-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGnmS744z8/Z4gdhR+f24yVOPsfOS2JzHH4nuIGHr3VdsQnOHUxsYo1g4SlUi/qY YDVCYm2dFRKY3oFUhwLu4Q== 0001019687-09-001731.txt : 20090514 0001019687-09-001731.hdr.sgml : 20090514 20090514124921 ACCESSION NUMBER: 0001019687-09-001731 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090514 DATE AS OF CHANGE: 20090514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMOKY MARKET FOODS INC CENTRAL INDEX KEY: 0001370544 STANDARD INDUSTRIAL CLASSIFICATION: SAUSAGE, OTHER PREPARED MEAT PRODUCTS [2013] IRS NUMBER: 204748589 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-52158 FILM NUMBER: 09825379 BUSINESS ADDRESS: STREET 1: 804 ESTATES DR. #100 CITY: APTOS STATE: CA ZIP: 95003 BUSINESS PHONE: 866-851-7787 MAIL ADDRESS: STREET 1: 804 ESTATES DR. #100 CITY: APTOS STATE: CA ZIP: 95003 10-K 1 smoky_10k-123108.txt 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, 2008 [ ] 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 (IRS Employer of incorporation or organization) Identification No.) 804 ESTATES DR., SUITE 100 APTOS, CALIFORNIA 95003 (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 [ ] NO [X] 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 [X] Smaller reporting company (Do not check if a 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 14,909,944 shares held by nonaffiliates of the registrant on June 30, 2008, based upon the average bid and asked price of the common shares on the OTC Bulletin Board of $0.07 per share on June 30, 2008, was approximately $1,043,696. 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, 2009, the registrant had 70,850,820 common shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ TABLE OF CONTENTS PART I..................................................................... 1 Item 1. Business.......................................................... 1 Item 1A. Risk Factors...................................................... 8 Item 1B. Unresolved Staff Comments......................................... 17 Item 2. Properties........................................................ 17 Item 3. Legal Proceedings................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders............... 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 Revenue Recognition........................................................ 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 25 Item 8. Financial Statements.............................................. 25 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 25 Item 9A(T). Controls and Procedures........................................ 25 Item 9B. Other Information................................................. 26 PART III................................................................... 27 Item 10. Directors, Executive Officers and Corporate Governance............ 27 Item 11. Executive Compensation............................................ 28 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................................... 31 Item 13. Certain Relationships and Related Transactions, and Director Independence...................................................... 32 Item 14. Principal Accountant Fees and Services............................ 33 Item 15. Exhibits and Financial Statement Schedules........................ 34 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 804 Estates Dr., Suite 100, Aptos, CA 95003. Our telephone number is (866) 851-7787. We are a development stage company that is in the process of securing capital to start revenue-producing operations. We use USDA-approved, custom-engineered, proprietary wood-burning oven technology to produce a complete line of Smoke-BakedTM meat and fish. We plan to sell smoked foods through the development of a national chain of stand-alone Smoky Market restaurant-stores and numerous self-contained kiosks that operate inside qualified high-traffic venues such as shopping malls, sports arenas, college campuses, corporate dining areas and airports. We plan to produce principal menu items in bulk at a centralized location. We expect to be able to deliver food of consistent size, taste and quality without the need to construct expensive on-site ovens or to train skilled cooks to handle raw product at numerous locations. We believe this will permit our development of a national chain operation while keeping our in-store costs down. Assuming that we are successful in expanding our retail operations into all regions of the U.S., we plan to begin directly marketing and selling our smoke-baked products on the internet. In addition to offering customers at our Smoky Market restaurant-stores access to on-line ordering for gifts and event catering, we plan to create marketing operations with selected e-commerce affiliates that are large internet retail companies with substantial numbers of customer visits and certain consumer goods organizations such as the RV industry. 1 We have developed the core smoked-meat recipes for our proposed business, entered into an agreement with a commercial meat processor at which we have placed a proprietary oven capable of producing approximately 100,000 pounds of smoked meat per month, tested the re-heating process for our menu items and completed concept designs for our proposed restaurant-stores and kiosks. We do not yet have any restaurant-stores or kiosks in service, but we successfully tested the applications for preparation of our food products in a restaurant located in Los Gatos, California for three months from October through December 2006. We have acquired the assets and leasehold rights of this Los Gatos restaurant and are remodeling the site into a prototype Smoky Market restaurant-store with expected completion in the summer of 2009. Beginning in 2010, and assuming the availability of capital, we plan to open additional stores in the Western region toward our goal of opening three restaurant-stores in each of our five regional operating territories during 2010. We also have built our prototype kiosk for installation into a mall located in Southern California, which is expected to be installed during the summer of 2009. We expect this plan for development will enable us to maximize the operating and financial efficiencies of our production capacity. MARKET OPPORTUNITY Our goal is to build a national chain of Smoky Market restaurant-stores and kiosks featuring a selection of meat and fish entrees and one-dish meal recipes that are prepared without the use of sodium, sugar, and chemical preservatives by our proprietary Smoke-Baking technique. Unlike other popular restaurant categories, the smoked-food/barbecue segment in which we compete does not include a widely recognized national chain. Where foodservice categories like pizza, subs, chicken, Mexican, Chinese, and burgers have total chain brand units numbering into the thousands, the largest barbecue restaurant chain in the country, Sonny's Barbecue, has approximately 200 stores. We believe that there is no large national chain in the smoked-food/barbecue restaurant segment primarily for two reasons: first, barbecue remains highly regionalized with respective regions having demographic preferences for barbecue flavor, and second, quality consistency within chain brands is a serious obstacle. We believe that we can succeed where others have not because of our plans to address these two issues. We plan to address the regionalization of tastes by creating different recipes, with different sauces and flavors, for each of five regions within the United States. As we expand, each region will be headed by a regional officer charged with customizing the recipes, marketing program and other aspects of our business in order to meet the tastes of that region. We plan to address issues of quality and consistency by having all of our meat prepared in our smoker-over system at a centralized location and also centralizing, or regionalizing, the preparation of side dishes and other offerings. Food handlers at local restaurant-stores and kiosks will merely need to unpackage and heat most items on the menu, resulting in a consistently healthful and tasty offering throughout the country. FOOD PRODUCTION & DISTRIBUTION PROPRIETARY SMOKING TECHNOLOGY The wood-burning smoker-oven system used to produce Smoky Market brand foods Smoke-BakesTM meat 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 smoked taste. 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. 2 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. Pursuant to the processing agreement, Specialty Foods has agreed to process the smoked meats for our business in return for a processing fee equal to its actual costs of production, including allocable overhead, plus a fixed fee designed to give Specialty Foods a net profit of not less than $35,000 per month from the operation of two 10-hour shifts of processing for us. The agreement is based upon a single oven capable of producing at least 100,000 pounds of smoked meat per month or more depending upon the production item mix. The term of the agreement is ten years, with an option to extend the agreement for three additional 10-year periods (subject to early termination in the event of default). As we expand and need to add additional smoker ovens, we will be required to expand our relationship with Specialty Foods (or other processors) on such terms as are mutually agreed upon by the parties. Considering the size of Specialty Food's surrounding 15-acre area, we believe that it would be in our best interests to enter into agreements with Specialty Foods with respect to the expansion of production at this location. If this expansion occurs, we expect to include the construction of a kosher facility. 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 LandLock Sea Foods, a supplier of fish products, that we believe will enable lower market prices as we grow and achieve economies-of-scale. 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. 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. 3 SMOKED FOOD PRODUCTS Below is our line of smoked foods that we expect to produce under the Smoky Market brand. We expect that certain of these items will be featured on the menus at Smoky Market restaurant-stores, with a selection of these items to be retail packaged and featured for take-home consumption. Our line of wood-smoked foods presently includes the follow: ENTREE ITEMS (Individual serving portions that are ready to "heat'n serve") o Pork Loin Baby Back Ribs o Pork Country-Style Ribs o Pork Loin Chop o Carved Boneless Chicken Breast o Jumbo Chicken Thigh o Cornish Game Hen o Turkey Breast, Thigh & Leg o Rack Of Lamb & Lamb Chops o Duck o 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) o Beef Sirloin Tri-Tip o Beef Brisket o Corned Beef Brisket o Pork Loin Roast o Pork Shoulder o Boneless Pork Leg o Carved Chicken Strips o Turkey Breast SMOKED FINGER FOODS (Delicate smoky treats for snacking fun & entertainment) o Beef & Pork Meatballs o Pork Country Rib Strips o Pork Ribletts o Carved Chicken Strips o Chicken Drummies (Regular & Teriyaki) o Lamb Ribletts Teriyaki SIDE ORDER FOODS o Hickory Smoke-Baked(TM) Beans o Sweet Butter-Creamed Corn o Creamy-Garlic Coleslaw Dressing & Veggie Dip o Southern-Style Barbecue Dipping Sauce o Cornbread Muffins 4 We anticipate that Smoky Market restaurant-stores and kiosks will feature a selection of the items listed above and include sandwiches, quesadillas, quiches and recipe dishes. Items will be available for menu foodservice and for packaged sales. In time, as our brand concept develops, we expect that the complete line of our smoked foods will be available for purchase from our internet website at www.smokymarket.com. MARKETING & OPERATIONS SMOKY MARKET RESTAURANT-STORES The Smoky Market "restaurant-store" concept falls under the category of fast-casual, a relatively new and fast-growing segment in the restaurant industry. Our theme concept is a rustic, old-style - but sophisticated - motif of warm, light-colored wood with an inviting decor and designed to accommodate a full-service restaurant operation, seating 40 to 90 customers. We also plan to have each Smoky Market restaurant-store include an area of refrigerated and frozen display cases that feature our packaged foods, including entrees, finger-foods, and recipe dish items for take-home sales. The larger Smoky Market restaurant-stores will also feature an internet ordering station for spontaneous on-line ordering by customers of our foods for gifts. The distinguishing feature and key operating advantage of our Smoky Market restaurant-store concept is the absence of handling or cooking of raw products on site; our entire menu will be fully cooked and portion-packaged for quick and easy heating. We believe this operating aspect to be unique in the restaurant industry and will provide an assurance of quality consistency with substantially decreased reliance upon the need for heavily trained and skilled cooks. The principal heating equipment for all menu items to be served hot will be special ovens that incorporate functional elements of infra-red heating, impinged air velocity and microwave. These ovens require no exhaust hood system in 48 out of 50 states, which substantially reduces typical investment costs, and the speed of their heating application will enable Smoky Market entrees to be served as if the restaurant-market were a quick-service business. We expect the entire preparation process for a Smoky Market meal will require only minutes to heat for serving. FRANSHIP(TM) PROGRAM The franchise industry is successful largely because of the dedicated managers and assistant managers who work much longer than typical 40-hour weeks, at fixed salary pay scales that yield in most cases an amount of net pay effectively not much greater than the hourly pay of general employees. The franchise industry is also successful largely because many franchisees are full-time owner-operators of their franchise. We plan to create a relationship with our local managers we call "Franship." At this time, the structure and application for our Franship program are still being formalized and research is being conducted relative to certain legal definitions and federal/state filing requirements. However, the basic opportunity being proposed for a Franship candidate is a unique blend of the concepts of franchising and employment. We would retain majority ownership and control of each restaurant-store and kiosk and the Franship manager would, in most cases, be an employee of our company or a joint venture. The Franship candidate would make a cash investment for the right to share in 10% of his or her respective Smoky Market concept (either a restaurant-store or kiosk). This profit-sharing right will become vested and transferable as the Franship income right appreciates in value. We expect that this will provide substantial motivation for the local manager to maximize profitability but permit us to retain ownership and ultimate control. 