UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______to

Commission file number 001-33446

 

VAUGHAN FOODS, INC.

 

(Exact name of registrant as specified in its charter)


 

 

Oklahoma

73-1342046

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

216 N.E. 12th Street, Moore, OK

73160

(Address of principal executive offices)

(Zip Code)

(405) 794-2530
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o     Accelerated filer  o      Non-accelerated filer  o     Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No þ

 

 

Number of shares outstanding of the registrant’s common stock, as of November 15, 2010:

Class

Shares Outstanding



 

 

Common Stock, $0.001 par value per share

9,380,577



VAUGHAN FOODS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2010
INDEX

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

1

 

 

 

 

Consolidated Balance Sheets as of September 30, 2010 (unaudited), and December 31, 2009

 

2

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009

 

3

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2009 and Nine Months Ended September 30, 2010 (unaudited)

 

4

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

 

5

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

 

 

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

 

16

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

20

 

 

 

 

 

Item 4. Controls and Procedures

 

20

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. Legal Proceedings 

 

21

 

 

 

 

 

Item 1A. Risk Factors

 

21

 

 

 

 

 

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

 

22

 

 

 

 

 

Item 3. Defaults Upon Senior Secruties

 

22

 

 

 

 

 

Item 4. [Removed and Reserved]

 

22

 

 

 

 

 

Item 5. Other Information

 

22

 

 

 

 

 

Item 6. Exhibits

 

22

 

 

 

 

SIGNATURES

 

23

 

 

 

 

EXHIBIT INDEX

 

24



PART 1 — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Vaughan Foods, Inc. and Subsidiary

We have reviewed the accompanying consolidated balance sheet of Vaughan Foods, Inc. and subsidiary (the “Company”) as of September 30, 2010, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2010 and 2009, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2010 and 2009, and the consolidated statements of stockholders’ equity for the nine-month period ended September 30, 2010. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the balance sheet of the Company as of December 31, 2009, and the related statement of stockholders’ equity for the year ended December 31, 2009, and the related statements of operations and cash flows for the year then ended (not presented herein); and in our report dated March 19, 2010, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, and the accompanying statement of stockholders’ equity for the year ended December 31, 2009, are fairly stated, in all material respects, in relation to the financial statements from which they have been derived.

(Cole & Reed P.C.)

Oklahoma City, Oklahoma
November 15, 2010

1


Vaughan Foods, Inc.
Consolidated Balance Sheets
September 30, 2010 & December 31, 2009

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 


 


 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

Cash receipts subject to account control agreement

 

 

502,339

 

 

523,454

 

Accounts receivable, net of allowance for credit losses of $56,375 at September 30, 2010 and $106,375 at December 31, 2009

 

 

5,798,193

 

 

5,311,989

 

Inventories

 

 

2,952,545

 

 

3,054,819

 

Prepaid expenses and other assets

 

 

208,315

 

 

210,516

 

Deferred tax assets

 

 

299,865

 

 

264,772

 

 

 



 



 

 

 

 

 

 

 

 

 

Total current assets

 

 

9,761,257

 

 

9,365,550

 

 

 



 



 

 

 

 

 

 

 

 

 

Restricted assets:

 

 

 

 

 

 

 

Cash

 

 

528,000

 

 

528,000

 

Investments

 

 

930,255

 

 

541,398

 

 

 



 



 

 

 

 

 

 

 

 

 

Total restricted assets

 

 

1,458,255

 

 

1,069,398

 

 

 



 



 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

15,108,469

 

 

15,797,007

 

 

 



 



 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Loan origination fees, net of amortization

 

 

308,744

 

 

421,791

 

Intangible assets

 

 

53,953

 

 

77,090

 

Deferred tax assets, noncurrent

 

 

2,552,348

 

 

2,655,925

 

 

 



 



 

 

 

 

 

 

 

 

 

Total other assets

 

 

2,915,045

 

 

3,154,806

 

 

 



 



 

 

 

 

 

 

 

 

 

Total assets

 

$

29,243,026

 

$

29,386,761

 

 

 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

7,015,431

 

$

8,431,570

 

Disbursements in transit

 

 

1,535,933

 

 

1,269,790

 

Line of credit

 

 

1,919,577

 

 

2,322,063

 

Note payable to former owners of Allisons Gourmet Kitchens, LP

 

 

28,880

 

 

875,617

 

Accrued liabilities

 

 

1,636,987

 

 

1,392,817

 

Current portion of long-term debt

 

 

1,011,433

 

 

1,138,602

 

Current portion of capital lease obligation

 

 

 

 

94,479

 

 

 



 



 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

13,148,241

 

 

15,524,938

 

 

 



 



 

 

 

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

6,606,265

 

 

6,943,639

 

Note payable to former owners of Allisons Gourmet Kitchens, LP, net of current portion

 

 

811,867

 

 

 

Deferred gain on sale of assets

 

 

16,712

 

 

43,607

 

 

 



 



 

 

 

 

 

 

 

 

 

Total long-term liabilities

 

 

7,434,844

 

 

6,987,246

 

 

 



 



 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; authorized 50,000,000 shares; 9,380,577 shares issued and outstanding at September 30, 2010 and 4,623,077 shares issued and outstanding at December 31, 2009

 

 

9,381

 

 

4,623

 

Preferred stock, $0.001 par value; authorized 5,000,000 shares; 0 shares issued and outstanding at Septmber 30, 2010 and December 31, 2009

 

 

 

 

 

Paid in Capital

 

 

14,502,695

 

 

12,734,115

 

Retained Earnings (deficit)

 

 

(5,852,135

)

 

(5,864,161

)

 

 



 



 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

8,659,941

 

 

6,874,577

 

 

 



 



 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

29,243,026

 

$

29,386,761

 

 

 



 



 

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

2


Vaughan Foods, Inc.
Unaudited Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2010 and 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 


 


 

 

 

2010

 

2009

 

2010

 

2009

 

 

 


 


 


 


 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

23,286,922

 

$

24,107,433

 

$

71,208,551

 

$

73,892,354

 

Cost of sales

 

 

21,512,987

 

 

22,123,101

 

 

63,923,231

 

 

67,310,730

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,773,935

 

 

1,984,332

 

 

7,285,320

 

 

6,581,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

2,145,875

 

 

2,067,191

 

 

6,543,488

 

 

6,551,704

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(371,940

)

 

(82,859

)

 

741,832

 

 

29,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(214,305

)

 

(306,074

)

 

(690,976

)

 

(821,954

)

Gain (loss) on sale of asset

 

 

8,965

 

 

8,965

 

 

29,654

 

 

15,044

 

Interest income

 

 

 

 

2

 

 

 

 

112

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income and expense, net

 

 

(205,340

)

 

(297,107

)

 

(661,322

)

 

(806,798

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) before income taxes

 

 

(577,280

)

 

(379,966

)

 

80,510

 

 

(776,878

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

(212,541

)

 

(161,923

)

 

68,484

 

 

(310,436

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(364,739

)

$

(218,043

)

$

12,026

 

$

(466,442

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding Basic and diluted

 

 

9,380,577

 

 

4,623,077

 

 

8,439,533

 

 

4,623,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share Basic and diluted

 

$

(0.04

)

$

(0.05

)

