UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
(X) Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 2004
OR
(_) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1939 For the transition period from to
Commission File Number 1-13984
CREATIVE BAKERIES, INC.
(Exact name of Registrant as specified in its Charter)
NEW YORK 13-3832215
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20 PASSAIC AVENUE, FAIRFIELD, NJ 07004
--------------------------------------
(Address of principal executive offices)
(973) 808-9292
--------------
(Registrant's telephone number, including area code)
Former name: William Greenberg Jr. Desserts and Cafes, Inc.
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES __ NO X
As of November 15, 2004, there were 6,815,926 shares of the registrant's common
stock, par value $0.001 per share, outstanding.
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated financial statements:
Balance sheet as of September 30, 2004 F-2
Statement of operations for the nine and
three months ended September 30, 2004 and 2003 F-3
Statement of cash flows for the nine months
ended September 30, 2004 and 2003 F-4
Notes to condensed consolidated financial
statements F-5 - F-11
Item 2. Management's discussion and analysis of F-12 - F-17
financial condition
Item 3. Controls and Procedures F-18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders F-19
Item 6. Exhibits and reports on Form 8-K F-19
SIGNATURES F-20
CERTIFICATIONS F-21 - F-22
PART I. FINANCIAL INFORMATION
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - SEPTEMBER 30, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 1,569
Accounts receivable, less allowance for doubtful
accounts of $400 268,852
Inventories 231,370
Prepaid expenses 33,394
------------
Total current assets 535,185
------------
Property and equipment, net 333,825
------------
Other assets:
Security deposits 5,765
Tradename and licensing agreements,
net of amortization 74,625
------------
80,390
------------
$ 949,400
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Long-term debt, current portion $ 48,567
Notes payable, officer, current portion 578,294
Accounts payable 555,215
Accrued expenses 91,799
Warrants payable 115,625
------------
Total current liabilities 1,389,500
------------
Other liabilities:
Long-term debt, net of current portion 82,168
Notes payable, officer, net of current portion 51,076
Deferred rent 17,340
------------
150,584
Stockholders' equity (deficiency):
Preferred stock $.001 par value, authorized 2,000,000
shares, none issued
Common stock, $.001 par value, authorized 30,000,000
shares, issued and outstanding 6,815,926 shares 6,815
Additional paid in capital 11,387,849
Deficit (11,985,348)
------------
(590,684)
------------
$ 949,400
============
See notes to consolidated financial statements.
F-2
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Nine Months Three Months
Ended Sept 30 Ended Sept 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $ 1,746,549 $ 2,222,256 $ 588,644 $ 742,941
Cost of sales 1,573,260 1,958,231 535,110 658,201
----------- ----------- ----------- -----------
Gross profit 173,289 264,025 53,534 84,740
----------- ----------- ----------- -----------
Selling, general and
administrative expenses 732,745 560,344 228,587 182,952
Write-off of tradename rights 17,981 -- 17,981 --
Gain on sale of asset (10,000) -- (10,000) --
Cancellation of
indebtedness -- (57,978) -- (57,978)
Interest expense 48,941 6,860 16,474 3,037
789,667 509,226 253,042 128,011
Loss from continuing
operations (616,378) (245,201) (199,508) (43,271)
Income from discontinued
operations -- 134,265 -- 134,265
----------- ----------- ----------- -----------
Net income (loss) ($ 616,378) ($ 110,936) ($ 199,508) $ 90,994
=========== =========== =========== ===========
Earnings per common share:
Primary and fully diluted:
Loss from continuing
operations ($ 0.10) ($ 0.04) ($ 0.03) $ 0.00
Discontinued operations 0.00 0.02 0.00 0.02
----------- ----------- ----------- -----------
Net income (loss) per
common share ($ 0.10) ($ 0.02) ($ 0.03) $ 0.02
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 5,991,304 5,449,680 6,631,202 5,455,446
=========== =========== =========== ===========
See notes to consolidated financial statements.