5 DISTRIBUTION Processed smoked foods will be bulk-packaged at our processing facility and shipped initially to smaller localized food distributors that will service our Smoky Market restaurant-stores within respective market areas; as we grow nationally, we may also consider placing our distribution needs with a large national foodservice distributor. In northern California, we have an informal commitment from InterState Refrigerated Distributing Company for fee-based order drops and if this program is successful, we intend to offer this distribution plan to local distributors in markets throughout all regional territories. DESIGN, MARKETING, HUMAN RESOURCES AND OPERATIONS ASSISTANCE As we execute our business plan, we intend to engage the services of Tartan Marketing, a well-established advertising and marketing agency based in Minneapolis, MN that will complete the designs of our restaurant-store and kiosk concepts, develop programs for recruitment of key management employees and Franship candidates, coordinate our program for site acquisitions on a national scale, assist in the formation and implementation of operating systems, and create our media and public relations campaign for brand development in each region to be penetrated. GENERAL INFORMATION INTELLECTUAL PROPERTY We do not own any intellectual property that is material to our business. We license the recipes for substantially all of our products, certain trademarks and tradenames, including Smoky Market(R) and Smoke-Baked,(TM) and design features related to the ovens used for smoking our products from Smoky Systems, LLC, pursuant to an exclusive license agreement. Under the license agreement, we issued Smoky Systems 40,000,000 shares of our common stock as consideration for the licensed rights. The license agreement is for a fixed term of 10 years, with renewal options for four additional 10-year terms, but is terminable 90 days following breach or in connection with a bankruptcy or similar event. In addition, our license to such rights ceases to be exclusive if our annual revenues from licensed products does not equal or exceed $30 million by 2011. Neither we nor Smoky Systems have 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. 6 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 Generally, most smoked-food or barbeque restaurants use burning wood in a barbeque pit or smoker to cook their meat, which yields a natural, penetrating smoky flavor to varying degrees, depending on smoking technique and wood quality. The moisture content of the smoked meats will also vary from concept to concept, and even from unit to unit within the same concept brand, depending on a number of variables. For these reasons, the vast majority of smoked-food or restaurants have remained single to small multi-unit concepts, and the largest barbecue chain in the country, Sonny's Barbeque, has only approximately 200 stores. However, more barbeque or smoked-food concepts are opening, and we believe that existing concepts are planning aggressive expansions as they acquire improved smoking equipment and devise improved foodservice systems. We plan to compete principally in the retail packaged food industry and in the fast-casual and quick-service segment of the restaurant industry. In the retail packaged food segment, we expect that our principal competitors will include well known retails chains such as Costco Club Stores, specialty foods stores such as Barney Greengrass or Dean & DeLuca, commercial smokehouses, and numerous other packaged food enterprises. We expect to compete based upon quality, flavor, healthfulness, variety and price. As a new entrant into the market, we are uncertain how we will compare to our competitors on most of those factors, but expect that our additive-free naturally-smoked foods will compete in terms of quality, flavor and healthfulness. As a new market entrant, our variety is limited, and we expect that our price will be below that of specialty stores and internet sellers, but above that of major retail chains. The fast-casual segment of the restaurant industry is characterized by a large number of participants, both individual stores and large chains, and is extremely competitive. Because of the localized nature of the business, we will be competing with different restaurants in each geographic market. We expect to compete based upon quality of food and service, ambience, flavor, variety and price. As a new entrant into the market, we are uncertain how we will compare to our competitors on most of those factors. Many of our existing and potential competitors have longer operating histories, a large existing customer base, greater financial strength, and more recognized brands than we do. These competitors may be able to attract and retain customers more easily because of their brand names and their larger marketing budgets and sales forces. Our larger competitors can also devote substantially more resources to product development and may adopt more aggressive pricing policies. 7 RESEARCH AND DEVELOPMENT We are recently formed and 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. EMPLOYEES We currently have a total of two paid full-time employees and one paid full-time contractor, which includes two officers (Edward C. Feintech, our CEO and Toni L. Adams, our Secretary) and a quality-control operator of our smoker-oven system. We also have two executives, our Chief Financial Officer and our Chief Information Officer, providing services on a part-time basis as consultants. 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 those responsible for overseeing the process of procuring real estate (fee simple or lease) and arranging for the construction or placements of our Smoky Market outlets, and the hiring of initial management. This number excludes management and staffing at the Smoky Market restaurant-markets and kiosks. 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. OUR PREDECESSOR AND AFFILIATE, SMOKY SYSTEMS WAS UNABLE TO GENERATE SIGNIFICANT REVENUES OR PROFITS FROM ITS EFFORTS TO FOLLOW A BUSINESS PLAN SIMILAR TO OURS. Smoky Systems, LLC was established in 2000 and attempted to create a national smoked good business similar to that which we are attempting to establish. Smoky Systems was unable to generate significant revenues or profits, principally because it was not able to secure financing as a private company to formally launch operations. We have licensed our recipes, trademarks, basic modular restaurant design, and other intellectual property for our smoked-foods processing, marketing, branding and operations from Smoky Systems and are attempting to successfully implement a similar business plan under the same management team. We are subject to the same risks, including risks related to the raising of capital and the attractiveness of our business plan, as Smoky Systems, and may similarly be unable to generate significant revenues or profits. 8 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 experience make it difficult to evaluate our ability to generate revenues, manage growth, obtain necessary capital, manage costs, create profits, and generate cash from operations. Specifically, our ability to do the following may be impaired: o implement our business plan (which may be based upon faulty assumptions and expectations arising from our limited experience); o obtain capital necessary to continue operations and implement our business plan; o comply with SEC rules and regulations and manage market expectations; o differentiate ourselves from our competitors; or o establish a significant retail and restaurant customer base. If we fail to successfully manage these risks, we may never expand our business or become profitable and our business may fail. WE WILL BE UNABLE TO IMPLEMENT OUR BUSINESS PLAN IF WE CANNOT RAISE SUFFICIENT CAPITAL AND MAY BE REQUIRED TO PAY A HIGH PRICE FOR CAPITAL. As of December 31, 2008, we had $282 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: o the availability and cost of capital generally; o our financial results; o the experience and reputation of our management team; o market interest, or lack of interest, in our industry and business plan; o the trading volume of, and volatility in, the market for our common stock; o our ongoing success, or failure, in executing our business plan; o the amount of our capital needs; and o 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 May 7, 2009. This doubt is based on the fact that we have had losses since inception, have a working capital deficit and have had no material revenue generating operations since inception. 9 IF WE FAIL TO DEVELOP OUR BRAND RECOGNITION, OUR ABILITY TO COMPETE IN A HIGHLY FUNGIBLE RESTAURANT MARKET WILL BE IMPAIRED. The foodservice industry is intensely competitive with respect to the quality and value of food products, service, price, dining experience and location. We compete with major restaurant chains, some of which dominate the industry. Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food restaurants, as well as supermarkets and convenience stores. Our competitors have substantially greater brand recognition, as well as greater financial, marketing, operating and other resources than we have, which may give them competitive advantages. The fast-casual and quick-services restaurant segments are growing rapidly with numerous restaurant chains competing for quality site locations. Suitable locations for our restaurants may be difficult to locate, or we may be unable to finance the acquisition of such locations. Our competitors could also make changes to pricing or other marketing strategies which may impact us detrimentally. As our competitors expand operations, we expect competition to intensify. Such competition could prevent us from generating significant revenue, which is necessary to sustain our operations in the long term. THE PACKAGED FOOD MARKET IS COMPETITIVE, AND WE MAY BE UNABLE TO SUCCESSFULLY CAPTURE RETAIL CUSTOMERS. The market for packaged meat products, and competing packaged products, is highly competitive. We propose to sell packaged meat products over the Internet and at retail locations. We may be unable to differentiate ourselves in the marketplace and compete successfully against existing or future competitors of our business. In order to succeed, we will be required to take customers away from established smoked meat and fish brands and alternative food products sold over the Internet or at retail stores. Our retail products will be sold at higher prices than some of our competitor's products, and consumers may not differentiate the quality of our products or may not be willing to pay higher prices. If we fail to establish customers for our packaged food business, it is unlikely that we will generate significant revenue or become profitable, and in the long run our business will likely fail. WE MAY BE UNABLE TO ESTABLISH A SIGNIFICANT NUMBER OF RESTAURANT-STORES OR KIOSKS. Many factors may affect our ability to establish new restaurant-stores and kiosks, including: o identification and availability of suitable locations; o negotiation of favorable lease or purchase arrangements; o management of the costs of construction and development; o securing required governmental approvals and permits and complying with governmental regulations; o recruitment of qualified operating personnel; o labor disputes; o shortages of materials and skilled labor; o environmental concerns; and o 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. 10 WE ARE DEPENDENT UPON RECIPES AND OTHER PROPRIETARY INFORMATION LICENSED TO US BY SMOKY SYSTEMS, LLC AND MAY NOT BE ABLE TO CONTINUE OUR CURRENT OPERATIONS WITHOUT SUCH INTELLECTUAL PROPERTY. We rely on Smoky Systems, LLC to provide the recipes, trademarks, basic modular restaurant-market design, and other intellectual property for our smoked-foods processing, marketing, branding and operations. The agreement under which we license this intellectual property is effective for the term of the license agreement, which has limited terms and may be terminated early following an uncured material breach or may not be renewed upon expiration. The license agreement is for a fixed term of 10 years with renewal options for four additional 10-year terms, but is terminable 90 days following any uncured breach or in connection with a bankruptcy or similar event. In addition, our license to such rights ceases to be exclusive if our annual revenues from licensed products does not equal or exceed $30 million by 2011. A termination or nonrenewal of the license agreement, or even a loss of our exclusivity, would result in a substantial decrease in revenue, cause significant harm to our business, and possibly force us to discontinue operations. In the future, irrespective of our license with Smoky Systems, we may be unable to continue to obtain needed services or licenses for needed intellectual property on commercially reasonable terms, or at all, which would harm our ability to continue production, our cost structure and the quality of our products or services. 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 AND FISH 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 and fish required for our products are subject to constant fluctuations and frequent shortages of item availability. Adequate supplies of raw meat and fish may not always be available, and the price of raw meat and fish 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 systems break down, become contaminated or are removed from Specialty Foods' facility, we would experience an interruption in our ability to supply products to customers. This would harm our relationships with our customers and internet affiliates, and harm our revenues in the short run. Any long-term interruptions in our ability to produce smoked foods would significantly limit our ability to continue operations. WE 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, the success of each Smoky Market foodservice concept will be largely dependent upon the efforts of local management. We may be unable to locate qualified persons willing 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 local management, we may experience lower revenues and higher costs than expected. CERTAIN DIRECTORS OF OUR COMPANY ARE ALSO EXECUTIVES OF OUR AFFILIATE, SMOKY SYSTEMS, WHICH MAY LEAD TO A CONFLICT OF INTEREST. Our Chairman, President and Chief Executive Officer, Edward C. Feintech, our Chief Information Officer, Dennis Harrison, and our Chief Financial Officer, Shane Campbell, are all affiliated with our majority shareholder, Smoky Systems, LLC. Mr. Feintech is the current manager of Smoky Systems. In addition, Scott Bargfrede, an "independent" director, holds a minor interest (less than 1%) in Smoky Systems. We may be required to renegotiate our relationship with Smoky Systems, may experience disputes and litigation with Smoky Systems or otherwise have the interests of our shareholders generally be adverse to the interests of Smoky Systems. If a conflict arises, the overlap in management and conflicts may inhibit fair and equitable resolution of any issues and leave our company vulnerable to shareholders derivative suits. 