$

0.00

 

$

(0.10

)

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

3


Vaughan Foods, Inc.
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 31, 2009 and the Nine Months Ended September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid in
Capital

 

Retained
Earnings
(Deficit)

 

Total
Stockholders’
Equity

 

 

 


 

 

 

 

 

 

Shares issued

 

Amount

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2009

 

 

4,623,077

 

$

4,623

 

$

12,571,302

 

$

(5,363,934

)

$

7,211,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock options in connection with Equity Incentive Plan

 

 

 

 

 

 

88,352

 

 

 

 

88,352

 

Issuance of stock warrants in connection with refinancing revolving line of credit

 

 

 

 

 

 

 

 

74,461

 

 

 

 

 

74,461

 

Net (loss)

 

 

 

 

 

 

 

 

(500,227

)

 

(500,227

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

 

4,623,077

 

$

4,623

 

$

12,734,115

 

$

(5,864,161

)

$

6,874,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense (unaudited)

 

 

 

 

 

 

67,450

 

 

 

 

67,450

 

Issuance of common stock in connection with private placement transaction (unaudited)

 

 

4,757,500

 

 

4,758

 

 

1,701,130

 

 

 

 

1,705,888

 

Net income (unaudited)

 

 

 

 

 

 

 

 

12,026

 

 

12,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance and September 30, 2010 (unaudited)

 

 

9,380,577

 

$

9,381

 

$

14,502,695

 

$

(5,852,135

)

$

8,659,941

 

 

 
















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

4


Vaughan Foods, Inc.
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 


 

 

 

2010

 

2009

 

 

 


 


 

 

 

(unaudited)

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

12,026

 

$

(466,442

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,931,617

 

 

1,477,310

 

Provision for credit losses

 

 

(50,000

)

 

(9,467

)

(Gain) on sale of assets

 

 

(29,654

)

 

(15,044

)

Stock option expense

 

 

67,450

 

 

66,094

 

Deferred income taxes

 

 

68,484

 

 

(310,436

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(436,204

)

 

51,326

 

Inventories

 

 

102,274

 

 

(193,836

)

Prepaid expenses and other assets

 

 

2,201

 

 

(56,203

)

Accounts payable

 

 

(2,124,576

)

 

259,786

 

Disbursements in transit

 

 

266,143

 

 

429,837

 

Accrued liabilities

 

 

244,170

 

 

231,071

 

 

 



 



 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

53,931

 

 

1,463,996

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(357,116

)

 

(365,812

)

Proceeds from sale of assets

 

 

19,750

 

 

5,000

 

Investments in restricted assets

 

 

(388,857

)

 

(868,233

)

 

 



 



 

 

 

 

 

 

 

 

 

Net cash (used by) investing activities

 

 

(726,223

)

 

(1,229,045

)

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of loan origination fees

 

 

(58,333

)

 

(221,422

)

Proceeds from stock issue

 

 

1,705,888

 

 

 

Proceeds from line of credit

 

 

 

 

1,336,273

 

Repayments on line of credit

 

 

(402,486

)

 

 

Cash receipts subject to account control agreement

 

 

21,115

 

 

(833,492

)

Repayment of notes payable to former owners of Allison’s Gourmet Kitchens, LP

 

 

(34,870

)

 

(6,931

)

Proceeds from notes issued to former owners of Allison’s Gourmet Kitchens, LP

 

 

 

 

80,250

 

Repayment of long-term debt and capital leases

 

 

(559,022

)

 

(589,629

)

 

 



 



 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

672,292

 

 

(234,951

)

 

 



 



 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

 

 

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

 

$

 

 

 



 



 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

474,541

 

$

575,023

 

 

 

 

 

 

 

 

 

Issuance of stock options issued in connection with refinancing revolving line of credit

 

$

 

$

74,461

 

 

 

 

 

 

 

 

 

Issuance of warrants to placement agent in connection with private placement transaction

 

$

219,661

 

$

 

 

 

 

 

 

 

 

 

Software development costs, financed through accounts payable

 

$

708,437

 

$

 

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

5


Vaughan Foods, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2010 and 2009

 

 

(1)

Nature of Operations

Vaughan Foods, Inc. (the “Company”) is an Oklahoma-based specialty food processor serving customers in a multi-state region. The Company and its subsidiaries operate from processing facilities in Moore, Oklahoma and Fort Worth, Texas.

 

 

 

(2)

Summary of Significant Accounting Policies

 

 

 

(a)

Basis of Reporting

 

 

 

 

 

The accompanying consolidated financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures normally prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report filed on Form 10-K with the SEC on March 19, 2010.

 

 

 

 

 

This summary of significant accounting policies is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management which is responsible for the integrity and objectivity of the consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements.

 

 

 

 

(b)

Unaudited Interim Financial Information

 

 

 

 

 

The financial information herein is unaudited; however, such information reflects solely normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the entire year.

 

 

 

 

(c)

Cash and Cash Equivalents

 

 

 

 

 

For purposes of the consolidated statements of cash flows, the Company considers investments with maturities of three months or less at date of purchase to be cash equivalents. Cash subject to account control agreement represents unrestricted cash that results from collections of trade accounts receivable. Such amounts are generally applied the next business day to outstanding balances and accrued interest on the revolving credit agreement, and subject to availability and other terms of the agreement, can be re-borrowed immediately after being applied to the line of credit.

 

 

 

 

(d)

Disbursements in Transit

 

 

 

 

 

Disbursements in transit as presented in the consolidated balance sheet and consolidated statement of cash flows, represent drafts for payment to the Company’s vendors in transit and in the process of being collected.

 

 

 

 

(e)

Accounts Receivable and Credit Policies

 

 

 

 

 

Trade accounts receivable are customer obligations due under normal trade terms generally requiring payment within 15 to 21 days from the invoice date. Receivables are recorded based on the amounts invoiced to customers. Interest and delinquency fees are not included in income until realized in cash. Discounts allowed for early payment, if any, are charged against income when the payment is received. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are generally applied to the earliest unpaid invoices.

 

 

 

 

 

The carrying amount of accounts receivable is reduced by an allowance for credit losses that reflects management’s estimate of the amounts that will not be collected. The allowance for credit losses is based on various factors including among other things, (a) our assessment of the collectibility of specific customer accounts, (b) our macro assessment of political and economic risk, (c) the overall aging of accounts receivable portfolio, and (d) the effects each of these and other factors have on the consolidated portfolio. Balances still outstanding after management has used reasonable collection efforts are charged off to the valuation allowance. Recoveries on accounts previously charged off are credited to the valuation allowance.

 

 

 

 

 

A lien exists on certain receivables related to fresh produce under the Perishable Agricultural Commodities Act of 1930, which partially subordinates the lien placed by the line of credit.

 

 

 

 

(f)

Inventories

 

 

 

 

 

Inventories consist principally of food products and are stated at the lower of average cost (which approximates first-in, first-out) or market. Costs included in inventories consist of materials, certain prepaid expenses related to materials, packaging supplies, and labor. General and administrative costs are not charged to inventories.

6



 

 

 

 

(g)

Property and Equipment

 

 

 

 

 

Property and equipment are recorded at cost. Equipment classified as capital leases are recorded at the present value of the future minimum lease payments, and amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in other income and expense.