F-3
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
--------- ---------
Operating activities:
Loss from continuing operations ($616,378) ($245,201)
Adjustments to reconcile loss from
continuing operations to cash used in
operating activities:
Depreciation and amortization 77,710 64,869
Common stock issued for services 100,000 5,000
Write-off of tradename rights 17,981 --
Gain on sale of equipment (10,000) --
Cancellation of indebtedness -- (57,978)
Changes in other operating assets and
liabilities from operations:
Accounts receivable (93,869) (100,637)
Inventory (57,851) 8,858
Prepaid expenses 32,682 22,433
Security deposits (1,051) --
Accounts payable 192,806 45,669
Accrued expenses 10,155 28,720
Deferred rent 11,820 (13,242)
--------- ---------
Net cash used in operating activities (335,995) (241,509)
--------- ---------
Investing activities:
Purchase of property and equipment (93,222) --
Sale of tradename rights and equipments 35,000 --
--------- ---------
Net cash used in investing activities (58,222) --
--------- ---------
Financing activities:
Proceeds from notes payable 90,152 50,124
Payment of notes payable (256,769) --
Proceeds from officers loans 487,107 144,563
Payment of officers' loans (7,227) --
--------- ---------
Net cash provided by financing activities 313,263 194,687
--------- ---------
Net decrease in cash and cash equivalents (80,954) (46,822)
--------- ---------
Cash and cash equivalents, beginning of period 82,523 51,155
--------- ---------
Cash and cash equivalents, end of period $ 1,569 $ 4,333
========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest: $ 25,786 $ --
========= =========
See notes to consolidated financial statements.
F-4
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
results of operations for the nine months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report for the year ended
December 31, 2003 included in its Annual Report filed on Form 10-KSB.
Going concern:
The Company has incurred losses from continuing operations over the last
several quarters. Management has described its plan of action in regard to
this uncertainty in its latest annual report filed December 31, 2003.
2. Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
3. Nature of operations, risks and uncertainties:
The Company is a manufacturer of baking and confectionery products, which
are sold to supermarkets, food distributors, educational institutions,
restaurants, mail order and to the public. Although the Company sells its
products throughout the United States, its main customer base is on the
East Coast of the United States.
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and
events as of the date of the financial statements. Accordingly, upon
settlement, actual results may differ from estimated amounts.
The Company maintains all of its cash balances in New Jersey financial
institutions. The balances are insured by the Federal Deposit Insurance
Company (FDIC) up to $100,000. At September 30, 2004, the Company had no
uninsured cash balances.
F-5
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
4. Accounts receivable:
Following is a summary of receivables at September 30, 2004:
Trade accounts $ 269,252
Less allowance for doubtful accounts (400)
---------
$ 268,852
=========
5. Inventories:
Inventories at September 30, 2004 consist of:
Finished goods $ 98,569
Raw materials 57,619
Supplies 60,182
Work in process 15,000
--------
$231,370
========
6. Property and equipment:
The following is a summary of property and equipment at September 30,
2004.
Baking equipment $1,482,810
Furniture and fixtures 100,998
Leasehold improvements 180,422
----------
1,774,230
Less: Accumulated depreciation
and amortization 1,430,405
----------
$ 333,825
==========
Depreciation expense was $60,409 and $60,369 respectively, for the nine
months ended September 30, 2004 and 2003.
The useful lives of property and equipment for purposes of computing
depreciation are:
Years
-----
Machinery and equipment 10
Furniture and computers 5
Leasehold improvements 10-15
7. Loan acquisition costs:
The Company incurred loan acquisition costs for October 2003 in the amount
of $16,957 in connection with one of the notes payable financings the
Company entered into in 2003. In June 2004, the related note was paid in
full and the remaining acquisition costs were expensed. Loan amortization
expense for the three and nine months ended September 30, 2004 were $0 and
$12,798.
F-6
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
8. Tradename and licensing agreements:
On March 7, 2002, the Company purchased the rights to the tradenames
Brooklyn Cheesecake Company, Inc. and Brooklyn Cheesecake and Desserts
Company, Inc. and the related corporate logo in exchange for 300,000
shares of the Company's common stock, valued on the purchase date at
$90,000. The tradename rights are being amortized on the straight-line
basis over a fifteen-year term. Amortization expense was $4,500 for each
of the nine months ended September 30, 2004 and 2003.