12 WE EXPECT TO BE DEPENDENT ON A THIRD PARTY TO PROVIDE DESIGN AND MARKETING MATERIALS IN RELATION TO OUR RESTAURANT-MARKETS AND KIOSKS AND TO ASSIST IN DEVELOPMENT OF OUR GENERAL OPERATING AND MARKETING PLAN. We intend to engage Tartan Marketing, Inc. to assist with the design of our restaurant-stores and with the creation and execution of a formal business plan. As we roll out our business plan, we will rely upon Tartan Marketing to assist in the development and execution of our operating and marketing plans to launch and grow the Smoky Market foodservice brand on a national scale. We expect to rely upon Tartan Marketing for development of internal and external operating system control and reporting, our human resource program, senior and executive level management recruitment and expansion strategy planning and implementation. If we are unable to sustain a long-term agreement with Tartan Marketing, or if this agency fails to fulfill its obligations under specific project agreements that are signed, our ability to generate revenue will be delayed or reduced, and we will incur substantial costs in obtaining the necessary services to execute the roll out for our restaurant-stores 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 restaurant-markets. These regulations include matters relating to: o the environment; o building construction; o zoning requirements; o worker safety; o the preparation and sale of food and alcoholic beverages; and o employment. 13 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 restaurant-markets 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 restaurant-markets in the future. Various federal and state labor laws will govern our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit, and work authorization or immigration requirements. 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 restaurant-markets 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 restaurant-markets, 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 restaurant-markets. 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 in excess of 63% of our outstanding shares of common stock and are expected to continue to control a majority of our outstanding common stock following any financing transactions projected for the foreseeable future. These directors, officers 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. 14 THERE IS A PUBLIC MARKET FOR OUR STOCK, BUT IT IS THIN AND SUBJECT TO MANIPULATION. The volume of trading in our common stock is limited and can be dominated by a few individuals. The limited volume can make the price of our common stock subject to manipulation by one or more stockholders and will significantly limit the number of shares that one can purchase or sell in a short period of time. An investor may find it difficult to dispose of shares of our common stock or obtain a fair price for our common stock in the market. THE MARKET PRICE OF OUR COMMON STOCK MAY BE HARMED BY OUR NEED TO RAISE CAPITAL. We need to raise additional capital in order to roll out our business plan and expect to raise such capital through the issuance of 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: o intentional manipulation of our stock price by existing or future stockholders; o short selling of our common stock or related derivative securities; o a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares; o the interest, or lack of interest, of the market in our business sector, without regard to our financial condition or results of operations; o 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; o developments in the businesses of companies that purchase our products; or o 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. 15 WE ARE UNLIKELY TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE. We have never declared or paid dividends on our stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business. We do not anticipate paying any cash dividends in the foreseeable future, and it is unlikely that investors will derive any current income from ownership of our stock. This means that your potential for economic gain from ownership of our stock depends on appreciation of our stock price and will only be realized by a sale of the stock at a price higher than your purchase price. OUR COMMON STOCK IS A "LOW-PRICED STOCK" AND SUBJECT TO REGULATION THAT LIMITS OR RESTRICTS THE POTENTIAL MARKET FOR OUR STOCK. Shares of our common stock are "low-priced" or "penny stock," resulting in increased risks to our investors and certain requirements being imposed on some brokers who execute transactions in our common stock. In general, a low-priced stock is an equity security that: o Is priced under five dollars; o Is not traded on a national stock exchange, the Nasdaq Global Market or the Nasdaq Capital Market; o 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 o 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: o 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. o 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. o In connection with the execution of any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers the following: o bid and offer price quotes and volume information; o the broker-dealer's compensation for the trade; o the compensation received by certain salespersons for the trade; o monthly accounts statements; and o a written statement of the customer's financial situation and investment goals. 16 ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. We do not currently have fee ownership of any property. We lease a 5,000 square foot warehouse and office located in Aptos, California. The term of the lease is month-to-month, and our monthly rent under the lease is $2,800. 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. When and if financing is secured and formal operations begin, we expect to formalize our arrangements with Specialty Foods and begin paying rent. 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 for a total purchase price of $150,000. Under the terms of the lease, our monthly rent is $6,000 and increases 3.5% annually. Subject to the availability of capital, we intend to enter into leases for cold storage and warehouse fulfillment of our internet orders and for additional office space in northern California and in Georgia. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report. 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 for the periods indicated. Our common stock is quoted on the OTC Bulletin Board under the symbol SMKY. HIGH LOW FISCAL YEAR ENDED DECEMBER 31, 2008 Quarter ended December 31, 2008 $0.07 $0.03 Quarter ended September 30, 2008 $0.15 $0.04 Quarter ended June 30, 2008 $0.36 $0.02 Quarter ended March 31, 2008 $0.65 $0.16 FISCAL YEAR ENDED DECEMBER 31, 2007 Quarter ended December 31, 2007 $0.98 $0.25 Quarter ended September 30, 2007 $1.10 $0.07 Quarter ended June 30, 2007 N/A N/A Quarter ended March 31, 2007 N/A N/A 17 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. OUTSTANDING SHARES AND NUMBER OF STOCKHOLDERS As of March 31, 2009, there were 70,850,820 shares of common stock issued and outstanding, which were held by approximately 107 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, 2008: PLAN CATEGORY ------------- NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES FUTURE ISSUANCE UNDER TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a)) ------------------- -------------------- ----------- (a) (b) (c) Equity compensation plans approved by security holders 1,887,500 $0.10 817,500 Equity compensation plans not approved by security holders N/A N/A N/A TOTAL 1,887,500 0.10 817,500
RECENT SALES OF UNREGISTERED SECURITIES Other than transactions previously reported and except as set forth in the following paragraphs, there were no securities sold during the year ended December 31, 2008 without being registered under the Securities Act. In October 2008, we offered and sold an aggregate of 40,000 shares of common stock to two unrelated service providers in exchange for financial services with a fair market value of $1,600 (or $.04 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) the 18 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 investor was provided with certain disclosure materials and all other information requested with respect to our company; (d) the investor acknowledged that all securities being purchased were "restricted securities" for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act. In December 2008, (i) we offered and sold 40,000 shares of common stock to an individual service provider in exchange for employee benefit services with a fair market value of $1,600 (or $.04 per share); (ii) we offered and sold 30,000 shares of common stock to an individual in exchange for inventory supplies with a fair market value of $1,200 (or $.04 per share); (iii) we offered and sold 500,000 shares of common stock to an individual in exchange for services with a fair market value of $20,000 (or $.04 per share); (iv) we offered and sold to a service provider 300,000 shares of common stock in exchange for investor relations services with a fair market value of $12,000 (or $.04 per share); and (v) we offered and sold to an individual service provider 35,000 shares of common stock in exchange for investor relations services with a fair market value of $1,400 (or $.04 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) the investors, 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." 19 OVERVIEW We use USDA-approved, custom-engineered, proprietary wood-burning oven technology to produce a complete line of Smoke-BakedTM meat and fish. We plan to sell smoked foods through the development of a national chain of stand-alone Smoky Market restaurant-stores and numerous self-contained kiosks that operate inside qualified high-traffic venues such as shopping malls, sports arenas, college campuses, corporate dining areas and airports. We plan to produce principal menu items in bulk at a centralized location. We expect to be able to deliver food of consistent size, taste and quality without the need to construct expensive on-site ovens or to train skilled cooks to handle raw product at numerous locations. We believe this will permit our development of a national chain operation while keeping our in-store costs down. Assuming that we are successful in expanding our retail operations into all regions of the U.S., we plan to begin directly marketing and selling our smoke-baked products on the internet. In addition to offering customers at our Smoky Market restaurant-stores access to on-line ordering for gifts and event catering, we plan to create marketing operations with selected e-commerce affiliates that are large internet retail companies with substantial numbers of customer visits and certain consumer goods organizations such as the RV industry. We have developed the core smoked-meat recipes for our proposed business, entered into an agreement with a commercial meat processor at which we have placed a proprietary oven capable of producing approximately 100,000 pounds of smoked meat per month, tested the re-heating process for our menu items and completed concept designs for our proposed restaurant-stores and kiosks. We do not yet have any restaurant-stores or kiosks in service, but we successfully tested the applications for preparation of our food products in a restaurant located in Los Gatos, California for three months from October through December 2006. We have acquired the assets and leasehold rights of this Los Gatos restaurant and are remodeling the site into a prototype Smoky Market restaurant-store with expected completion in the summer of 2009. Beginning in 2010, and assuming the availability of capital, we plan to open additional stores in the Western region toward our goal of opening three restaurant-stores in each of our five regional operating territories during 2010. We also have built our prototype kiosk for installation into a mall located in Southern California, which is expected to be installed during the summer of 2009. We expect this plan for development will enable us to maximize the operating and financial efficiencies of our production capacity. We have generated net losses in each fiscal year since our inception. Our current focus is on generating sales of food products under the Smoky Market(R) brand principally through company-owned restaurant-stores & kiosks, and in time, through internet sales. As discussed in "Liquidity and Capital Resources" below, we estimate that we will need approximately $1.5 million of financing to commence our business plan and begin to generate revenue, with expected capital expenditures of approximately $900,000 to complete the build-out of our restaurant-store, kiosks, and brand development costs related to marketing and collateral materials, and internet operations during the remainder of 2009. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2008, we had cash and cash equivalents of $282 and a working capital deficit of $716,046, as compared to cash and cash equivalents of $16,235 and a working capital deficit of $507,199 as of December 31, 2007. Given the working capital deficit, we need additional cash in order to continue our limited day-to-day operations in the immediate term. To finance the launch of our foodservice concept operations, we will be required to raise additional capital, which we expect to raise through the issuance of debt, equity securities and/or warrants during the second quarter of 2009. We believe that a minimum of approximately $1.5 million of financing would be required to commence our business plan and begin to generate revenue. We believe that a minimum of $3.5 million of additional financing would be required in order to execute the initial expansion phase of our business plan. 20 Expected capital expenditures during the remainder of 2009 include principally the completion of our Los Gatos restaurant-store at an approximate cost of $200,000, the completion payment and installation of our prototype kiosk for placement inside a high-traffic mall venue at a cost of $75,000, a minimum of four additional kiosks at a cost of $425,000, and brand development costs related to marketing and collateral materials, and internet operations of approximately $200,000. Depending upon the level of capital available, we plan to open additional stores in the Western region toward our goal of opening three stores in each of our five regional operating territories. In addition, if our initial expansion plans are successful, we may need to make investments in additional production capacity; this will likely require the purchase of an existing food processing facility (possibly with a leaseback arrangement with the operator) in order that we may add additional space, ovens and/or buildings. We expect that this would require approximately $5.5 million in cash including acquisition of the property and the building additions. We would expect to be able to fund a significant portion of such purchase price with secured debt, but would be required to raise capital through the issuance of equity securities for at least twenty-five percent, and possibly a larger percentage, of the purchase price. We do not presently have any binding commitments to provide financing. We are in discussions with various potential investors, brokers, agents, finders and others regarding private financings. In light of our absence of revenue and the early stage of development of our business plan, it is uncertain that we will be able to raise significant capital through the sale of our debt or equity securities, and it is unlikely that we would qualify for commercial debt financing. If we are unable to obtain additional equity financing, we will be forced to significantly curtail our operations and proposed expansion, and our ability to continue as a going concern will be uncertain. RESULTS OF OPERATIONS Our revenues from operations decreased while our operating expenses increased in 2008. The revenue decrease was due primarily to a decrease in products sold between 2007 and 2008. The operating expense increase was due to increases in rent and stock-based compensation in the payment of salaries, professional services, and financing activities, as summarized and discussed below. Also, our working capital deficiency increased from 2007 to 2008 as summarized and discussed below. REVENUES AND EXPENSES. Our operating results for the years ended December 31, 2007 and 2008 are summarized as follows: FOR THE YEARS ENDED DECEMBER 31, 2008 DECEMBER 31, 2007 ----------------- ----------------- REVENUE $ 287 $ 6,947 COST OF GOODS SOLD -- $ 12,425 GROSS PROFIT (LOSS) $ 287 $ (5,478) OPERATING EXPENSES SALARIES, WAGES & BENEFITS $ 283,603 $ 359,122 MARKETING $ 87,355 $ 116,296 RENT $ 107,853 $ 41,046 PROFESSIONAL FEES $ 102,390 $ 158,483 DEPRECIATION/AMORTIZATION $ 38,405 $ 41,072 STOCK BASED COMPENSATION SALARIES, WAGES & BENEFITS $ 119,780 $ 189,369 PROFESSIONAL $ 1,818,983 $ 159,900 FINANCING $ 617,292 $ 645,175 OTHER $ 155,155 $ 212,163 OPERATING LOSS $(3,330,529) $(1,928,104) OTHER EXPENSE - NET $ (12,601) $ (55,693) NET (LOSS) $(3,343,130) $(1,983,797) 21 Revenues decreased by $6,660 from $6,947 in 2007 to $287 in 2008, while operating expenses increased by $1,408,190 from $1,922,626 in 2007 to $3,330,816 in 2008. As a result, our operating loss increased by $1,402,425, from $1,928,104 in 2007 to $3,330,529 in 2008. The increase in operating expenses was due primarily to increases in rent and stock-based compensation. Our rent expense increased by $66,807, from $41,046 in 2007 to $107,853 in 2008. The increase in rent is primarily due to our acquisition of the lease of a restaurant location in Los Gatos, California. Under the terms of the lease, our monthly rent is $6,000. Stock-based compensation in the category of professional services increased by $1,659,083 from $159,900 in 2007 to $1,818,983 in 2008 and stock-based compensation in the category of financing activities decreased by $27,883, from $645,175 in 2007 to $617,292 in 2008, while stock-based compensation in the category of salaries, wages and benefits decreased by $69,589 from $189,369 in 2007 to $119,780 in 2008. Overall, stock-based compensation expense increased by $1,561,611, from $994,444 in 2007 to $2,556,055 in 2008. The overall increase in stock-based compensation expense is due to the Company exchanging stock for services as cash balances needed to be preserved for the current recessionary economy. In addition, our marketing expenses decreased to $87,355 in 2008 from $116,296 in 2007. 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, 2007 and 2008 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. FOR THE YEARS ENDED DECEMBER 31, 2008 DECEMBER 31, 2007 ----------------- ----------------- CURRENT ASSETS Cash $ 282 $ 16,235 Inventory $ 22,126 $ 4,250 Total Current Assets $ 22,558 $ 20,485 CURRENT LIABILITIES Accounts payable $ 256,884 $ 202,206 Accrued payroll costs $ 264,771 $ 191,728 Short-term advance $ 75,000 $ 40,000 Bank overdraft $ 39,353 -- Total Current Liabilities $ 738,604 $ 527,684 WORKING CAPITAL DEFICIENCY $(716,046) $(507,199) 22 Our working capital deficiency increased by $208,847, from $507,199 in 2007 to $716,046 in 2008. The increase in our working capital deficiency was primarily due to (i) an increase in our accounts payable of $54,678, from $202,206 on 2007 to $256,884 in 2008, (ii) an increase in our accrued payroll costs of $73,043, from $191,728 in 2007 to $264,771 in 2008, (iii) an increase in short-term advances of $35,000, from $40,000 in 2007 to $75,000 in 2008, and (iv) a bank overdraft of $39,353 in 2008. These increases are due primarily to the Company's challenged operating results and insufficient capitalization. CASH FLOWS. Our cash flows for the years ended December 31, 2007 and 2008 are summarized as follows: FOR THE YEARS ENDED DECEMBER 31, 2008 DECEMBER 31, 2007 ----------------- ------------------ NET CASH USED IN OPERATING ACTIVITIES $(535,630) $(655,458) NET CASH USED BY INVESTING ACTIVITIES $(208,092) $ (67,520) CASH PROVIDED BY FINANCING ACTIVITIES $ 727,768 $ 631,093 NET DECREASE IN CASH $ (15,954) $ (91,885) CASH, BEGINNING OF PERIOD $ 16,235 $ 108,120 CASH, END OF PERIOD $ 282 $ 16,235 We utilized less cash in our operating activities in 2008, from $655,458 in 2007 to $535,629 in 2008, primarily due to more use of stock-based financing and compensation and the increase in compensation accrued but unpaid to employees. We used more cash in our investing activities, from $67,520 in 2007 to $208,092 in 2008, primarily due to the purchase of restaurant leasehold improvements and equipment. We were able to generate more cash from financing activities, from $631,093 in 2007 to $727,768 in 2008, primarily due to proceeds from the sale of a $500,000 promissory note. 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. 23 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. As of December 31, 2008, management believes that there is no impairment of long-lived assets. REVENUE RECOGNITION As of December 31, 2008, the Company was still in the development stage. As such, the only revenue consisted of minimal amounts of ecommerce sales. Such sales are recognized at the time of shipment. NET (LOSS) PER COMMON SHARE The Company follows SFAS 128, "Earnings per 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. INCOME TAXES The Company provides for income taxes under Statement of Financial Accounting Standards Number 109, "Accounting for Income Taxes." SFAS No. 109 requires the use of an asset and liability approach in accounting for income taxes. SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. No provision for income taxes is included in the statement due to its immaterial amount, net of the allowance account, based on the likelihood of the Company utilizing the loss carry-forward. 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. 24 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(T). 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, 2008. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are 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. 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, 2008. Our management has concluded that, as of December 31, 2008, 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. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report. 25 Changes in Internal Controls ---------------------------- During the last fiscal quarter ended December 31, 2008, 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. 26 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. Although Edward C. Feintech and Shane A. Campbell are still affiliated with Smoky Systems, LLC, in management capacities, because Smoky Systems has no current operations, neither devotes any significant amount of time to the business of Smoky Systems. NAME AGE POSITION - ---- --- -------- Edward C. Feintech 61 Founder, Promoter, President, Chief Executive Officer and Chairman of the Board Scott L. Bargfrede 51 Director Shane A. Campbell 50 Director and Chief Financial Officer* Dennis A. Harrison 60 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. 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 and in 1992, he graduated from the University of Wisconsin Graduate School of Banking. 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 though 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. 27 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 2008, were filed with the SEC on a timely basis except as follows: (a) Form 4 for Daniel Brune, a director, was due on September 11, 2007, but was filed on May 23, 2008 (b) Form 4 for Dennis Harrison, an officer, was due on April 2, 2008, but was filed on April 22, 2008; (c) Form 4 for Shane Campbell, an officer, was due on April 8, 2008, but was filed on April 22, 2008; (d) a Form 4 for Scott Bargfrede, a director, was due on May 20, 2008 but was filed on May 23, 2008; and (e) a Form 4 for Edward Feintech, an officer and director, was due on May 26, 2008, but was filed on June 17, 2008. CODE OF ETHICS We have not adopted a code of ethics. Although we expect to adopt a code of ethics during 2009, 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 a retail store and commence operations, we expect to begin developing more comprehensive policies and procedures appropriate to our size and stage. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table summarizes the compensation for the fiscal years ended December 31, 2007 and December 31, 2008 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 2007 or 2008 exceeded $100,000 (collectively, the "Named Executive Officers"). 28 NAME AND YEAR SALARY BONUS STOCK OPTION NON-EQUITY NONQUALIFIED ALL TOTAL PRINCIPAL POSITION ($) ($) AWARDS AWARDS INCENTIVE DEFERRED OTHER ($) ($) ($) PLAN COMPENSATION COMPENSATION COMPENSATION EARNINGS ($) ($) ($) Edward C. Feintech, CEO, 2008 175,000 -- -- -- -- -- -- 175,000 President and Director 2007 152,000 -- 150,000(1) 30,983(2) -- -- -- 332,983 (1) Value determined based upon the fair market value of 1,500,000 shares of common stock issued on May 31, 2007, which was $0.10 per share. (2) Value determined using the Black-Scholes option valuation model. The grant date for such options was May 31, 2007, and the options are exercisable during a seven year term at an exercise price of $0.10 per share, which was the fair market value of the stock on the date of grant. Assumptions used for the valuation model are set forth below:
Expected Life 7 years Risk-Free Interest Rate 4.7% Expected Volatility Factor 186% Weighted average fair market value of stock options granted 0.099 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 $0.10 at any time prior to May 13, 2013. The options vested 25% on May 31, 2007 and have continued to vest 1/48th each month thereafter until fully vested. 29 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table provides information regarding equity awards held by the Named Executive Officers as of December 31, 2008: OPTION AWARDS STOCK AWARDS - --------------- ----------------------------------------------------------------- -------------------------------------------------- NAME Number of Number of Equity Option Option Number of Market Equity Equity Securities Securities Incentive Exercise Expiration Shares or Value of Incentive Incentive Underlying Underlying Plan Price Date Units of Shares or Plan Awards: Plan Unexercised Unexercised Awards: ($) Stock That Units of Number of Awards: Options Options Number of Have Not Stock That Unearned Market or (#) (#) Securities Vested Have Not Shares, Payout Exercisable Unexercisable Underlying (#) Vested Units or Value of Unexercised ($) Other Unearned Unearned Rights That Shares, Options Have Not Units or (#) Vested Other (#) Rights That Have Not Vested ($) - --------------- ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ---------- Edward C. 209,896(1) 115,104(1) N/A $0.10 May 31, N/A N/A N/A N/A Feintech, 2013 CEO, President and Director - --------------- ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ---------- 274,479(1) 150,521(1) N/A $0.10 May 31, N/A N/A N/A N/A 2014 - --------------- ------------ ------------- ------------ ------------ ------------ ------------ ------------ ------------- ---------- (1) Options vested 25% on May 31, 2007 and 1/48th each month thereafter until fully vested.
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, 2008. 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. 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 90 days 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. 30 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 2008. 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 March 31, 2009 and as adjusted to reflect the sale of the shares of our common stock offered hereby, by: o all persons known by us to beneficially own more than 5% of our common stock; o each of our named executive officers; o each of our directors; and o 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. AMOUNT AND NATURE OF NAME OF EXECUTIVE OFFICER OR DIRECTOR BENEFICIAL OWNER PERCENT (1) - --------------------------------------- -------------------- ----------- Edward C. Feintech (includes Smoky Systems, LLC) Chairman, President and CEO 42,561,481 (2) 59.60% Scott L. Bargfrede, Director 354,074 (3) * Shane A. Campbell, Director and CFO 271,875 (4) * All Officers and Directors as a Group (4 persons) 43,869,721 (5) 63.95% NAME OF 5% STOCKHOLDER - ---------------------- Edward C. Feintech (includes Smoky Systems, LLC) 1511 E 2nd St., Webster City, IA 50595 42,561,481 (2) 59.60% _____________________ * 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) 70,850,820, which is the number of shares of common stock actually outstanding on March 31, 2009, 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). 31 (2) Includes, in addition to outstanding shares held by Mr. Feintech, 562,500 shares issuable upon exercise of non-statutory stock options. Also includes 40,095,730 shares of common stock held of record by Smoky Systems, LLC. Mr. Feintech, as manager of Smoky Systems, LLC, has voting and investment control over shares held by Smoky Systems, LLC. (3) Includes 121,875 shares issuable upon the exercise of non-statutory stock options. (4) Includes 121,875 shares issuable upon the exercise of non-statutory stock options. (5) Includes 1,171,875 shares issuable upon the exercise of non-statutory stock options. 