 

 

 

 

 

Depreciation, including assets classified as capital leases, are provided using the straight-line method over the following estimated useful lives:


 

 

 

Plant and improvements

 

15 - 40 years

 

 

 

Machinery and equipment

 

2 - 15 years

 

 

 

Transportation equipment

 

3 - 10 years

 

 

 

Office equipment

 

2 - 7 years


 

 

 

 

(h)

Concentrations of Credit Risk

 

 

 

 

 

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

 

 

 

(i)

Revenue Recognition

 

 

 

 

 

The Company recognizes revenue, net of related sales discounts and allowances, when persuasive evidence of an arrangement exists (such as a customer purchase order), delivery has occurred, the price to the customer has been fixed or is determinable, and collectibility is reasonably assured. Revenues also include those amounts related to shipping and handling. Shipping and handling expenses are included in cost of sales. Consideration from the Company to a customer is presumed to be a reduction to the selling price of the Company’s products and accordingly, is characterized as a reduction of sales when recognized in the Company’s consolidated statements of operations. As a result, certain promotional expenses are recorded as a reduction of net sales, at the time in which the sale is recognized.

 

 

 

 

(j)

Accounting for Rebates

 

 

 

 

 

The Company establishes liabilities for rebates to customers based on specific programs, expected usage and historical experience.

 

 

 

 

(k)

Income Taxes

 

 

 

 

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

 

 

 

(l)

Earnings (Loss) Per Share

 

 

 

 

 

Basic earnings (loss) per share (“EPS”) excludes dilution and is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common shares (such as stock options) were issued during the period. Diluted EPS is not presented if the effect of the incremental shares is anti-dilutive.

 

 

 

 

 

As of September 30, 2010, the Company has Class A and Class B warrants outstanding resulting from its initial public offering with exercise prices of $9.75 and $13.00, respectively. Both classes of warrants expire on June 27, 2012. The exercise price of both classes of warrants exceeds the Company’s stock price, therefore the Company has not included these warrants as shares in diluted earnings per share because the effects of inclusion would be anti-dilutive.

7



 

 

 

 

 

On November 26, 2008 and March 12, 2009, the Company granted 605,000 and 14,120, respectively, stock options to certain employees, members of the board of directors and certain consultants to the Company, vesting over four years, with a weighted average exercise price of $0.70. The exercise prices of the options are equal to the Company’s stock price on the dates of issuance, which both exceed the Company’s average stock price, therefore the Company has not included these options as shares in diluted earnings per share because the effects of inclusion would be anti-dilutive.

 

 

 

 

 

On March 6, 2009, the Company issued a seven-year warrant to purchase 252,454 shares of common stock to its lender in connection with refinancing its revolving line of credit, as further described in Note 7. The exercise price of the warrant $0.59 per share, which is greater than the Company’s average stock price, therefore the Company has not included these options associated with the warrant in diluted earnings per share because the effects of inclusion would be anti-dilutive.

 

 

 

 

 

On February 24, 2010, the Company issued five year warrants to purchase 1,903,000 shares of common stock to 71 accredited investors in connection with a private placement transaction. The exercise price of the warrants is $0.70 per share, which is greater than the Company’s average stock price, therefore the Company has not included these options associated with the warrants in diluted earnings per share because the effects of inclusion would be anti-dilutive.

 

 

 

 

 

On February 23, 2010, the Company issued five year warrants to purchase 475,750 shares of common stock to the placement agent in connection with a private placement transaction. The exercise price of the warrants is $0.625 per share, which is greater than the Company’s average stock price, therefore the Company has not included these options associated with the warrants in diluted earnings per share because the effects of inclusion would be anti-dilutive.

 

 

 

 

(m)

Use of Estimates

 

 

 

 

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

 

 

(n)

Fair Value of Financial Instruments

 

 

 

 

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are measured at cost which approximates fair value because of the short-term nature of these instruments. The carrying amount of the Company’s borrowings under the line of credit and long-term debt approximates fair value because the interest rate on the instruments fluctuate with market interest rates or represents borrowing rates available with similar terms.

 

 

 

 

(o)

Investments

 

 

 

 

 

The Company’s investments primarily consist of money market mutual funds. These investments are classified as available for sale and are reported at fair value, which was determined using quoted market prices in active markets for identical assets. Any related unrealized gains and losses are excluded from earnings and reported net of income tax as a separate component of stockholders’ equity until realized. There were no unrealized gains or losses for the three months or nine months ended September 30, 2010 and 2009. Realized gains and losses on sales of securities are based on the specific identification method. Declines in the fair value of investment securities below their carrying value that are other than temporary are recognized in earnings.

 

 

 

 

(p)

Stock-Based Compensation Expense

 

 

 

 

 

The Company measures stock-based compensation costs at the grant date based on the fair value of the award and recognize as expense ratably over the service period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock option awards. The Company awards stock options to employees, executive officers, directors and certain consultants.

 

 

 

 

(q)

Recently Issued Accounting Pronouncements

 

 

 

 

 

In June 2009, the FASB issued Accounting Standards Codification ASC 105-10, which establishes the Codification as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). The Codification, which changes the referencing of the financial accounting standards, became effective and was adopted by the Company for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded by the Codification, which is now the single official source of authoritative U.S. GAAP. All other accounting literature not included in the Codification is non-authoritative. Updates to the ASC are issued in the form of Accounting Standards Updates (“ASU”). The Codification does not change U.S. GAAP, and its adoption did not have a material effect on the Company’s financial statements.

8



 

 

 

 

 

In July 2010, the FASB issued Accounting Standards Codification ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which amends ASC Topic 310, “Receivables,” which will require additional or enhanced disclosures in annual and interim financial statements to assist the users of such financial statements in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The provisions of ASU 2010-20 apply to all entities with financing receivables, excluding short-term accounts receivable or receivables measured at fair value or lower of cost or fair value. The content of ASU 2010-20 relating to disclosures as of the end of a reporting period is effective for the first interim or annual reporting period ending on or after December 15, 2010, while the content relating to disclosures about activity that occurs during a reporting period is effective for the first interim or annual reporting period beginning on or after December 15, 2010. We are in the process of reviewing this ASU and will incorporate any additional disclosures in our annual financial statements for the year ending December 31, 2010.

 

 

 

(3)

Operating Results and Liquidity

 

 

 

 

The Company experienced mediocre operating results during certain periods in the last two years, and encountered adverse conditions in the commodities markets and the capital markets, which has both affected operating results and cash flow, and has limited the Company’s access to capital.

 

 

 

 

 

As a result, the Company’s liquidity management has required heightened oversight to satisfy all constituencies. Management has taken steps to strengthen the Company’s capital resources and liquidity by, among other things, (a) the addition of $1.7 million in new equity capital during the first quarter of 2010, (b) decelerating previously-planned expansions into new markets, and (c) deferring some capital investments in production equipment and planned additions to existing facilities.

 

 

 

 

 

Management strives to continuously strengthen the financial performance and resulting liquidity of the Company through detailed evaluations of, among other things, (a) individual customer profitability, (b) product line profitability, (c) efficiency of manufacturing operations, (d) efficiency of transportation and delivery systems, (e) manufacturing overhead expenses and (f) general and administrative expenses.