The Company had a licensing agreement for the use of the trademark and
name of one of its subsidiaries and various recipes and methods used in
the production of baked and other goods. The agreement calls for royalties
to be paid upon reaching certain sales levels by the licensee. The
trademark rights were sold on August 26, 2004 for $25,000.
9. Notes payable to executive officer:
Note dated May 21, 2004 in the amount of $54,000, payable on demand, with
interest at the rate of 8.5% per annum. The note is secured by all of the
Company's assets. This note consolidates in a single promissory note
several loan advances received by the Company in the first quarter of 2004
plus an additional $20,000 during the quarter ended June 30, 2004.
Note dated June 15, 2004 in the amount of $317,000, with interest at the
rate of 13% per annum. Interest payments are due on the last day of each
month with the note maturing on August 31, 2004. The note is secured by
all of the Company's assets. The note has been extended to November 30,
2004.
This note repaid and retired a former note payable in the amount of
$250,000 that was to become due on August 31, 2004.
Note payable effective April 2, 2003 in the original amount of $54,000,
with a variable interest rate that was 8.4% at September 30, 2004. Monthly
payment of principal and interest are approximately $1,300. Note is
unsecured and due on demand. The outstanding balance on the loan was
$47,022 at September 30, 2004.
Note dated January 1, 2003 in the original amount of $88,000 with an
interest rate of 8.5% per annum. Interest only payments are due for the
first eighteen months and principal and interest are due monthly
thereafter until the maturity date of December 31, 2005. The balance on
the note was $102,941 at September 30, 2004 including accrued interest.
Note dated September 30, 2004 in the amount of $108,407, payable on
demand, with interest at the rate of 8.5% per annum. The note is secured
by all of the Company's assets. This note consolidates in a single
promissory note several loan advances received by the Company in the third
quarter of 2004.
F-7
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
9. Notes payable to executive officer (continued):
Maturities for the next five years are as follows:
September 30, 2005 $578,294
September 30, 2006 26,854
September 30, 2007 11,400
September 30, 2008 11,400
September 30, 2009 1,422
--------
$629,370
========
10. Long-term debt:
Note dated May 25, 2004 in the amount of $31,000, payable on demand, with
interest at the rate of 8.5% per annum. The note is secured by all of the
assets of the Company. This note consolidates in a single promissory note
several loan advances received in during 2004. The holder of the note is a
member of the Board of Directors.
Capitalized lease with an order date of March 9, 2004, in the amount of
$47,940 plus a 10% buyout amount of $4,794. Monthly payments of principal
and interest in the amount of $1,051 commencing April 7, 2004, payable
over 60 months. The lease matures in April 2009. The balance of the lease
was $48,911 at September 30, 2004. The note is guaranteed by a member of
the Board of Directors.
Note payable effective August 18, 2003 in the original amount of $50,000,
with a variable interest rate that was 8.25% at September 30, 2004.
Monthly payments of principal and interest are approximately $1,000. Note
is unsecured and due on demand. The outstanding balance on the loan was
$48,324 at September 30, 2004. The holder of the note is a member of the
Board of Directors.
Note dated June 28, 2004 in the amount of $2,500, payable on demand, with
interest at the rate of 8.5% per annum. The holder of the note is a member
of the Board of Directors.
Maturities for the next five years are as follows:
September 30, 2005 $ 48,567
September 30, 2006 16,542
September 30, 2007 17,400
September 30, 2008 18,214
September 30, 2009 19,488
Thereafter 10,524
--------
$130,735
========
11. Common Stock:
During the quarter ended June 30, 2004 the Company issued 314,715 shares
of its common stock upon exercise of warrants.
F-8
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
11. Common Stock (continued):
The issuance of the common stock was exempt from registration pursuant to
Section 4(2) of The Securities Act of 1933, as amended.
12. Commitments and contingencies:
The Company rents office, plant and warehouse space in New Jersey under a
five-year lease that expires August 31, 2008. Rental expense for the nine
months ended September 30, 2004 and 2003 was $149,351 and $180,838,
respectively.