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, 2008, 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): BASE SALARY OR CONSULTING FEE NAME PER ANNUM ---- --------- Edward C. Feintech, President & CEO $175,000 Shane Campbell, CFO $65,000* Dennis Harrison, CIO $105,000* *Currently serving as a part-time consultant; salary is not being paid. Certain officer, directors, promoter and affiliates purchased convertible notes, and received warrants, in our convertible note offering conducted between May 2006 and May 2007. The convertible notes and warrants were purchased on the same terms as offered to all participants in the offering. The principal amount of the convertible notes (all of which have been converted into common stock), and the number of warrants received in the offering by any participating officers, directors, promoters or affiliates are as follows: - ----------------------------------- ----------------------- -------------------- PRINCIPAL AMOUNT OF NAME OF PERSON CONVERTIBLE NOTES NUMBER OF WARRANTS - ----------------------------------- ----------------------- -------------------- Edward C. Feintech, President, $25,000 250,000 CEO and Chairman - ----------------------------------- ----------------------- -------------------- Toni L. Adams, Secretary and former Director of Operations $40,000 400,000 - ----------------------------------- ----------------------- -------------------- Scott L. Bargfrede, Director $15,000 150,000 - ----------------------------------- ----------------------- -------------------- 32 MAJORITY STOCKHOLDER Smoky Systems, LLC beneficially owns approximately 57% of our common stock as of March 31, 2009, and its manager is Edward C. Feintech, our President, CEO, the Chairman of our Board of Directors and a promoter. In addition, 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, 29.5% CEO and Chairman - ----------------------------------- ------------------------ Toni L. Adams, Secretary and 4.83% former Director of Operations - ----------------------------------- ------------------------ 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 preformed 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 year ended December 31, 2008 was Moore & Associates, Chartered ("Moore & Associates"). Moore & Associated also audited the financial statements for the year ended December 31, 2007 that are included in this Form 10-K. The Company's independent auditor for the year ended December 31, 2007 was Jaspers + Hall, PC ("Jaspers + Hall"). The aggregate fees for audit services totaled $9,000 for the fiscal year ended December 31, 2008 and $5,000 for the fiscal year ended December 31, 2007. AUDIT RELATED FEES The aggregate fees for professional services for assurance and other audit related services was $12,000 for the fiscal year ended December 31, 2008 and $3,000 for the fiscal year ended December 31, 2007. TAX FEES There were no fees paid to either Moore & Associates or Jaspers + Hall for tax related professional services for the year ended December 31, 2008 or the fiscal year ended December 31, 2007. ALL OTHER FEES Neither Moore & Associates nor Jaspers + Hall provided to the Company any other material services during the fiscal year ended December 31, 2008 or the fiscal year ended December 31, 2007. 33 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. INCORPORATED BY REFERENCE/FILED EXHIBIT NO. EXHIBIT 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 2006 Stock Incentive Plan Incorporated by reference to Registration Statement on Form 10-SB filed on February 16, 2007, File No. 000-52158 4.3 Form of Warrant (Bridge Financing) Incorporated by reference to the Quarterly Report on Form 10-Q filed on May 14, 2007, File No. 000-52158 10.1 Exclusive License Agreement with Smoky Systems, LLC Incorporated by reference to (Amended and Restated) Registration Statement on Form 10-SB filed on February 16, 2007, File No. 000-52158 10.2 Amended and Restated Processing Agreement with Mary Incorporated by reference to Ann's Specialty Foods, Inc. dated July 1, 2006 Amendment No. 3 to Registration Statement on Form SB-2 filed on August 24, 2007, File No. 333-143008 34 INCORPORATED BY REFERENCE/FILED EXHIBIT NO. EXHIBIT HEREWITH - -------------- --------------------------------------------------------- -------------------------------- 10.3 Form of Purchase Agreement (Bridge Financing) Incorporated by reference to Amendment No. 3 to Registration Statement on Form SB-2 filed on August 24, 2007, File No. 333-143008 10.4 Form of Convertible Note (Bridge Financing) Incorporated by reference to the Quarterly Report on Form 10-Q filed on May 14, 2007, File No. 000-52158 10.5 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 10.6 Independent Contractor Agreement dated November 20, Incorporated by reference to 2006 with Kenneth N. Hankin Registration Statement on Form 10-SB filed on February 16, 2007, File No. 000-52158 10.7 Employment Agreement dated May 10, 2007 with Edward C. Incorporated by reference to the Feintech Quarterly Report on Form 10-Q filed on May 14, 2007, File No. 000-52158 10.8 QMG Services Proposal Incorporated by reference from Amendment No. 2 to Registration Statement on Form SB-2, File No. 333-143008, filed on August 1, 2007 10.9 Investment Agreement dated October 30, 2007 with Incorporated by reference to the Dutchess Private Equities Fund, Ltd. Current Report on 8-K/A filed on November 6, 2007, File No. 000-52158 10.10 Registration Rights Agreement dated October 30, 2007 Incorporated by reference to the with Dutchess Private Equities Fund, Ltd. Current Report on 8-K/A filed on November 6, 2007, File No. 000-52158 10.11 Binding Term Sheet for Purchase Agreement dated Incorporated by reference to the November 7, 2007 with Ron Barone Current Report on 8-K filed on November 19, 2007, File No. 000-52158 10.12 Consulting Agreement dated May 1, 2008 with Incorporated by reference to the International Monetary Current Report on 8-K filed on May 8, 2008, File No. 000-52158 35 INCORPORATED BY REFERENCE/FILED EXHIBIT NO. EXHIBIT HEREWITH - -------------- --------------------------------------------------------- -------------------------------- 10.13 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 10.14 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 10.15 Note and Share Purchase Agreement dated January 27, Incorporated by reference to the 2009 with 70 Limited LLC Current Report on 8-K filed on September 10, 2008, File No. 000-52158 23.1 Consent of Independent Registered Public Filed herewith Accountants 24 Power of Attorney Included on the signature page hereof 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Filed herewith Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Filed herewith Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer Filed herewith 32.2 Section 1350 Certification of Chief Financial Officer Filed herewith
36 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: May 14, 2009 -------------------------------------- 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 May 14, 2009 - ----------------------- and Chairman Edward C. Feintech (Principal Executive Officer) /s/ Shane Campbell Director, Chief Financial Officer May 14, 2009 - ----------------------- (Principal Financial and Accounting Shane Campbell Officer) /s/ Scott L. Bargfrede Director May 14, 2009 - ----------------------- Scott L. Bargfrede 37 SMOKY MARKET FOODS, INC. (a development stage company) FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 (as restated) F-1 MOORE & ASSOCIATES, CHARTERED ACCOUNTANTS AND ADVISORS - ------------------------ PCAOB REGISTERED Report of Independent Registered Public Accounting Firm To the Board of Directors Smoky Market Foods, Inc. We have audited the accompanying balance sheet of Smoky Market Foods, Inc. (A Development Stage Company) as of December 31, 2008 and restated December 31, 2007, and the related statements of operations, stockholders' deficit and cash flows for the years ended December 31, 2008, restated December 31, 2007 and since inception on April 18, 2006 through December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conduct our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 provides 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. (A Development Stage Company) as of December 31, 2008 and restated December 31, 2007 and the related statements of operations, stockholders' deficit and cash flows for the years ended December 31, 2008, restated December 31, 2007 and since inception on April 18, 2006 through December 31, 2008 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has a net deficit in working capital of $716,046 and $507,199 as of December 31, 2008 and 2007 respectively, 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/ Moore & Associates Moore & Associates, Chartered Las Vegas, Nevada May 7, 2009 6490 WEST DESERT INN RD, LAS VEGAS, NEVADA 89146 (702) 253-7499 FAX: (702)253-7501 F-2 SMOKY MARKET FOODS, INC. (A Development Stage Company) Balance Sheets -------------- DECEMBER 31, DECEMBER 31, 2007 2008 (RESTATED) ----------- ----------- ASSETS: - ------- Current Assets Cash $ 282 $ 16,235 Inventory 22,126 4,250 Employee advances 150 -- ----------- ----------- Total Current Assets 22,558 20,485 ----------- ----------- Property & Equipment, net of accumulated depreciation 462,315 291,478 ----------- ----------- Other Assets Intangible assets 29,333 33,333 Deposits 11,333 8,483 ----------- ----------- Total Other Assets 40,666 41,816 ----------- ----------- Total Assets $ 525,539 $ 353,779 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): - ----------------------------------------------- Current Liabilities Accounts payable $ 256,884 $ 202,206 Accounts payable - related parties 87,364 75,623 Accrued payroll costs 264,771 191,728 Short-term advance 75,000 40,000 Bank overdraft 39,353 -- Current maturities of capital lease obligations 15,232 18,127 ----------- ----------- Total Current Liabilities 738,604 527,684 Long-term Liabilities Promissory note payable, less amortized discount 491,975 -- Capital lease obligatons, less current maturities -- 12,835 ----------- ----------- Total Liabilities 1,230,579 540,519 ----------- ----------- 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 67,422,820 and 54,812,824 at December 31, 2008 and 2007, respectively 67,423 54,813 Deferred Stock-Based Compensation (108,542) (1,044,574) Other paid-in capital 4,424,630 2,579,565 Additional paid-in capital for warrants 862,895 831,772 Deficit accumulated during the development stage (5,951,446) (2,608,316) ----------- ----------- Total Stockholders' Equity (Deficit) (705,040) (186,740) ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) $ 525,539 $ 353,779 =========== =========== The accompanying notes are an integral part of these financial statements. F-3 SMOKY MARKET FOODS, INC. (A Development Stage Company) Statements of Operations ------------------------ FOR THE YEARS ENDED ---------------------------- APRIL 18, 2006 DECEMBER 31, (INCEPTION) TO DECEMBER 31, 2007 DECEMBER 31, 2008 (RESTATED) 2008 ------------ ------------ ------------ Revenue $ 287 $ 6,947 $ 10,379 Cost of Goods Sold -- 12,425 15,302 ------------ ------------ ------------ Gross Profit (Loss) 287 (5,478) (4,923) ------------ ------------ ------------ Operating Expenses Salaries, Wages & Benefits - related parties 283,603 359,122 811,229 Marketing 87,355 116,296 237,881 Rent 107,853 41,046 162,693 Professional fees 102,390 158,483 369,141 Depreciation/amortization 38,405 41,072 98,532 Stock based compensation - related parties Salaries, Wages & Benefits 119,780 189,369 349,303 Professional 1,818,983 159,900 2,102,633 Financing 617,292 645,175 1,267,467 Other 155,155 212,163 453,626 ------------ ------------ ------------ 3,330,816 1,922,626 5,852,505 ------------ ------------ ------------ Operating Loss (3,330,529) (1,928,104) (5,857,428) ------------ ------------ ------------ Other Income (Expense) Interest Income -- 887 887 Interest Expense (12,601) (56,580) (94,905) ------------ ------------ ------------ Other Expense - Net (12,601) (55,693) (94,018) ------------ ------------ ------------ Loss before Income Taxes (3,343,130) (1,983,797) (5,951,446) Income Taxes -- -- -- ------------ ------------ ------------ Net (Loss) $ (3,343,130) $ (1,983,797) $ (5,951,446) ============ ============ ============ Basic and Diluted (Loss) per Share: Basic and Diluted $ (0.058) $ (0.043) ============ ============ Weighted Average Number of Shares 57,665,296 46,388,636 ============ ============ The accompanying notes are an integral part of these financial statements. F-4 SMOKY MARKET FOODS, INC. (A Development Stage Company) Statements of Stockholders' Deficit ----------------------------------- Accumulated Common Stock Deferred Other Additional During the ------------------------ Stock-Based Paid-in Paid-in Development Total Shares Amount Compensation Capital Capital Stage (Deficit) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, April 18, 2006 (Inception) -- $ -- $ -- $ -- $ -- $ -- $ -- Common stock issued for: License agreement with related party 40,000,000 40,000 -- -- -- 40,000 Officers/director compensation 300,000 300 29,700 -- -- 30,000 Current services 1,300,000 1,300 128,700 -- -- 130,000 Stock options (1,425,000) issued to officers/directors -- -- (144,584) -- 144,584 -- -- Amortization of stock-based compensation 13,679 13,679 Net (Loss) for the period 4/18/06 to 12/31/06 -- -- -- -- -- (624,519) (624,519) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2006 (Restated) 41,600,000 41,600 (130,905) 158,400 144,584 (624,519) (410,840) Common stock issued for: Cash 628,571 629 -- 301,371 -- -- 302,000 CEO compensation 1,500,000 1,500 148,500 -- -- 150,000 Endorsement rights 500,000 500 (50,000) 49,500 -- -- -- Current services 525,000 525 (330,000) 341,975 -- -- 12,500 Leasehold rights to pilot restaurant 228,571 229 -- 119,771 -- -- 120,000 Satisfaction of trade payables 10,173 10 -- 1,566 -- -- 1,576 Future store opening promotion 1,375,000 1,375 (623,750) 622,375 -- -- -- Stock options (425,000) issued to CEO as compensation -- -- (42,013) -- 42,013 -- -- Common stock conversion priveledges to debtholders -- -- (322,587) -- 322,587 -- -- Warrants issued to convertible debtholders -- -- (322,588) -- 322,588 -- Conversion of convertible debt to common stock 8,445,509 8,445 -- 836,107 -- -- 844,552 Amortization of stock-based compensation -- -- 777,269 -- -- -- 777,269 Net (Loss) for the Year Ended December 31, 2007 -- -- -- -- -- (1,983,797) (1,983,797) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2007 (Restated) 54,812,824 54,813 (1,044,574) 2,579,565 831,772 (2,608,316) (186,740) Common stock issued for: Cash 1,673,332 1,673 -- 139,327 -- -- 141,000 Services performed by the CIO 266,666 267 -- 41,733 -- -- 42,000 Future marketing services 3,000,000 3,000 987,000 -- -- 990,000 Exercise of stock options 50,000 50 8,000 12,450 -- -- 20,500 Current services 7,253,332 7,253 601,922 -- -- 609,175 Conversion of short-term advance to common shares 366,666 367 -- 62,633 -- -- 63,000 Warrants issued in conjunction with debt offerring -- -- -- -- 31,123 -- 31,123 Amortization of stock-based compensation -- -- 928,032 -- -- -- 928,032 Net (Loss) for the Year Ended December 31, 2008 -- -- -- -- -- (3,343,130) (3,343,130) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 