 

 

 

 

 

During the first nine-months of 2010, the Company increased its working capital by $2.8 million, raised $1.7 million in net proceeds from new equity, decreased its outstanding accounts payable by $2.1 million, decreased short-term borrowings on its revolving line of credit by $0.4 million, and paid off long-term debt of $0.6 million.

 

 

 

 

 

The Company makes no assurance that actions taken will be sufficient to mitigate the effects of continuing fragile economic conditions, and other external market conditions, which are beyond the control of management. A further worsening of the economy in the United States of America could materially, adversely affect the Company’s business, including its financial condition and results of operations.

 

 

 

(4)

Inventories

 

 

 

A summary of inventories follows:


 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials and supplies

 

$

2,447,081

 

$

2,828,026

 

Finished goods

 

 

505,464

 

 

226,793

 

 

 



 



 

 

 

 

 

 

 

 

 

Total inventory

 

$

2,952,545

 

$

3,054,819

 

 

 



 



 


 

 

(5)

Restricted Assets

 

 

 

The Company is required to hold cash in reserve in separate trust accounts applicable to its $5.0 million Cleveland County Industrial Authority Industrial Development Revenue Bonds, issued December 2004. The project

9


 

 

 

construction account represents proceeds of the bond offering to be drawn for approved capital expenditures. The debt reserve account represents funds to be used for debt service in the event of default. The interest and principal accounts represent deposits to be used for debt service. Letters of credit are amounts placed in deposit with a lending institution for purposes of securing letters of credit. These assets are as follows:


 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

Debt reserve account

 

$

500,000

 

$

483,834

 

Interest fund account

 

 

96,922

 

 

24,231

 

Principal fund account

 

 

333,333

 

 

33,333

 

Deposits related to letters of credit

 

 

528,000

 

 

528,000

 

 

 



 



 

 

 

 

 

 

 

 

 

Total restricted assets

 

$

1,458,255

 

$

1,069,398

 

 

 



 



 


 

 

(6)

Property and Equipment

 

 

 

Property and equipment, at cost, consists of the following:


 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

Land

 

$

238,162

 

$

238,162

 

Plant and improvements

 

 

11,699,376

 

 

11,699,376

 

Machinery and equipment

 

 

9,589,085

 

 

9,279,686

 

Transportation equipment

 

 

439,750

 

 

485,159

 

Software and office equipment

 

 

2,058,635

 

 

159,638

 

Software development

 

 

370,925

 

 

1,769,898

 

Construction in progress

 

 

268,271

 

 

26,641

 

 

 



 



 

 

 

 

24,664,204

 

 

23,658,560

 

Less accumulated depreciation

 

 

(9,555,735

)

 

(7,861,553

)

 

 



 



 

Property and equipment, net

 

$

15,108,469

 

$

15,797,007

 

 

 



 



 


 

 

 

During the three months ended September 30, 2010 and 2009, depreciation expense, including depreciation on assets classified as capital leases, was $562,671 and $423,531, respectively. During the nine months ended September 30, 2010 and 2009, depreciation expense, including depreciation on assets classified as capital leases, was $1,737,101 and $1,258,579, respectively.

 

 

(7)

Line of Credit

 

 

 

On March 18, 2009, the Company closed on an asset-based line of credit of up to $3.0 million, secured by accounts receivable and inventories (the “revolving line of credit”). The revolving line of credit bears interest, floating at the Wall Street Journal Prime Rate plus 4.5 percent, and is subject to certain financial covenants, including minimum cash position and EBITDA, measured on a monthly and quarterly basis, respectively, which the Company was in compliance with or has obtained a waiver of compliance as of September 30, 2010. The maximum amount of the line of credit was increased to $3.5 million on September 30, 2009 in connection with a modification of terms used to calculate the available borrowing amount and a modification of the covenants. The revolving line of credit matured on May 1, 2010. On April 26, 2010, the Company entered into a second amendment to extend the maturity date to July 1, 2010. On June 25, 2010, the Company entered into a third amendment to extend the maturity date to June 25, 2011 under substantially the same terms. On August 9, 2010, the Company entered into a fourth amendment to modify the terms of the EBITDA covenant. In connection with the revolving line of credit, the Company issued 252,454 warrants to purchase common stock of the Company. The exercise price of the warrants of $0.59 is equal to the weighted average price for the 30 trading days ending on the trading day immediately before

10



 

 

 

delivery. The Company values the warrants using the Black-Scholes option-pricing model and amortizes to expense over the life of the loan. Cash receipts from customers are deposited into a bank account that is subject to an account control agreement, wherein the funds are held for collection – generally one-to-two days – before being applied to balances outstanding under the revolving line of credit. Once the funds are applied to balances outstanding, additional borrowing capacity is created, and funds can be immediately re-borrowed, subject to the other terms of the revolving line of credit agreement. The maximum availability under the line of credit on September 30, 2010 was $3.5 million of which there were short-term borrowings of $1.9 million.


 

 

(8)

Long-Term Debt and Capital Lease Obligations

 

 

 

Long-term debt consists of the following:


 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

6.75 - 7.10% Cleveland County Industrial Revenue Bonds secured by real property final payment due December 1, 2024

 

$

3,645,000

 

$

3,645,000

 

4.25% Real estate loan secured by real property final payments due August 1, 2028

 

 

3,019,894

 

 

3,093,666

 

6.00% Real estate loans secured by real property final payments due June 22, 2015

 

 

166,398

 

 

178,253

 

5.25% Equipment loan secured by manufacturing equipment final payment due March 3, 2012

 

 

647,946

 

 

978,478

 

Various equipment and real estate loans with interest rates of 9.56% and due dates from 2011-2021

 

 

138,460

 

 

186,844

 

 

 



 



 

 

 

 

 

 

 

 

 

Total long-term debt

 

 

7,617,698

 

 

8,082,241

 

Less current portion

 

 

1,011,433

 

 

1,138,602

 

 

 



 



 

Net long-term debt

 

$

6,606,265

 

$

6,943,639

 

 

 



 



 


 

 

 

The Industrial Development Revenue Bonds issued by Cleveland County Industrial Authority contain certain financial covenants as follows:

 

 

 

Debt Service Coverage Ratio: The Company is required to maintain a debt service coverage ratio of 1.50x to 1.00. The ratio will be reported to the Trustee and notice given to Beneficial Owners quarterly for each of the previous four quarters. The actual debt service coverage ratio as of September 30, 2010 is 1.96x to 1.00.

 

 

 

Current Ratio: The Company is required to maintain a current ratio of 1.10x to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. The actual current ratio as of September 30, 2010 is 0.74x to 1.00.

 

 

 

Debt to Equity Ratio: The Company is required to maintain a debt to equity ratio of not more than 4.00x to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. The actual debt to equity ratio as of September 30, 2010 is 0.86x to 1.00.

 

 

 

Accounts Payable: The Company agrees that not more than 10 percent of its accounts payable shall be in excess of 75 days past due. The actual percentage as of September 30, 2010 is 0.48 percent.

 

 

 

Accounts Receivable: The Company agrees that not more than 20 percent of accounts receivable will be in excess of 90 days past due. The actual percentage as of September 30, 2010 is 0.52 percent.