The minimum future rentals on the facilities are as follows:
September 30, 2005 145,000
September 30, 2006 156,500
September 30, 2007 162,500
September 30, 2008 154,000
--------
$618,000
========
The Company has 1,156,250 outstanding common stock purchase warrants that
give the warrant holder the right to elect that the Company repurchase
each warrant for consideration consisting of $.10 per warrant plus 40% of
one share of the Company's common stock or exercise the warrants at $.6875
per warrant less the $.10 feature.
The warrants originally expired on December 31, 2000 and have been
extended for a one-year period over the last two years. The Company has
again extended the expiration date of the warrants from December 31, 2003
to December 31, 2004 in exchange for the warrant holders' forbearance. The
total number of shares represented by the warrants is 462,500.
The Company entered into an agreement for legal services commencing
November 1, 2003. The agreement calls for half of the monthly retainer fee
of $1,500 to be paid through the issuance of an equivalent number of
restricted common shares based on an agreed upon market value formula. At
September 30, 2004 18,682 shares of the Company's common stock was due
under the agreement.
13. Concentration of Credit Risk
As of September 30, 2004, the Company had included in accounts receivable
two customers whose outstanding balances equaled or exceeded 10% of total
accounts receivable. If either of the customers should default, it could
have a significant impact on the Company's operation.
F-9
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
14. Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS No. 109") "Accounting for Income
Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and income tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the
tax payable or refundable for the period, plus or minus the change during
the period in deferred tax assets and liabilities. There was no cumulative
effect of adoption or current effect in continuing operations mainly
because the Company has accumulated a net operating loss. The Company has
made no provision for a deferred tax asset due to the net operating loss
carryforward because a valuation allowance has been provided which is
equal to the deferred tax asset. It cannot be determined at this time that
a deferred tax asset is more likely than not to be realized.
The Company has a loss carryforward of $9,860,154 that may be offset
against future taxable income. The carryforward losses expire at the end
of the years 2006 through 2023.
15. Warrants:
At September 30, 2004 the Company had outstanding 1,156,250 common stock
purchase warrants with an exercise price of $.6875 each, which expire on
December 31, 2004. These warrants are the same warrants as described in
Note 12, commitments and contingencies, and are exercisable as described
in Note 12 or they can be used to purchase 40% of one share of common
stock per one warrant. The warrants are included in the computation of
outstanding stock options and warrants as described in the Company's
December 31, 2003 annual report filed on Form 10-KSB.
F-10
CREATIVE BAKERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
16. Earnings per share:
Primary earnings per share is computed based on the weighted average
number of shares actually outstanding plus the shares that would have been
outstanding assuming conversion of the common stock purchase warrants
which are considered to be common stock equivalents. However, according to
FASB 128, effective for financial statements issued and annual periods
beginning after December 15, 1997, entities with a loss from continuing
operations should not include the exercise of potential shares in the
calculation of earnings per share since the increase would result in a
lower loss per share. Thus, common stock purchase warrants and stock
options are excluded from the calculation of earnings per share.
Reconciliation of shares used in computation of earnings per share:
2004 2003
--------- ---------
Weighted average of shares actually
outstanding 5,991,304 5,449,680
========= =========
Common stock purchase warrants
Primary and fully diluted weighted
average common shares outstanding 5,991,304 5,449,680
========= =========
F-11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The company continues to seek additional financing required for its
continued operations. The company continues to streamline its operations. This
includes upgrading its accounting, shipping and receiving departments as well as
funding a quality control staff. Established quality assurance systems must be
in place to attract both domestic and international high volume distributors.
Increased cost of staff as well as historically high costs of raw
materials and freight contributed to the third quarter loss of $ 199,508. The $
154,297, reduction in gross sales for the third quarter of 2004 as compared to
the same period of 2003, can be attributed to raising prices on marginally
priced items (muffins and mini cakes), The result was retailers either
purchasing from a different vendor or discontinuing the items.
New products have been developed to support items for export and the low
carbohydrate markets.