2008 67,422,820 $ 67,423 $ (108,542) $ 4,424,630 $ 862,895 $(5,951,446) $ (705,040) =========== =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements. F-5 SMOKY MARKET FOODS, INC. (A Development Stage Company) Statements of Cash Flows ------------------------ FOR THE YEARS ENDED --------------------------- APRIL 18, 2006 DECEMBER 31, (INCEPTION) TO DECEMBER 31, 2007 DECEMBER 31, 2008 (RESTATED) 2008 ----------- ----------- ----------- Operating Activities Net (Loss) $(3,343,130) $(1,983,797) $(5,951,446) Stock-based financing and compensation costs 2,555,909 984,871 3,717,183 Depreciation and amortization 38,405 41,072 98,532 Accrued interest converted to common stock -- 58,451 Amortization of promissory note discount 1,147 -- 1,147 Adjustments to reconcile net loss to cash used in operating activities: (Increase) decrease in accounts receivable -- 1,877 -- (Increase) decrease in inventory (17,876) 9,444 (22,126) (Increase) decrease in employee advances (150) -- (150) Increase (decrease) in accounts payable 117,669 55,356 344,248 Increase (decrease) in accrued payroll costs 73,043 191,728 264,771 Increase (decrease) in bank overdraft 39,353 -- 39,353 Increase (decrease) in accrued interest -- 43,991 -- ----------- ----------- ----------- Net Cash (Used) by Operating Activities (535,630) (655,458) (1,450,037) ----------- ----------- ----------- Investing Activities Purchase of property and equipment (205,242) (61,720) (373,132) Deposits and other asset purchases (2,850) (5,800) (11,333) ----------- ----------- ----------- Net Cash (Used) by Investing Activities (208,092) (67,520) (384,465) ----------- ----------- ----------- Financing Activities Proceeds from issuance of common stock 153,500 302,000 455,500 Proceeds from issuance of convertible notes -- 302,500 786,100 Proceeds from issuance of promissory notes 500,000 -- 500,000 Proceeds from (payments on) short term 90,000 40,000 130,000 advances - net Principal payments on capital lease obligations (15,732) (13,407) (36,816) ----------- ----------- ----------- Cash Provided by Financing Activities 727,768 631,093 1,834,784 ----------- ----------- ----------- Net Increase (Decrease) in Cash (15,954) (91,885) 282 Cash, Beginning of Period 16,235 108,120 -- ----------- ----------- ----------- Cash, End of Period $ 281 $ 16,235 $ 282 =========== =========== =========== Supplemental Information: Interest Paid $ 12,601 $ 12,977 $ 36,454 Income Taxes Paid $ -- $ -- $ -- Intangible Assets Acquired in Exchange for Common Stock $ -- $ 80,000 $ 125,000 Convertible Promissory Notes and Accrued Interest Exchanged for Common Stock $ -- $ 844,551 $ 844,551 Short-term Advances Exchanged for Common Stock $ 55,000 $ -- $ 55,000 The accompanying notes are an integral part of these financial statements. F-6
SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Smoky Market Foods, Inc, (the "Company") is a development stage company that was incorporated on April 18, 2006 under the laws of the State of Nevada. The Company intends to engage in the development, operation, franchising, and licensing of fast service casual restaurants. The restaurants will feature proprietary menu items and emphasize the preparation of food with high quality ingredients developed under the Smoky Market(TM) brand, as well as unique recipes and special seasonings to provide high quality food at competitive prices. Traditional restaurants will feature dine-in, carryout and, possibly in some instances, drive-thru or delivery service. Non-traditional units are expected to include express locations and kiosks which have a more limited menu and operate in non-traditional locations like airports, gasoline service stations, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient. The Company may also engage in other retail or wholesale distribution strategies intended to exploit the Smoky Market brand. As of the balance sheet date, the Company had minimal operations and in accordance with Statements on Financial Accounting Standards No. 7 is considered to be in the development stage. 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. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings. 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. F-7 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 ACCOUNTS RECEIVABLE Management monitors the liquidity and creditworthiness of accounts receivable due from customers on an ongoing basis, considering industry and economic conditions and other factors. These factors form the basis for calculating and recording an allowance for doubtful accounts, which is an estimate of future credit losses. The Company writes off individual accounts receivable against the bad debt allowance when the Company determines a balance is uncollectible. Management has determined that the bad debt allowance is appropriately established at $-0- as of both December 31, 2008 and 2007. 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, 2008 and 2007: 2008 2007 ----------- ----------- Finished Goods $ -- $ -- Raw Materials 22,126 4,250 ----------- ----------- $ 22,126 $ 4,250 =========== =========== F-8 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 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, 2008 and 2007: 2008 2007 ------------ ------------ Processing Equipment $ 104,771 $ 104,771 Leasehold Improvements 250,361 125,000 Kiosks 46,200 -- Operating Equipment 78,062 44,382 Office Equipment 29,112 29,112 Software 27,831 27,831 Transportation Equipment 10,078 10,077 Smallwares 3,765 3,765 ------------ ------------ 550,180 344,938 Accumulated depreciation (87,865) (53,460) ------------ ------------ $ 462,315 $ 291,478 ============ ============ Leasehold improvements are capitalized and amortized over the remaining term of the leased facility. The Company recorded $34,405 in depreciation expense relating to the assets above for both the years ended December 31, 2008 and 2007. DEPOSITS Deposits were as follows as of December 31, 2008 and 2007: December 31, December 31, 2008 2007 ------------ ------------ Security deposits at leased real estate facilities $ 10,500 $ 2,500 Other 833 5,983 ------------ ------------ $ 11,333 $ 8,483 ============ ============ BANK OVERDRAFT Smoky Market Foods, Inc. was in a bank overdraft position with one of its main banking institutions as of December 31, 2008 in the amount of $39,353. The Company and the bank had not yet negotiated a settlement of this amount as of the report date. F-9 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 ADVANCES As of December 31, 2008, the Company was indebted to two individuals for loans which are non-interest bearing, unsecured advances with no formal repayment terms. Repayment of the loans is expected within the next twelve months, so the debt has been classified as a current obligation. FINANCIAL INSTRUMENTS Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2008. 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. The carrying value of the Company's capitalized leases approximated their fair value based on the current market conditions for similar debt instruments. 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. As of December 31, 2008, management believes that there is no impairment of long-lived assets. REVENUE RECOGNITION As of December 31, the Company was still in the development stage. As such, the only revenue consisted of minimal amounts of ecommerce sales. Such sales are recognized at the time of shipment. SHIPPING AND HANDLING 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. F-10 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 ADVERTISING COSTS All advertising costs are charged to expense as incurred or the first time the advertising takes place, unless it is direct-response advertising that results in probable future economic benefits. Advertising expenses were $-0- for both the years ended December 31, 2008 and 2007. SEGMENT INFORMATION The Company follows Statement of Financial Accounting Standards (SFAS) 131, "Disclosure about Segments of an Enterprise and Related Information". Certain information is disclosed, per SFAS 131, 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 The Company follows SFAS 128, "Earnings per 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. INCOME TAXES The Company follows Statement of Financial Accounting Standard No. 109 (SFAS No. 109), "Accounting for Income Taxes," for recording the provision for 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. F-11 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 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. The Financial Accounting Standards Board has published FASB Interpretation No. 48 (FIN No. 48), "Accounting for Uncertainty in Income Taxes", to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes", on the uncertainty in income taxes recognized in an enterprise's financial statements. Specifically, FIN No. 48 prescribes (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. FIN No. 48 applies to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company has evaluated the effects of FIN No. 48 and found its adoption to not have a material impact on the financial statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING SECURITIES, ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method as described in FASB Statement of Financial Accounting Standards No. 128, "Earnings per Share." FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. We are not required to adopt FSP EITF 03-6-1; neither do we believe that FSP EITF 03-6-1 would have material effect on our consolidated financial position and results of operations if adopted. F-12 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts-and interpretation of FASB Statement No. 60". SFAS No. 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claims liabilities. This statement also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years. SFAS No. 163 has no effect on the Company's financial position, statements of operations, or cash flows at this time. In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". SFAS No. 162 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. SFAS No. 162 will become effective 60 days after the SEC approves the PCAOB's amendments to AU Section 411 of the AICPA Professional Standards. SFAS No. 162 has no effect on the Company's financial position, statements of operations, or cash flows at this time. In March 2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities--an amendment of FASB Statement No. 133. This standard requires companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has not yet adopted the provisions of SFAS No. 161, but does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows. In December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123 (R), Share-Based Payment. In particular, the staff indicated in SAB 107 that it will accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company currently uses the simplified method for "plain vanilla" share options and warrants, and will assess the impact of SAB 110 for fiscal year 2009. It is not believed that this will have an impact on the Company's consolidated financial position, results of operations or cash flows. F-13 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This statement improves comparability by eliminating that diversity. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of this statement is the same as that of the related Statement 141 (revised 2007). The Company will adopt this Statement beginning March 1, 2009. It is not believed that this will have an impact on the Company's consolidated financial position, results of operations or cash flows. In December 2007, the FASB, issued FAS No. 141 (revised 2007), Business Combinations'. This Statement replaces FASB Statement No. 141, Business Combinations, but retains the fundamental requirements in Statement 141. This Statement establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The effective date of this statement is the same as that of the related FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. The Company will adopt this statement beginning March 1, 2009. It is not believed that this will have an impact on the Company's consolidated financial position, results of operations or cash flows. F-14 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In February 2007, the FASB, issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities--Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities. Most of the provisions in FAS 159 are elective; however, an amendment to FAS 115 Accounting for Certain Investments in Debt and Equity Securities applies to all entities with available for sale or trading securities. Some requirements apply differently to entities that do not report net income. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157 Fair Value Measurements. The Company will adopt SFAS No. 159 beginning March 1, 2008 and is currently evaluating the potential impact the adoption of this pronouncement will have on its consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company will adopt this statement March 1, 2008, and it is not believed that this will have an impact on the Company's consolidated financial position, results of operations or cash flows. In September 2008, the FASB issued exposure drafts that eliminate qualifying special purpose entities from the guidance of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and FASB Interpretation 46 (revised December 2003), "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," as well as other modifications. While the proposed revised pronouncements have not been finalized and the proposals are subject to further public comment, the Company anticipates the changes will not have a significant impact on the Company's financial statements. The changes would be effective March 1, 2010, on a prospective basis. F-15 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In October 2008, the FASB issued FSP No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active," ("FSP FAS 157-3"), which clarifies application of SFAS 157 in a market that is not active. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP FAS 157-3 had no impact on the Company's results of operations, financial condition or cash flows. In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities." This disclosure-only FSP improves the transparency of transfers of financial assets and an enterprise's involvement with variable interest entities, including qualifying special-purpose entities. This FSP is effective for the first reporting period (interim or annual) ending after December 15, 2008, with earlier application encouraged. The Company adopted this FSP effective January 1, 2009. The adoption of the FSP had no impact on the Company's results of operations, financial condition or cash flows. In December 2008, the FASB issued FSP No. FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP FAS 132(R)-1"). FSP FAS 132(R)-1 requires additional fair value disclosures about employers' pension and postretirement benefit plan assets consistent with guidance contained in SFAS 157. Specifically, employers will be required to disclose information about how investment allocation decisions are made, the fair value of each major category of plan assets and information about the inputs and valuation techniques used to develop the fair value measurements of plan assets. This FSP is effective for fiscal years ending after December 15, 2009. The Company does not expect the adoption of FSP FAS 132(R)-1 will have a material impact on its financial condition or results of operation. In April 2009, the FASB issued FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"). FSP FAS 157-4 provides guidance on estimating fair value when market activity has decreased and on identifying transactions that are not orderly. Additionally, entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value. This FSP is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 will have a material impact on its financial condition or results of operation. F-16 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 NOTE 2. GOING CONCERN The Company's ability to continue as a going concern is contingent upon its ability to obtain debt and/or capital financing. 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 $5,951,446 in losses since inception which relate mainly to the Company's search for debt and equity financing necessary to carry out its business plan. Additionally, the Company has a net deficit in working capital of $716,046 and $507,199 at December 31, 2008 and 2007, respectively. The Company has had no material revenue generating operations since inception. In an effort to recapitalize the Company, management has authorized the sale of $10,000,000 of Preferred Stock (see Note 9). However, there can be no assurances that the Company will find investors to purchase such preferred shares. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. NOTE 3. NOTES PAYABLE In September 2008, the Company received $500,000 from a trust in exchange for a $500,000 promissory note and 300,000 warrants to purchase the Company's common stock. The promissory note is non-interest bearing and is due on September 30, 2010. The warrants have an exercise price of $.15 per share and expire on the due date of the promissory note. The warrants were valued at $9,172 under the Black-Scholes method, are classified as a bond discount, and are therefore netted against the promissory note on the balance sheet. The discount is being amortized straight-line over the two-year life of the warrants. . During 2007 and 2006, the Company raised $786,100 in exchange for convertible promissory notes. The notes accrued interest at an annual 9% rate and the combined principal and accrued interest were convertible to common stock at the price of $.10 per share. Each note included 10:1 warrant coverage, exercisable at $.25 per share, with expiration on September 30, 2008. The Company recognized $676,298 of additional costs for the combined Black-Scholes value of the warrants and beneficial conversion feature on the notes. These costs were charged to expense over the life of the notes, expiring on September 30, 2007, at which point all of the promissory notes were converted to common stock F-17 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 The Company incurred interest expense of $-0- and $43,603 with respect to these liabilities for the years ended December 31, 2008 and 2007, respectively. NOTE 4. CAPITAL LEASE OBLIGATIONS The Company assumed multiple lease obligations in the transaction described in Note 5. The leases have been capitalized and are reflected as liabilities on the balance sheet. Future lease obligations are as follows for the twelve months ending December 31: December 31, December 31, 2008 2007 ------------ ------------ Minimum lease payments for the years ended: 2008 $ -- $ 25,915 2009 16,527 14,321 Following twelve months -- -- ------------ ------------ Total 16,527 40,236 Amounts representing interest 1,295 9,274 ------------ ------------ Present value of minimum lease payments 15,232 30,962 Current portion 15,232 18,127 ------------ ------------ Long-term portion $ -- $ 12,835 ============ ============ NOTE 5. 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. This transaction is discussed more fully in Note 5 below. 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 at $.001 per share. Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated. All shares of any one series of the Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. No preferred shares had been issued as of December 31, 2008 and 2007 - See Note 10. F-18 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Stock Transactions: - ------------------- In April 2006, the Company issued 40,000,000 shares of its $.001 par value common stock to Smoky Systems, LLC in exchange for assets valued at $40,000. In May 2006, the Company issued 1,300,000 stock options to officers/directors, then another 162,500 in October 2006 in warrant purchase agreements. The combined awards were valued at $106,619. In July 2006, the Company issued 300,000 shares of its $.001 par value common stock to officers/directors of the Company in exchange for services valued at $30,000. In December 2006, the Company issued 50,000 of its $.001 par value common stock for services valued at $5,000. In December 2006, the Company issued 1,250,000 of its $.001 par value common stock to a consultant in exchange for services valued at $123,750 plus cash of $1,250. In April 2007, an individual was granted 500,000 shares of $.001 par value common stock in exchange for an endorsement agreement. The shares were valued at $.10 per share. Also in April 2007, a separate individual was granted 25,000 shares of the Company's $.001 par value common stock in exchange for IT consulting services. The shares were valued at $.10 per share. In May 2007, the Company issued 1,500,000 shares of its $.001 par value common stock as an award to the CEO. Additionally, the CEO was granted another 450,000 in May 2007, 25% of which vested immediately, with the remainder to vest over 48 months. The shares were valued at $.10 per share. Also in May 2007, the Company issued 325,000 shares of its $.001 par value common stock to an investment banking firm in exchange for services valued at $32,500. The shares were valued at $.10 per share (see update below). In June 2007, the Company issued 100,000 of its $.001 par value common stock to a consultant in exchange for services valued at $9,900 plus cash of $100. The shares were valued at $.10 per share. F-19 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In September 2007, the Company issued 628,571 of its $.001 par value common stock to an individual investor in exchange for $302,000, or $.48 per share. Also in September, 2007, the Company issued 400,000 of its $.001 par value common stock to a financial consultant in exchange for services. The services were valued at $192,000, based on 400,000 shares given at $.48 per share. Also in September 2007, the Company cancelled 325,000 of its $.001 par value common stock previously issued in May 2007 to an investment banking firm. It was discovered that the firm was no longer qualified by the SEC to perform the agreed upon services, so the transaction was rescinded. Also in September 2007, the Company retired $786,100 in convertible promissory notes and related accrued interest of $58,451, for a total debt retirement of $844,551. The debt and accrued interest was exchanged for 8,445,509 shares of $.001 par value common stock at the conversion rate of $.10 per share, pursuant to the multiple promissory note agreements. In October 2007, an individual was given 50,000 shares of $.001 par value common stock in exchange for future sports promotional activities. The shares were valued at $24,000, based on 50,000 shares given at $.48 per share In December 2007, a vendor exchanged $1,577 in trade payables for 10,173 shares of $.001 par value common stock. The stock was valued at $.155 per share. Also in December 2007, an individual was given 975,000 shares of $.001 common stock in exchange for future international promotional activities. The stock was valued at $.48 per share. Also in December 2007, an individual was given 50,000 shares of $.001 par value common stock in exchange for future promotional activities. The stock was valued at $.48 per share. In January 2008, an individual was sold 1,000,000 shares of $.001 par value common stock in exchange for cash at par value ($.001 per share) in connection with the renewal of his agreement for consulting services through the end of 2008. The stock was valued at $.25 per share. In February 2008, an individual exchanged a $40,000 promissory note for 266,666 shares of $.001 par value common stock. The exercise price and fair value of the stock was $.15 per share. F-20 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In March 2008, an individual exchanged services valued at $40,000 for 266,666 shares of $.001 par value common stock. The exercise price of the stock was $.15 per share. Also in March 2008, an individual was given 2,000,000 shares of $.001 par value common stock in exchange for future investor and public relations services. The exercise price was $.15 per share. In April 2008, two Company officers given an aggregate 500,000 shares in exchange a total of $75,000 in amounts owed to them by the Company. Also in April 2008, an individual chose to cancel a $15,000 short-term advance in exchange for 100,000 common shares, at a price of $.15 per share. Also in April 2008, an individual was given 500,000 common shares at an effective price of $.19 per share in return for financial services and investor relations services. In May 2008, an individual exercised his option to purchase 50,000 shares at $.25 per share, for a net proceeds of $12,500 to the Company. Also in May 2008, the Company issued 400,000 common shares to a financial institution in exchange for international investor relations services. The fair value of the stock was $.10 per share In June 2008, an individual was granted 791,666 shares at a fair market value of $.06 for financial services and investor relations. Also in June 2008, the Company granted 1,385,000 common shares to a present investor for financial services and future loan consideration. The fair value of the stock was $.06 per share. Also in June 2008, the Company issued 500,000 common shares at a fair value of $.06 per share to a financial services company. Also in June 2008, the Company issued 166,666 shares to an employee for services. The stock was valued at $.06 per share. In September 2008, the Company issued 1,000,000 of its $.001 par value common stock to an individual investor in exchange for $40,000, or $.04 per share. In September 2008, an individual was granted 600,000 common shares at a fair market value of $.04 for financial services and investor relations. F-21 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In September 2008, an individual was granted 130,000 common shares at a fair market value of $.04 for employee benefits. In September 2008, an individual was granted 200,000 common shares at a fair market value of $.04 for financial services. In September 2008, an individual was granted 60,000 common shares at a fair market value of $.04 for employee benefits. In September 2008, an individual was granted 1,000,000 common shares at a fair market value of $.04 for financial services. In September 2008, an individual was granted 75,000 shares at a fair market value of $.04 per share for financial services. In October 2008, an individual was granted 35,000 common shares at a fair market value of $.04 per share for financial services. In October 2008, an individual was granted 5,000 common shares at a fair market value of $.04 per share In December 2008, an individual was granted 40,000 common shares at a fair market value of $.04 per share for employee benefit services. In December 2008, an individual was granted 30,000 common shares at a fair market value of $.04 per share for inventory supplies. In December 2008, an individual was granted 500,000 common shares at a fair market value of $.04 per share for financing consideration. In December 2008, a corporation was granted 300,000 common shares at a fair market value of $.04 per share for investor relations services. In December 2008, an individual was granted 35,000 common shares at a fair market value of $.04 per share for investor relations services. F-22 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 NOTE 6 - INCOME TAXES At December 31, 2008 and 2007, the Company had federal net operating loss carryforward amounts of $5,516,280 and $2,173,151, which begins to expire in 2021. The provision for income taxes consisted of the following components for the years ended December 31, 2008 and 2007: 2008 2007 ------------ ------------ Current Federal $ -- $ -- State -- -- Deferred -- -- ------------ ------------ $ -- $ -- ============ ============ Components of net deferred tax assets, including a valuation allowance, are as follows at December 31, 2008 and 2007: 2008 2007 ------------ ------------ Deferred Tax Assets Net operating loss carryforward $ 5,516,250 $ 2,173,151 Less valuation allowance (5,516,250) (2,173,151) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============ The valuation allowance for deferred tax assets as of December 31, 2008 and 2007 was $5,516,250 and $2,173,151, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of December 31, 2008 and 2007 and maintained a full valuation allowance. F-23 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Reconciliation between the statutory rate and the effective tax rate is as follows at December 31, 2008 and 2007: 2008 2007 ------------ ------------ Federal stautory rate -35.0% -35.0% State taxes, net of federal benefit 0.0% 0.0% Change in valuation allowance 35.0% 35.0% ------------ ------------ Effective tax rate 0.0% 0.0% ============ ============ NOTE 7. RELATED PARTY TRANSACTIONS As discussed in Note 4, the Company issued 40,000,000 shares of common stock to a related party, Smoky Systems, LLC in exchange for a license to certain assets. The license entitles Smoky Market Foods, Inc. to the use of certain assets developed by Smoky Systems, LLC. The licensed assets include intellectual property such as trademarks, copyrights, telephone numbers, email addresses, marketing collateral and other branded materials that will be utilized by management to exploit the Smoky Market brand. Management assigned a nominal value of $40,000 to such assets in this related party transaction. The 40,000,000 shares were issued at the $.001 par value per share. Subsequently in 2006, the Company purchased certain tangible assets from Smoky Systems in a bulk asset purchase. The purchase was consummated at Smoky Systems, LLC's net book value on such assets. The transaction is summarized as follows: Property and equipment acquired $ 163,628 Less assumed capital leases 52,048 -------------- Net purchase price $ 111,580 ============== As of December 31, 2008 the Company owed $87,364 to two related parties. Such debts were reflected as trade payables, which are non-interest bearing obligations with no formal repayment terms. F-24 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 NOTE 8 - COMMITMENTS OPERATING LEASE COMMITMENT - -------------------------- The Company is obligated under a long-term lease of restaurant property in Los Gatos, California through February 2013. Base monthly rent was $5,000 at December 31, 2008, with common area maintenance ("CAM") charges of $1,043. Future minimum lease payments, exclusive of CAM charges, are as follows for the years ending December 31: 2009 $ 61,500 2010 63,345 2011 65,245 2012 67,203 2013 11,255 ----------- Total $ 268,548 =========== EMPLOYMENT CONTRACT - ------------------- Effective May 1, 2007, the Company entered into a three-year employment contract with the chief executive officer. Terms of the agreement include 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. 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 through December 31, 2008 under this plan is as follows: F-25 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Weighted Options and Average Stock Awards Option Available Number of Exercise for Grant Shares Price ---------- ---------- ---------- Outstanding as of April 18, 2006 (Inception) -- -- -- Shares reserved 6,500,000 -- Options granted (1,462,500) 1,462,500 $ 0.10 Options exercised -- -- -- Options canceled -- -- -- ---------- ---------- Outstanding as of December 31, 2006 5,037,500 1,462,500 $ 0.10 Shares reserved -- -- -- Options granted (425,000) 425,000 -- Stock awards granted (1,775,000) 1,775,000 n/a Options exercised -- -- -- Options canceled -- -- -- ---------- ---------- Outstanding as of December 31, 2007 2,837,500 3,662,500 $ 0.10 Shares reserved -- -- -- Options granted -- -- -- Stock awards granted (2,020,000) 2,020,000 n/a Options exercised -- -- -- Options canceled -- -- -- ---------- ---------- Outstanding as of December 31, 2008 817,500 5,682,500 $ 0.10 ========== ==========