 

 

 

Capital lease obligations consist of the following:

11



 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

8.95 - 9.19% Equipment leases

 

$

 

$

94,479

 

Less current portion

 

 

 

 

94,479

 

 

 



 



 

Net long-term debt

 

$

 

$

 

 

 



 



 


 

 

 

Annual Debt Service Requirements

 

 

 

The annual principal payment requirements to maturity, for long-term debt and capital lease obligations at September 30, 2010 are as follows:


 

 

 

 

 

 

Year Ending
September 30,

 

 

Long-Term Debt

 


 

 


 

2011

 

$

1,011,433

 

2012

 

 

756,043

 

2013

 

 

605,429

 

2014

 

 

643,325

 

2015

 

 

745,715

 

Thereafter

 

 

3,855,753

 

 

 



 

Principal outstanding at September 30, 2010

 

$

7,617,698

 

 

 



 


 

 

 

During the the three months ended September 30, 2010 and 2009, total interest costs were $214,305 and $306,074, respectively. During the the nine months ended September 30, 2010 and 2009, total interest costs were $690,976 and $821,954, respectively.

 

 

(9)

Accrued Liabilities

 

 

 

A summary of accrued liabilities follows:


 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

Rebates and commissions

 

$

437,447

 

$

906,481

 

Interest expense

 

 

98,639

 

 

32,884

 

Compensation

 

 

581,176

 

 

230,790

 

Workers’ compensation

 

 

232,873

 

 

76,593

 

Promotions and incentives

 

 

182,578

 

 

121,645

 

Property taxes

 

 

104,274

 

 

24,424

 

 

 



 



 

Total accrued liabilities

 

$

1,636,987

 

$

1,392,817

 

 

 



 



 


 

 

(10)

Intangible Assets

 

 

 

The Company holds an intangible asset, a customer list acquired by the Company in the amount of $154,210. The Company began amortizing the asset to expense over a period of five years beginning July 1, 2007, resulting in amortization expense of $7,712 in each of the three month periods ended on September 30, 2010 and 2009 and amortization expense of $23,137 in each of the nine month periods ended on September 30, 2010 and 2009. As of September 30, 2010, accumulated amortization expense was $100,257 and the net carrying amount was $53,953.

12



 

 

(11)

Income Taxes

 

 

 

Income tax expense (benefit) for the three months and nine months ended September 30, 2010 and 2009, consist of the following:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2010

 

2009

 

 

2010

 

2009

 

 

 

(unaudited)

 

 

(unaudited)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

 

$

 

 

$

 

$

 

State

 

 

 

 

 

 

 

 

 

 

 

 







 







 

 

 

 

 

 

 

 

 

 

 

 

 







 







Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(190,160

)

 

(148,783

)

 

 

61,273

 

 

(281,657

)

State

 

 

(22,381

)

 

(13,140

)

 

 

7,211

 

 

(28,779

)

 

 







 







 

 

 

(212,541

)

 

(161,923

)

 

 

68,484

 

 

(310,436

)

 

 







 







Total income tax expense (benefit)

 

$

(212,541

)

$

(161,923

)

 

$

68,484

 

$

(310,436

)

 

 







 







          Deferred tax assets (liabilities) are as follows:

 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(unaudited)

 

 

 

Net operating loss carryforward

 

$

3,020,196

 

$

3,306,341

 

Depreciation

 

 

(522,521

)

 

(691,761

)

Deferred gain on sale of assets

 

 

6,351

 

 

16,571

 

Inventory capitalization

 

 

113,573

 

 

95,319

 

Reserve for worker compensation expense

 

 

88,492

 

 

29,105

 

Allowance for credit losses

 

 

21,423

 

 

40,423

 

Work opportunity credit carryforward

 

 

37,132

 

 

37,132

 

Oklahoma job and investment credits

 

 

1,000,188

 

 

877,310

 

Allowance for state job and investment credits

 

 

(912,621

)

 

(789,743

)

 

 



 



 

Net deferred tax asset

 

$

2,852,213

 

$

2,920,697

 

 

 



 



 

 

 

 

 

 

 

 

 

Current portion

 

$

299,865

 

$

264,772

 

Non-current portion

 

 

2,552,348

 

 

2,655,925

 

 

 



 



 

 

 

$

2,852,213

 

$

2,920,697

 

 

 



 



 


 

 

 

In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either the generation of future taxable income during the periods in which those temporary differences become deductible or the carryback of losses to recover income taxes previously paid during the carryback period.

 

 

 

The Company is not currently subject to any specific audit by any federal, state or local taxing authority. The Company is no longer subject to income tax examinations by tax authorities before 2005. There are no tax positions previously taken which could give rise to uncertainty, and therefore there are no calculations or classifications of interest, penalties or effects on income tax rates related to such uncertainties

13



 

 

 

As of September 30, 2010, the Company has a net operating loss carryforward of $7.9 million representing a tax asset of $3.0 million which, if unused, will commence expiring in 2023 and state new jobs/investment credit carryforwards totaling $1.0 million of which the Company has elected to provide a realizability allowance of $0.9 million resulting in a net carrying amount of $0.1 million. If unused, the credits will commence expiring on December 31, 2021.

 

 

 

Actual income tax expenses differ from “expected” income tax, computed by applying the U.S. Federal corporate tax rate of 34 percent to earnings from operations before income taxes, as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2010

 

2009

 

 

2010

 

2009

 

 

 

(unaudited)

 

(unaudited)

 

 

(unaudited)

 

(unaudited)

 

Computed “expected” income taxes

 

$

(196,275

)

$

(129,188

)

 

$

27,374

 

$

(264,139

)

State income taxes, net of federal income tax

 

 

(22,860

)

 

(15,047

)

 

 

3,188

 

 

(30,764

)

Other

 

 

6,594

 

 

(17,688

)

 

 

37,922

 

 

(15,533

)

 

 







 







 

 

$

(212,541

)

$

(161,923

)

 

$

68,484

 

$

(310,436

)

 

 







 








 

 

(12)

Operating Leases

 

 

 

The Company has noncancelable long-term operating leases for certain distribution equipment with various expiration dates, one lease for refrigerated warehouse space and one lease for office equipment. The equipment leases require the Company to pay a base rate plus specific mileage amounts. Future minimum annual lease payments for these long-term leases for the next five years ending September 30,


 

 

 

 

 

 

 

(unaudited)

 

2011

 

$

948,662

 

2012

 

 

811,943

 

2013

 

 

641,777

 

2014

 

 

517,038

 

2015

 

 

517,038

 

 

 



 

 

 

$

3,436,458

 

 

 



 

          Rent expense on operating leases are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

556,052

 

 

449,294

 

 

1,505,059

 

 

1,495,539

 

14



 

 

(13)

Stock Based Compensation

 

 

 