Management will continue to refine operations and control costs. Active
solicitation for companies to be acquired by or merged, continue to be
evaluated.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2003
The Company had consolidated net sales of $588,644 and $742,941 for the
three months ended September 30, 2004 and 2003 respectively, a decrease of
$154,297, or 20.8%. Consolidated net sales for the nine months ended September
30, 2004 and 2003 were $1,746,549 and $2,222,264 respectively, a decrease of
$475,715, or 21.4%. The decrease in sales is a result of raising prices for
which customers either changed vendors or discontinued items.
The cost of sales were $535,110 and $658,201 and $1,573,260 and $1,958,231
for the three and nine months ended September 30, 2004 and 2003 respectively, a
decrease of $123,091 (18.7%) and $384,971 (19.7%) respectively. The reduction
was a direct result of the decreased sales. The gross profit percentages for the
three and nine months ended September 30 average 9.1% and 9.9% respectively. The
inability to purchase ingredients efficiently, due to poor cash flow, and the
slow summer season, were the leading contributors to these decreases.
Selling, general and administrative expenses however, totaled $228,587 and
$182,952 for the three months ended September 30, 2004 and 2003 and $732,745 and
$560,344 for the nine months ended September 30, 2004 and 2003 respectively.
This was an increase of $45,635 (24.9%) and $172,401 (30.8%) respectively. This
was a result of managements upgrade of various departments personnel.
During the quarter ended September 30, 2004, the Company wrote off the
balance of trademark rights after selling such rights for $25,000. Additionally,
the Company sold fully depreciated equipment for $10,000. There were no similar
transactions for the quarter ended September 30, 2003.
The company had a cancellation of debt in the three months ended September
30, 2003 of $57,978, which was a result of renegotiating its current warehouse
lease. The write-off was for an accumulated rent straight-lining liability.
There was no cancellation of debt as of September 30, 2004.
Interest expense was $16,474 and $3,037 for the three-months ended
September 30, 2004 and 2003 respectively, an increase of $13,437 or 442.4%. The
increase of $42,081 or 613.4% to $48,941 from $6,860 for the nine months ended
September 30, 2004 and September 30, 2003 were due substantially to additional
loans from the Chairman and Chief Executive Officer and a second director.
F-12
SEGMENT INFORMATION
Not applicable since retail operations were discontinued.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception the Company's only source of working capital has been
the $8,455,000 received from the issuance of its securities.
As of September 30, 2004, the Company had a negative working capital from
continuing operations of approximately $854,315 as compared to a negative
working capital of $372,879 at September 30, 2003.
Although the Company has previously been successful in obtaining
sufficient capital funds through issuance of common stock and warrants, there
can be no assurance that the Company will be able to do so in the future.
RISK FACTORS
The following information sets forth facts that could cause our actual
results to differ materially from those contained in forward looking statements
we have made in this quarterly report and those we may make from time to time.
If We Are Unable to Obtain Additional Funds, We May Have to Significantly
Curtail the Scope of Our Operations and Alter Our Business Model.
Management believes that profitable operations are essential for the
Company to become viable. The present business plan contemplates profitable
operations will be achieved. However, in the event that profitable operations
are not achieved, our present financial resources should allow us to continue
operations through December 31, 2004. If additional financing is required and
not available when required or is not available on acceptable terms, we may be
unable to continue our operations at current levels or at all. We are engaged in
seeking additional financing and we continue to impose actions designed to
minimize our operating loses. We would consider strategic opportunities,
including investment in the Company, a merger or other acceptable transactions,
to sustain our operations. We do not currently have any agreements in place with
respect to any such strategic opportunity, and there can be no assurances that
additional capital will be available to us on acceptable terms, or at all. If we
are unable to obtain additional financing or to arrange a suitable strategic
opportunity, our business will be placed in significant financial jeopardy.
Our Independent Auditors have Stated that Our Recurring Losses from
Operations and Our Accumulated Deficit Raise Substantial Doubt About Our Ability
to Continue as a Going Concern.