The following table summarizes information about stock options outstanding and exercisable at December 31, 2008: Stock Options Outstanding -------------------------------------------- Weighted-Average Number of Remaining Weighted- Options Contractual Average Exercise Price Outstanding Life in Years Exercise Price - -------------- ----------- ------------- -------------- $0.10 1,887,500 4.58 $ 0.10 Stock Options Exercisable ---------------------------- Number of Weighted- Options Average Exercise Price Exercisable Exercise Price - -------------- ----------- -------------- $0.10 1,753,125 $ 0.10 F-26 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 The following table summarizes information about stock options outstanding and exercisable at December 31, 2007: Stock Options Outstanding -------------------------------------------- Weighted-Average Number of Remaining Weighted- Options Contractual Average Exercise Price Outstanding Life in Years Exercise Price - -------------- ----------- ------------- -------------- $0.10 1,887,500 5.58 $ 0.10 Stock Options Exercisable ---------------------------- Number of Weighted- Options Average Exercise Price Exercisable Exercise Price - -------------- ----------- -------------- $0.10 1,456,250 $ 0.10 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 Weigted-average fair value of stock options granted $ 0.099 F-27 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 COMMON STOCK WARRANTS The following is a summary of the status of all the Company's stock warrants as of December 31, 2008 and 2007 and changes during the years then ended: Weighted Number Average of Exercise Warrants Price ---------- ---------- Oustanding, January 1, 2007 4,836,000 $ 0.25 Granted 3,025,000 0.25 Exercised -- -- Cancelled -- -- ---------- ---------- Ouststanding, December 31, 2007 7,861,000 0.25 Granted 300,000 0.15 Exercised -- -- Cancelled (7,861,000) 0.25 ---------- ---------- Ouststanding, December 31, 2008 300,000 $ 0.15 ========== ========== Warrants exercisable at December 31, 2007 7,861,000 $ 0.25 ========== ========== Warrants exercisable at December 31, 2008 300,000 $ 0.15 ========== ========== The following tables summarize information about stock warrants outstanding and exercisable at December 31, 2008: Stock Warrants Outstanding -------------------------------------------- Average Number of Remaining Weighted- Warrants Contractual Average Exercise Price Outstanding Life in Years Exercise Price - -------------- ----------- ------------- -------------- $0.15 300,000 113.80 $ 0.15 Stock Warrants Exercisable ---------------------------- Number of Weighted- Warrants Average Exercise Price Exercisable Exercise Price - -------------- ----------- -------------- $0.15 300,000 $ 0.15 F-28 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 The following tables summarize information about stock warrants outstanding and exercisable at December 31, 2007: Stock Warrants Outstanding -------------------------------------------- Weighted- Average Number of Remaining Weighted- Warrants Contractual Average Exercise Price Outstanding Life in Years Exercise Price - -------------- ----------- ------------- -------------- $0.25 7,861,000 108.82 $ 0.25 Stock Warrants Exercisable ---------------------------- Number of Weighted- Warrants Average Exercise Price Exercisable Exercise Price - -------------- ----------- -------------- $0.25 7,861,000 $ 0.25 NOTE 9 - PRIOR YEAR RESTATEMENT The financial statement information prior to 2008 has been restated to correct for previous accounting errors, including unrecorded liabilities and the misapplication of FAS 123r - Accounting for Stock-Based Compensation. A summary of the changes to the previously issued balance sheet and income statement are as follows: F-29 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 DECEMBER 31, 2007 DECEMBER 31, (AS PREVIOUSLY PRIOR PERIOD 2007 REPORTED) ADJUSTMENTS (AS RESTATED) ----------- ----------- ----------- ASSETS: - ------- Current Assets Cash $ 16,235 $ 16,235 Inventory 4,250 4,250 ----------- ----------- Total Current Assets 20,485 20,485 ----------- ----------- Property & Equipment, net of accumulated depreciation 166,478 (1) 125,000 291,478 ----------- ----------- Other Assets Intangible assets 125,000 (2) (91,667) 33,333 Deposits 8,483 8,483 ----------- ----------- Total Other Assets 133,483 41,816 ----------- ----------- Total Assets $ 320,446 $ 353,779 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): - ----------------------------------------------- Current Liabilities Accounts payable $ 264,548 (3) (62,342) $ 202,206 Accounts payable - related parties -- (4) 75,623 75,623 Accrued payroll costs -- (5) 191,728 191,728 Short-term advance 40,000 40,000 Current maturities of capital lease obligations 18,127 18,127 ----------- ----------- Total Current Liabilities 322,675 527,684 Long-term Liabilities Capital lease obligatons, less current maturities 12,835 12,835 ----------- ----------- Total Liabilities 335,510 540,519 ----------- ----------- Stockholders' Equity (Deficit) Common Stock, par value $.001, 200,000,000 shares 54,813 54,813 Deferred Stock-Based Compensation (1,096,973)(6) 52,398 (1,044,575) Other paid-in capital 2,437,816 (7) 141,749 2,579,565 Additional paid-in capital for warrants 693,106 (8) 138,666 831,772 Deficit accumulated during the development stage (2,103,826)(9) (504,489) (2,608,315) ----------- ----------- Total Stockholders' Equity (Deficit) (15,064) (186,740) ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) $ 320,446 $ 353,779 =========== =========== RESTATEMENT EXPLANATIONS - ------------------------ (1) $85,000 was reclassified from intangible assets and an additional $40,000 was recorded in the restatement of stock based consideration exchanged for intangible leasehold rights. (2) A reduction of $85,000 was made to reclass leasehold rights to property and equipment. Additionally, $6,667 of an intangible license was amortized. (3) $106,250 in previously unrecorded liabilities are reflected, less $75,623 in related party accounts payable, which have been reclassified and reported separately on the line below. (4) $75,623 in related party accounts payable have been reclassified in order to present such debt separately on the balance sheet. (5) $98,758 in additional payroll related costs were discovered and recorded as a liability as of Decembrer 31, 2007. (6) (7) & (8) These adjustments relate to corrections in the application of FAS 123r Accounting for Stock-based Compensation. (9) The accumulated deficit increased $504,489 due to $98,758 in additional payroll costs, $106,250 in additional vendor payables, $6,667 in amortization of license amortization and $292,814 in adjustments related to the application of FAS 123r. F-30 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 DECEMBER 31, 2007 DECEMBER 31, (AS PREVIOUSLY PRIOR PERIOD 2007 REPORTED) ADJUSTMENTS (AS RESTATED) ----------- ----------- ----------- Revenue $ 6,947 $ 6,947 Cost of Goods Sold 12,425 12,425 ----------- ----------- ----------- Gross Profit (Loss) (5,478) -- (5,478) ----------- ----------- ----------- Operating Expenses Salaries, Wages & Benefits 260,364 (1) 98,758 359,122 Marketing 116,296 116,296 Rent 41,046 41,046 Professional fees 103,483 (2) 55,000 158,483 Depreciation/amortization 34,405 (3) 6,667 41,072 Stock based compensation -- Salaries, Wages & Benefits 180,950 (4) 8,419 189,369 Professional 191,650 (4) (31,750) 159,900 Financing 394,555 (4) 250,620 645,175 Other 212,163 212,163 ----------- ----------- ----------- 1,534,912 387,714 1,922,626 ----------- ----------- ----------- Operating Loss (1,540,390) (387,714) (1,928,104) ----------- ----------- ----------- Other Income (Expense) Interest Income 887 887 887 Interest Expense 56,580 (56,580) (56,580) ----------- ----------- ----------- Other Expense - Net 57,467 (55,693) (55,693) ----------- ----------- ----------- Net (Loss) $(1,482,923) $ (443,407) $(1,983,797) =========== =========== =========== (Loss) per Share - basic and diluted $ (0.032) $ (0.010) $ (0.043) =========== =========== =========== RESTATEMENT EXPLANATIONS - ------------------------ (1) $98,758 in additional payroll related costs were discovered and recorded as a liability as of Decembrer 31, 2007. (2) $55,000 in additional unrecorded professional fees were discovered and recorded as liabilities at December 31, 2007. (3) Represents amortization of intangible license rights not previously recorded. (4) Adjustments made to correct FAS 123r calculations relating to stock-based compensation given to employees, vendors, creditors and shareholders.
F-31 SMOKY MARKET FOODS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 NOTE 10. SUBSEQUENT EVENTS The Company retains the services of a consultant (the "Consultant") who is assisting the company in obtaining debt or equity financing and other corporate finance initiatives. The Consultant was granted 1,250,000 common shares and $25,000 as compensation under the terms of the first agreement, and another 1,000,000 common shares and $25,000 for 2008. The fair value of such shares was reflected as an operating cost in the statement of operations. In the first quarter of 2009, management authorized the sale of up to $10,000,000 in 10% Convertible Redeemable Preferred Stock ("2009 Preferred Stock"). Each share of 2009 Preferred stock includes a 2009A Warrant to purchase 25,000 shares of common stock. The 2009 Preferred Stock carries a 10% cumulative dividend and a liquidation preference equal to the purchase price plus unpaid accrued interest. The Company has authorized 500 shares to be issued at $20,000 per share. Each share is convertible at the option of the holder after March 31, 2012 into a number of shares of Common Stock that has a calculated market value of five times the liquidation preference investment, or after April 1, 2014 with the number of shares of Common Stock calculated at a market value of ten times the liquidation preference. If not converted into Common Stock, the 2009 Preferred Stock is redeemable at a redemption price equal to the Liquidation Preference at the option of the Company any time following March 31, 2012 with 30-days advanced written notice. In the first quarter of 2009, the Company issued 103,000 common shares to an individual for financing services. The Company also borrowed $100,000 in the first quarter of 2009 in exchange for a 10% promissory note due in June 2010 and 3,000,000 common shares. The Company also issued a combined 325,000 common shares in the first quarter of 2009 in connection with the receipt of multiple short-term cash advances from multiple individuals which aggregated $16,250. F-32 EX-23.1 2 smoky_10kex23-1.txt Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in Registration Statement No. 333-146034 on Forms S-8 of our report dated May 7, 2009 relating to our audit of the financial statements of Smoky Market Foods, Inc. for the periods ending December 31, 2008 and December 31, 2007, which appear in this Annual Report on Form 10-K of Smoky Market Foods, Inc. for the year ended December 31, 2008. /s/ Moore & Associates, Chartered - --------------------------------- Moore & Associates, Chartered Las Vegas, Nevada May 13, 2009 EX-31.1 3 smoky_10kex31-1.txt Exhibit 31.1 CERTIFICATION I, Edward C. Feintech, certify that: 1. I have reviewed this annual report on Form 10-K of Smoky Market Foods, Inc. for the year ended December 31, 2008; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2009 /s/ Edward C. Feintech ---------------- ------------------------------------------- Edward C. Feintech, Chief Executive Officer EX-31.2 4 smoky_10kex31-2.txt Exhibit 31.2 CERTIFICATION I, Shane A. Campbell, certify that: 1. I have reviewed this annual report on Form 10-K of Smoky Market Foods, Inc. for the year ended December 31, 2008; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2009 /s/ Shane A. Campbell --------------- --------------------------------- Shane A. Campbell Chief Financial Officer EX-32.1 5 smoky_10kex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C., SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 10-K of Smoky Market Foods, Inc. (the "Company") for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward C. Feintech, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edward C. Feintech - ---------------------- Edward C. Feintech Chief Executive Officer May 14, 2009 EX-32.2 6 smoky_10kex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C., SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 10-K of Smoky Market Foods, Inc. (the "Company") for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shane A. Campbell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Shane A. Campbell - --------------------- Shane A. Campbell Chief Financial Officer May 14, 2009 -----END PRIVACY-ENHANCED MESSAGE-----