In August 2006, the Company adopted the 2006 Equity Incentive Plan (the “Plan”) providing for potential awards of up to 1,000,000 options to purchase shares of common stock in the Company. On November 26, 2008, the Compensation Committee of the Board of Directors of the Company approved a proposal by management to issue stock options under the Plan to certain employees, directors and consultants of the Company or a Subsidiary. On March 12, 2009, 14,120 incentive stock options were issued on substantially the same terms as the incentive stock options issued on November 26, 2008. Except as noted below, options shall have a 10-year term, and shall vest at 25% per year, commencing on the first anniversary of the grant date. The grant date was November 26, 2008, and the exercise prices are equal to the closing market price on November 25, 2008 ($0.69), except for owners of 10% or more of the total shares of the Company. Exercise prices for the 10% and greater owners are 110% of the closing market price on November 25, 2008 ($0.76) and the options (i) have a term of five (5) years and (ii) vest at the rate of 25% per year. In all cases, the options shall immediately vest upon a Change in Control of the Company, as defined in the Plan. All options granted to employees are intended to qualify as Incentive Stock Options, as defined by Section 422 of the Internal Revenue Code of 1986, as amended, and the stock options granted to non-employee directors and consultants to the Company or a Subsidiary will be Nonqualified Stock Options as provided for in the Plan. The Company uses the Black-Scholes method of valuing the options and charges amounts to earnings using the straight-line method over the vesting period. The Company charged $22,483 and $22,145 against earnings during the three months ended September 30, 2010 and 2009, respectively. The Company charged $67,450 and $66,094 against earnings during the nine months ended September 30, 2010 and 2009, respectively, leaving a total of $190,398 of unrecognized expense in connection with the issuance of the stock options.

 

 

(14)

Major Customers

 

 

 

The Company has two major customers which comprise 15 percent and 10 percent of its sales. A change in either of these customer relationships could adversly affect our revenue, results of operations and cashflows.

 

 

(15)

Commitments and Contingencies

 

 

 

The Company and its subsidiaries are subject to legal proceedings and claims which arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur, the Company is not aware of any proceeding at September 30, 2010, which would have a material adverse effect on its consolidated financial position, results of operations or liquidity.

 

 

(16)

Private Placement Transaction

 

 

 

On February 24, 2010, the Company closed a private placement financing transaction, selling 951,500 Units at $2.00 per Unit, each Unit consisting of five shares of restricted Common Stock and two 5-year restricted warrants to purchase one share of Common Stock at $0.70 per share to 71 accredited investors. The total aggregate consideration of the transaction is $1,903,000, with net proceeds of $1,707,600 after underwriting discount and other fees. The Company issued 475,750 five-year warrants to purchase common stock to the placement agent with a strike price of $0.625. The fair value of these warrants is determined using the Black-Scholes option-pricing model with assumptions of 162.1 percent volatility, an expected term of 30 months, expected dividend yield of 0.0 percent and a risk free rate of 1.42 percent resulting in a fair value of $219,661. Although this additional equity strengthened the Company’s capital and liquidity position, economic conditions continue to be very challenging for most industries and many companies.

 

 

(17)

Insurance Proceeds from Weather Related Damage

 

 

 

During the second quarter of 2010, the Company’s primary manufacturing facility sustained damaged due to adverse weather. The company has received a settlement proposal and a check for $0.6 million from its insurance carrier, but had not tendered the check, as of September 30, 2010.

 

 

 

Since the property is subject to certain liens, including those of bondholders, it was necessary to obtain the consent of its Significant Bondholders (as defined) in order to utilize the insurance proceeds for repair purposes. The Company received the required bondholder consent subsequent to September 30, 2010, has tendered the check and is commencing repairs to the facility.

 

 

 

The resolution of this transaction, including the facility repairs after application of the insurance proceeds, is not expected to have a material effect on the company’s financial position or results of operations. The proposed settlement proceeds of $0.6 million have not been recorded in the accompanying consolidated financial statements.

 

 

 

On August 15, 2010, the Company’s soup and sauce manufacturing facility sustained damages due to a fire that spread from an adjacent business. Damages to the facility are covered by insurance and, accordingly, the company does not expect any significant losses, net of insurance coverage, as a result of this casualty.

 

 

(18)

Note Payable to Former Owners of Allisons Gourmet Kitchens, LP

 

 

 

The Company has a note payable to Herbert B. Grimes, its current chief executive officer in the amount of $840,747 due on July 5, 2013 with interest rate of 10 percent per annum. The Company is making weekly payments to Mr. Grimes in the amount of $1,500 and has scheduled one-time payments of $35,000 on April 8, 2011. Mr. Grimes has agreed that repayment of the note is subject to the Company’s ability to pay as measured by its liquidity position, projected cash flows and EBITDA.

15


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATONS.

Forward-looking Statements

          Certain written and oral statements set forth below or made by the Company with the approval of an authorized executive officer constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which convey the uncertainty of future events and generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to the business, expansion and marketing strategies of the Company, industry projections or forecasts, the impact on our financial statements of inflation, legal action, future debt levels, sufficiency of cash flow from operations and borrowings and statements expressing general optimism about future operating results, are forward-looking statements. Such statements are based upon our management’s current estimates, assumptions and expectations, which are based on information available at the time of the disclosure, and are subject to a number of factors and uncertainties, including, but not limited to:

 

 

 

 

our future operating results and the future value of our common stock;

 

 

 

 

our ability to obtain financing to fund our operations;

 

 

 

 

whether our assumptions turn out to be materially correct;

 

 

 

 

our ability to attain such estimates and expectations;

 

 

 

 

our ability to execute our strategy;

 

 

 

 

further material changes in market conditions in any industry, including the economic state of the food industry;

 

 

 

 

the effects of, or further material changes in, economic and political conditions in the United States of America and the markets in which we serve;

 

 

 

 

our ability to reasonably forecast prices of the commodities we purchase;

 

 

 

 

our ability to timely forecast and meet customer demand for fresh-cut salads and refrigerated prepared salads;

 

 

 

 

our ability to respond to changing consumer spending patterns,

 

 

 

 

our ability to attract and retain quality employees and control our labor costs; and

 

 

 

 

our ability to provide products that are safe for human consumption

          Any of the foregoing factors and uncertainties, as well as others, could cause actual results to differ materially from those described herein. We undertake no obligation to affirm, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with the unaudited consolidated financial statements of the Company and the related notes thereto appearing elsewhere in this report.

16


General

          We are an integrated processor and distributor of value-added, refrigerated foods. We are uniquely able to distribute fresh-cut produce items along with a full array of value-added refrigerated prepared food multiple times per week. We sell to both food service and retail sectors. Our products consist of fresh-cut vegetables, fresh-cut fruits, salad kits, prepared salads, dips, spreads, soups, sauces and side dishes.

Results of Operations

Comparison of Three Months Ended September 30, 2010 and 2009

We recorded a net loss of $365,000 or $0.04 per share in the third quarter of 2010 compared to a loss of $218,000 or $0.05 per share in the third quarter of 2009.

Net sales. Net sales decreased $0.8 million or 3.4 percent to $23.3 million in the third quarter of 2010 from $24.1 million in the same period of 2009 due primarily to our strategic move away from commodity, low margin product lines.

Gross profit. Our gross profit decreased to $1.8 million or 7.6 percent of net sales from $2.0 million or 8.2 percent of net sales in the same quarter of 2009 due to higher worker’s compensation costs resulting from increased claims in the current year, increases in our maintenance and operational supply costs, increases in our raw material costs resulting from higher inbound freight costs and lower production yields and higher depreciation expense primarily related to the depreciation of our enterprise resource planning system. We experienced favorable cost reductions in our production labor costs as a result of management’s focus on obtaining customer orders in advance to maximize the efficiency of our product runs and reduced outbound freight costs resulting from consolidation of our delivery routes.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased $79,000 in the third quarter of 2010, to $2.1 million from $2.0 million in the third quarter of 2009, primarily due to personnel additions to our sales and marketing staff.