The report of our independent Certified Public Accountants dated March 17,
2004 for the December 31, 2003 consolidated financial statements contained an
explanatory paragraph that states that our recurring losses from operations and
accumulated deficit raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty. We believe
we will need to raise more money to finance our operations and sustain our
business model. We may not be able to obtain additional financing on acceptable
terms, or at all. Any failure to raise additional financing will likely place us
in significant financial jeopardy.
F-13
Our Financial Condition Has Adversely Affected Our Ability to Pay
Suppliers on a Timely Basis Which May Jeopardize Our Ability to Continue Our
Operations Necessary to Continue Shipment and Sales of Our Products.
As of September 30, 2004 our accounts payable totaled $555,215 of which
$105,109 were over sixty (60) days old. While we have negotiated payment plans
with our major suppliers and vendors whereby we pay C.O.D. with a nominal pay
down of any past due amounts, there can be no assurances that we will be able to
continue these payment plans or obtain the necessary materials and/or
ingredients to produce our baked goods. If we are unable to obtain additional
financing on acceptable terms, our ability to make timely payments to our
critical suppliers will be jeopardized and we will be unable to obtain critical
supplies and services to maintain and continue to manufacture, ship and to sell
our products.
The Company And the Price Of Our Shares May Be Adversely Affected By the
Public Sale of a Significant Number of the Shares Eligible For Future Sale.
All but a very small number of the outstanding shares of our Common Stock
are freely tradable. Sales of Common Stock in the public market could materially
adversely affect the market price of our Common Stock. Such sales may also
inhibit our ability to obtain future equity or equity-related financing on
acceptable terms. At our Annual Meeting of Stockholders held August 4, 2004 our
stockholders approved an increase in the number of authorized shares of Common
Stock from 10,000,000 shares to 30,000,000 shares. The issuance and registration
of additional shares could have a significant adverse effect on the trading
price of our Common Stock.
We Have Obtained Secured Financing With the Pledge of All of Our Assets
Which Will Have Priority Over Security Interests of Any Holders of Our Preferred
Shares.
We have previously procured financing to continue our operations at arms
length transaction from the following directors: Ronald L. Schutte, the Chief
Executive Officer and Chairman of the Board, in the amount of $629,370 and
Anthony J. Merante, a Director of the Company, in the amount of $79,324. We
intend to grant security interest to these two directors.
We HAVE Incurred Losses in the Past and We Expect To Incur Losses in the
Future.
We have incurred losses in each year since our inception. Our net loss
after write off of certain old liabilities, for the fiscal year ended December
31, 2003 was $146,614 and our accumulated deficit as of December 31, 2003 was
$11,368,970. We expect operating losses to continue for the foreseeable future
as we continue our marketing and sales activities and conduct additional
development of our products.
RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK
The Price of Our Common Stock is Subject to Volatility
Our Common Stock has traded as low as $.06 per share and as high as $1.02
per share in the twelve (12) month ended September 30, 2004. Our average trading
volume is extremely low. As such, a significant sale of our Common Stock may
result in a major fluctuation of the market price. Some other factors leading to
the volatility include:
o Price and volume fluctuation in the stock market at large which do
not relate to our operating performance;
o Fluctuation in our operating results;
o Concerns about our ability to finance our continuing operations;
o Financing arrangements which may require the issuance of a
significant number of shares in relation to the number shares of our
Common Stock currently outstanding;
o Fluctuations in market demand and supply of our products.
F-14
Our Common Stock is Currently Traded on the Over-The-Counter-Bulletin-
Board and an Investor's Availability to Trade Our Common Stock May Be Limited by
Trading Volume
The trading volume in our common shares has been relatively limited. A
consistently active trading market for our Common Stock may not continue on the
Over-The-Counter-Bulletin-Board. The average trading volume in our Common Stock
on the Over-The-Counter-Bulletin-Board for the month ended September 30, 2004
was approximately 3,772 shares.
RISKS RELATED TO OUR BUSINESS
We are Currently Dependent on a Few Major Customers for a Significant
Portion of Our Revenues
We currently record sales from approximately 53 customers. None of these
customers account for 10% of our revenues. We intend to establish long-term
relationships with our customers and continue to expand our customer base. While
we diligently seek to become less dependent on any one customer, it is likely
that certain business relationships may result in one or more customers
contributing to a significant portion of our revenue in any given year for the
foreseeable future.
