanding, December 31,2011    18,949,334   $0.09 
            
Warrants exercisable at December 31, 2011    18,949,334   $0.09 

 

F-19
 

  

The following table summarizes information about stock warrants outstanding and exercisable at December 31, 2011:

 

Stock Warrants Outstanding 
Number of
Warrants
Outstanding
   Weighted-
Average
Remaining
Contractual
Life in Years
   Exercise Price 
 210,000    4.75   $0.50 
 1,771,834    4.34   $0.25 
 3,515,000    2.58   $0.15 
 13,452,500    4.95   $0.05 
 18,949,334           

 

Stock Warrants Exercisable 
Number of
Warrants
Exercisable
   Weighted-
Average
Remaining
Contractual
Life in Years
   Exercise Price 
 210,000    4.75   $0.50 
 1,771,834    4.34   $0.25 
 3,515,000    2.58   $0.15 
 13,452,500    4.95   $0.05 
 18,949,334           

 

Warrants were valued and recorded pursuant to the Black-Scholes Method. For warrants issued in 2011, the average risk-free rate of return of return was .01%. average stock price volatility of 314%, and a weighted average expected term of 3.48 years, and a weighted average fair value of $.07 per warrant. Assumptions used were an average risk-free rate of return of .12% to .15%, average expected stock price volatility of 347%, weighted average expected term of 6.01 years, and a weighted average fair value of $.01 per warrant.

 

NOTE 10. SUBSEQUENT EVENTS

 

Management has evaluated the period subsequent to December 31, 2011 up to and including the date of the issuance of the financial statements for material subsequent events to disclose, and has determined that no such subsequent events exist.

 

F-20