Interest expense decreased to $214,000 in the third quarter of 2010 from $306,000 in the third quarter of 2009 due to fully amortizing the revolving line of credit loan origination costs accounted for as interest expense in the first quarter of 2010. Loan origination costs related to the revolving line of credit are amortized as interest expense ratably over the life of the loan, which expired May 1, 2010. The line of credit was renewed under similar terms for nominal fees.

Income tax expense (benefit). We recognized an income tax benefit of $213,000 in the third quarter of 2010 compared to a benefit of $162,000 in the same period of 2009. The primary cause of income tax benefits is the creation of net operating loss carryforwards, amounts which will be used to offset income tax expense in future taxable periods.

Comparison of Nine Months Ended September 30, 2010 and 2009

We recorded net income of $12,000 which rounds to $0.00 per share in the nine-month period ended on September 30, 2010, compared to a net loss of $466,000 or $0.10 per share in the comparable nine-month period September 30, 2009.

Net sales. Net sales decreased $1.3 million or 3.6 percent to $71.2 million in the nine months ended September 30, 2010 compared to $73.9 million the comparable nine-month period ended September 30, 2009 due primarily to the loss of certain foodservice customers and our strategic move away from commodity, low margin product lines.

Gross profit. Our gross profit increased to $7.3 million or 10.2 percent of net sales from $6.6 million or 8.9 percent of net sales in the comparable period of 2009. We experienced favorable cost reductions in our production labor costs as a result of management’s focus on obtaining customer orders in advance to maximize the efficiency of our product runs and reduced outbound freight costs resulting from consolidation of our delivery routes. We experienced higher worker’s compensation costs resulting from increased claims in the current year and increased maintenance and operational supply costs.

Selling, general and administrative expenses. Our selling, general and administrative expenses remained approximately the same in total expenditures at $6.5 million in both nine-month periods ending on September 30, 2010 and 2009.

Other income and expense. Other income and expense resulted in a net expense of $661,000 in the nine-month period ended on September 30, 2010 compared to a net expense of $807,000 in the same period ended September 30, 2009. Gain on sale of assets increased in the nine months ended September 30, 2010 to $30,000 from $15,000 in the same period ended September 30, 2009 due to the disposal of certain transportation equipment.

17


Interest expense decreased to $691,000 in the nine-month period ended September 30, 2010 from $822,000 in the same period ended September 30, 2009 due to fully amortizing the revolving line of credit loan origination costs accounted for as interest expense in the first quarter of 2010. Loan origination costs related to the revolving line of credit are amortized as interest expense ratably over the life of the loan, which expired May 1, 2010. The line of credit was renewed under similar terms for nominal fees.

Income tax expense (benefit). We recognized an income tax expense of $68,000 in the nine-month period ended September 30, 2010 compared to an income tax benefit of $310,000 in the same period ended September 30, 2009 primarily due to utilization of net operating loss carry-forwards, which consists of applying previous operating losses for tax purposes against future tax liabilities and resulting in tax expense for book purposes and calculation of net income. The primary cause of the income tax benefit in the nine-month period ended September 30, 2009 is due to the creation of net operating loss carry-forward tax assets.

Liquidity and Capital Resources

          The Company experienced mediocre operating results during certain periods in the last two years, and encountered adverse conditions in the commodities markets and the capital markets, which has both affected operating results and cash flow, and has limited the Company’s access to capital.

          As a result, the Company’s liquidity management has required heightened oversight to satisfy all constituencies. Management has taken steps to strengthen the Company’s capital resources and liquidity by, among other things, (a) the addition of $1.7 million in new equity capital during the first quarter of 2010, (b) decelerating previously-planned expansions into new markets, and (c) deferring some capital investments in production equipment and planned additions to existing facilities.

          Management strives to continuously strengthen the financial performance and resulting liquidity of the Company through detailed evaluations of, among other things, (a) individual customer profitability, (b) product line profitability, (c) efficiency of manufacturing operations, (d) efficiency of transportation and delivery systems, (e) manufacturing overhead expenses and (f) general and administrative expenses.

          During the first nine-months of 2010, the Company increased its working capital by $2.8 million, raised $1.7 million in net proceeds from new equity, decreased its outstanding accounts payable by $2.1 million, decreased short-term borrowings on its revolving line of credit by $0.4 million, and paid off long-term debt of $0.6 million.

          On February 24, 2010, the Company closed a private placement financing transaction, selling 951,500 Units at $2.00 per Unit, each Unit consisting of five shares of restricted Common Stock and two 5-year restricted warrants to purchase one share of Common Stock at $0.70 per share to 71 accredited investors. The total aggregate consideration of the transaction is $1,903,000, with net proceeds of $1,707,600 after underwriting discount and other fees. The Company issued 475,750 five-year warrants to purchase common stock to the placement agent with a strike price of $0.625. The fair value of these warrants is determined using the Black-Scholes option-pricing model with assumptions of 162.1 percent volatility, an expected term of 30 months, expected dividend yield of 0.0 percent and a risk free rate of 1.42 percent resulting in a fair value of $219,661.

          There can be no assurance that actions taken will be sufficient to enable management to mitigate the effects of continuing fragile economic conditions, and other external market conditions, which are beyond the control of management. A further worsening of the economy in the United States of America could materially adversely affect the Company’s business, including its results of operations, financial condition and prospects.

          The Company’s line of credit contains financial covenants for minimum balance of cash and EBITDA (earnings before interest, tax, depreciation and amortization), measured on a monthly and quarterly basis, respectively. The Company is considered to be in covenant default, when its actual results are less than the amounts in the forecast previously provided to the lender. A default was experienced with the results of the three-month period ended September 30, 2009 and again with the results of the three-month period ended March 31, 2010. Both occasions of default were related to the minimum EBITDA covenant, and were cured with a waiver, followed by an amendment to the loan agreement to reset the covenant requirements. The terms of the waivers and amendments required a nominal processing fee paid to the bank. The Company experienced another default with the results of the three-month period ended September 30, 2010 related to the minimum cash requirement. This default was cured with a waiver. Non-compliance with these covenants in the future may result in the inability to obtain a waiver and could cause the lender to require the outstanding balance of the line of credit to become due and payable, provided the Company is unable to cure the covenant default within a reasonable period, which shall not exceed 30 days.

          The Company’s long-term debt includes industrial development revenue bonds issued by Cleveland County Industrial Authority, which contain the following financial covenants:

          Debt Service Coverage Ratio: The Company is required to maintain a debt service coverage ratio of 1.50x to 1.00. The ratio will be reported to the Trustee and notice given to Beneficial Owners quarterly for each of the previous four quarters. The actual debt service coverage ratio as of September 30, 2010 is 1.96x to 1.00.
          Current Ratio: The Company is required to maintain a current ratio of 1.10x to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. The actual current ratio as of September 30, 2010 is 0.74x to 1.00.