We Have Limited Ability to Sell and Market Our Products
At the current time, we have limited marketing capability as compared with
many of our competitors and we do not have a large sales, promotion and
marketing budget as we are constrained by our lack of working capital and our
ability to raise the necessary cash flow from our business operations to
re-invest in our marketing programs. As a result of our limited marketing
capabilities, we are forced to rely upon customer referrals and a part-time
sales force. Our competitors have direct advertising and sales promotion
programs for their products as well as sales and marketing personnel that may
have a competitive advantage over us in contacting prospective customers. Our
position in the industry is considered minor in comparison to that of our
competitors, and while we continue to develop and explore new marketing methods
and techniques and programs directed toward foreign customers, our ability to
compete at the present time is limited. Our success depends upon the ability to
market, penetrate and expand markets and form alliances with distributors.
However, there can be no assurances that:
o Our direct selling efforts will be effective;
o We will obtain an expanded degree of market acceptance;
o We will be able to successfully form relationships with distributors
to market our products.
We Depend Upon the Marketability of Primary Products
Frozen cheesecake, pre-portioned desserts and tart shells are our primary
products. We may have to cease operations if any of our primary products fails
to achieve market acceptance and/or generate significant revenues. Additionally,
the marketability of our products is dependent upon customer taste, preference
and acceptance, which are variables that may be beyond our ability to control.
We May Not Be Able to Successfully Develop and Market New Products That We
Plan to Introduce
We plan to develop new baked goods for production. There are numerous
developmental issues that may preclude the introduction of these products into
commercial sale. If we are unable to establish market acceptance for these
products, we may have to abandon them or alter our business plan. Such
modifications to our business plan will likely delay achievement of milestones
related to revenue increases and achievement of profitability.
We May Experience Problems in Manufacturing Sufficient Quantities and
Commercial Quantities of Our Products
We may encounter difficulties in the production of our current and any
future products due to such reasons as: o Lack of working capital necessary to
gain market acceptance;
o Limited equipment and resources to produce product;
o Quality control and assurance;
o Supplies of ingredients; and
o Shortages of qualified personnel.
F-15
Any of the foregoing or other difficulties would affect our ability to
meet increases in demand should our products gain market acceptance.
We Claim Certain Proprietary Rights in Connection with the Combination of
Ingredients and Manufacture of Our Products
Although we do not possess any patent protection for the formulation and
production of our products, we believe that the combination of ingredients and
our method of production are unique and important to our ability to produce
quality baked goods and desserts. As we do not possess intellectual property
protection, there is the risk that we may not be able to prevent a competitor
from duplicating our recipes or our methods of production.
We Use Certain Names that Do Not Have Protection under Federal or State
Trademark Laws.
Our use of the names, "Creative Bakeries, Inc.," "Brooklyn Cheesecake
Company, Inc." and "Brooklyn Cheesecake and Desserts Company," under which
Creative Bakeries conducts business and has established goodwill may be subject
to legal challenge since there are other businesses operating under similar
names and we have not registered trademarks for these names with either federal
or state agencies. In addition, we utilize packaging with depictions of the
Brooklyn Bridge in designed or stylized formats in conjunction with the names,
"Brooklyn Cheesecake Company, Inc." and "Brooklyn Cheesecake and Deserts
Company," which have not been registered with either federal or state agencies.
In that we do not possess registered trademarks for our trade names or trade
dress, we may face opposition to our usage of same that may require us to
discontinue usage of certain trade names or packaging, which in turn will
require us to re-establish goodwill associated with our product names and
packaging. We are seeking trademark registrations with the United States Patent
and Trademark Office but there can be no assurances that we will be successful
in obtaining a registered mark.
Attraction and Retention of Key Personnel
Our future success depends in significant part on the continued services
of key sales and senior management personnel. The loss of Ronald L. Schutte, our
Chairman and Chief Executive Officer, or other key employees could have a
material adverse affect on our business, results of operations and financial
condition. There can be no assurances that we can attract, assimilate or retain
other highly qualified personnel in the future.