18


          Debt to Equity Ratio: The Company is required to maintain a debt to equity ratio of not more than 4.00x to 1.00 calculated as of the last day of each calendar quarter beginning after January 1, 2006. The actual debt to equity ratio as of September 30, 2010 is 0.86x to 1.00.
          Accounts Payable: The Company agrees that not more than 10 percent of the Company’s accounts payable shall be in excess of 75 days past due. The actual percentage as of September 30, 2010 is 0.48 percent.
          Accounts Receivable: The Company agrees that not more than 20 percent of the Company’s accounts receivable will be in excess of 90 days past due. The actual percentage as of September 30, 2010 is less than 0.52 percent.

          The Company has been in non-compliance with at least one of the financial covenants listed above since 2005 and as a result, has paid an increased interest rate of 1 percent, and has employed a consultant. Non-compliance with the covenants is not an event of default as defined by the bond indenture, therefore does not provide for the right of the bondholders or trustee to foreclose or require acceleration of payments.

Critical Accounting Policies

          The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and our estimates, assumptions and judgments routinely require adjustment. The amounts of our assumptions regarding assets and liabilities reported in our consolidated balance sheets and the amounts of revenues and expenses reported for each of our fiscal periods are affected by the critical estimates and assumptions which are used for, but not limited to, the accounting for inventory, customer rebates, allowance for credit losses, impairment of long-lived assets, intangible assets, income taxes and stock-based compensation. Actual results could differ from these estimates and such differences could be material.

Inventory. Inventory purchases and purchase commitments are based upon forecasts of demand. Our inventory is stated at the lower of average cost (which approximates first-in, first-out) or market. Inventory turns rapidly due to the nature of our fresh products and, accordingly, we do not generally experience material inventory valuation issues. However, in the instance where we may believe that demand no longer allows us to sell certain inventory above cost or at all, then we revalue that particular inventory to market or charge-off excess inventory levels. If customer demand subsequently differs from our forecasts, requirements for inventory revaluations and charge-offs could differ from our estimates. We have not historically experienced any material inventory revaluations or charge-offs and manage inventory levels of both perishable and non-perishable supplies to minimize the effects of any revaluations.

Customer Rebates. Estimates and reserves for rebates are based on specific rebate programs, expected usage and historical experience. Actual results could differ from these estimates. With respect to some programs, we make a provision for rebates based on anticipated purchase volume. Greater than anticipated volume under a program would result in an additional charge to earnings. We have not historically experienced any material charges to earnings under our rebate programs; however, we could experience such charges in the future.

Allowance for Credit Losses. The allowance for credit losses is based on various factors including among other things, (a) our assessment of the collectability of specific customer accounts, (b) our macro assessment of political and economic risks, (c) the overall aging of our accounts receivable portfolio, and (d) the effects each of these and other factors have on the consolidated portfolio. If there is a change in a customer’s creditworthiness or actual defaults differ from our historical experience, our estimates of recoverability of amounts due us will be affected. We continually monitor customer accounts for indications of a customer’s inability to pay. Our recent losses on charged-off accounts have not been material.

Long-lived Assets. Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its ultimate disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time. We have not experienced any write downs due to impairment for equipment in use. The depreciation lives of these assets are short (generally 5 to 7 years), resulting in relatively low net book values. Equipment not in use is depreciated in full or held for sale at its estimated recovery value.

Intangible Assets. We evaluate the recoverability of intangible assets annually or more frequently if impairment indicators arise. Under FASB ASC 350, intangible assets are evaluated whenever events or changes in circumstances indicate that the carrying value exceeds its fair value, which is determined based upon the estimated undiscounted future cash flows expected to result from the use of the asset, including disposition. Cash flow estimates used in evaluating for impairment represent management’s best estimates using appropriate assumptions and projections at the time. We believe that accounting for intangible assets is a critical accounting policy due to the requirement to estimate the value in accordance with FASB ASC 350. Our intangible assets consist primarily of customer relationship intangibles of purchased entities.

19


Income taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of the net deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either (a) the generation of future taxable income during the periods in which those temporary differences become deductible, or (b) the carryback of losses to recover income taxes previously paid during the carryback period. As of September 30, 2010, we have net operating loss carryforwards of $7.9 million, representing a deferred tax asset of $3.0 million which, if unused, will commence expiring in 2023 and state new jobs/investment credit carryforwards totaling $1.0 million of which we have elected to provide a realizability allowance of $0.9 million, resulting in a net carrying amount of $0.1 million. If unused, the credits will commence expiring on December 31, 2021.

Stock-Based Compensation. We measure stock based compensation costs at the grant date based on the fair value of the award and recognize as expense ratably over the requisite service period, net of estimated forfeitures. We use the Black-Scholes option-pricing model to determine the fair-value of stock option awards. We have awarded stock options to employees, executive officers, directors and certain consultants.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          As a smaller reporting company we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures

          The Company maintains disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.

          Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of September 30, 2010. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2010.

(b) Changes in internal control over financial reporting

          There were no changes in our internal controls over financial reporting that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

20


          Effective in 2010, we began utilizing a new Enterprise Resource Planning (“ERP”) system, which we believe has further strengthened our internal accounting and operating controls. We continue to evaluate the effects the new ERP system has on our internal controls and make adjustments as necessary.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

          We are not a party to any material legal proceedings. We could become involved in litigation from time to time relating to claims arising out of our ordinary course of business.

Item 1A. Risk Factors

          Our Form 10-K filed with the U.S. Securities and Exchange Commission on March 19, 2010, includes a detailed discussion of our risk factors. Since that time, the following risk factor has been recognized:

Healthcare reform legislation could have an impact on our business

          The recently enacted Patient Protection and Affordable Care Act (the “Patient Act”) as well as other healthcare reform legislation being considered by Congress and state legislatures may have an impact on our business. We are currently evaluating the effects of the Patient Act on our business, and expect that we will experience, among other things, having the federal government assume a greater role in the health care system, expanding healthcare coverage in the United States, mandating basic healthcare benefits, imposing regulations on businesses who provide or do not provide healthcare insurance to their employees and increasing tax rates on businesses. We believe that this legislation will most likely increase our employee healthcare-related costs and tax rates, which could have an adverse impact on our results of operations and financial condition.

21


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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed herewith or incorporated by reference as indicated as required by Item 601 of Regulation S-K.

 

 

Exhibit No.

Description

 

 

10.1

Fourth Amendment to Loan and Security Agreement Dated August 9, 2010.

 

 

31.1

Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

 

 

31.2

Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

22


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 15, 2010

 

 

 

 

Vaughan Foods, Inc.

 

 

 

 

By:

/s/ Herbert B. Grimes

 

 


 

 

Herbert B. Grimes

 

 

Chairman of the Board of Directors and
Chief Executive Officer

 

 

 

 

 

(Principal Executive Officer)

 

 

 

Dated: November 15, 2010

 

 

 

Vaughan Foods, Inc.

 

 

 

 

By:

/s/ Gene P. Jones

 

 


 

 

Gene P. Jones

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

23


EXHIBIT INDEX

 

 

 

Exhibit No.

 

Description


 


 

 

 

10.1

 

Fourth Amendment to Loan and Security Agreement Dated August 9, 2010.

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

24