We have Limited Product Liability Insurance Due to the High Cost of Same
We manufacture, market and sell baked goods and dessert products. In the
event our products are tainted/spoiled or cause illness in consumers, we may
face potential claims. Due to the high cost of product liability insurance, we
only maintain insurance coverage of $2,000,000 to protect against claims
associated with the consumption of our product. Any claim against us, whether or
not successful, may result in our expenditure of substantial funds and
litigation. Further, any claims may require management's time and use of our
resources and may have a materially adverse impact on us.
Geographic Concentration in New York City Tri-State Area
Most of Creative Bakeries' retail and institutional/wholesale customers
are located in the New York City metropolitan area. Adverse changes in economic
conditions in the New York City metropolitan area are more likely to affect the
Company's business, financial condition and results of operations than if its
operations were spread over a larger market area.
F-16
Government Regulation: Maintenance of Licenses and Certification
Creative Bakeries is subject to numerous state regulations relating to the
preparation and sale of food. It is also subject to federal and state laws
governing the Company's relationship with employees, including minimum wage
requirements, overtime, working and safety conditions, and citizenship
requirements. The failure to obtain or retain the required food licenses or to
be in compliance with applicable governmental regulations, or any increase in
the minimum wage rate, employee benefits costs (including costs associated with
mandated health insurance coverage) or other costs associated with employees,
could adversely affect our business, financial condition or results of
operations. In addition, the Company's products are certified as kosher by
independent entities. We believe that we will continue to meet the kosher
certification requirements. However, the failure to retain or obtain such
certification in the future could have a material adverse effect on our
business, financial condition or results of operations.
Continuing Changes in Food Service Industry
The results of operations of food service businesses are affected by,
among other things, changes in consumer tastes, national, regional and local
economic conditions, demographic trends, traffic patterns and the type, number
and location of competing units. Multi-unit food service companies also can be
substantially adversely affected by publicity resulting from poor food quality,
illness, injury or other health concerns or operating difficulties stemming from
one unit or a limited number of units, or health concerns as to particular types
of food or methods of preparing food. There can be no assurance that the Company
will be able to maintain the quality of its food products. In addition,
dependence on frequent deliveries of fresh ingredients also subjects food
service businesses, such as Creative Bakeries, to the risk that shortages or
interruptions in supply caused by adverse weather or other conditions could
adversely affect the availability, quality and cost of ingredients.
Competition
The baking industry is a highly competitive and highly fragmented
industry. Creative Bakeries competes with national, regional and local bakeries
as well as supermarket chains that have in-store bakeries. Many of these
competitors are larger; more established and have greater financial and other
resources than we do. Competition in both the retail and institutional/wholesale
baking industry is based on product quality, brand name loyalty, price and
customer service. Competitors with significant economic resources in the baking
industry could, at any time, enter the wholesale or retail bakery/cafe business.
Quarterly Fluctuations; Seasonality; Possible Volatility of Stock Price
Creative Bakeries' operating results may be subject to seasonal
fluctuations, especially during the Thanksgiving, Christmas, Chanukah, Easter
and Passover seasons. Such variations could cause the market price of the Common
Stock to fluctuate substantially. In addition, the stock markets in the United
States have, from time to time, experience significant price and volume
fluctuations that are unrelated or disproportionate to the operating performance
of individual companies. Such fluctuations may adversely affect the price of the
Company's Common Stock.
Possible Adverse Effect of Issuance of Preferred Stock
Creative Bakeries' Restated Certificate of Incorporation authorizes the
issuance of 1,000,000 (increased to 2,000,000 at August 4, 2004 annual meeting )
shares of Preferred Stock, with designations, rights and preferences as
determined from time to time by the Board of Directors. As a result of the
foregoing, the Board of Directors can issue, without further shareholder
approval, Preferred Stock with dividend, liquidation, conversion, voting or
other rights that could adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of Preferred Stock could, under certain
circumstances, discourage, delay or prevent a change in control of the Company.
F-17
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form
10-QSB, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the forgoing, our Chief Executive Officer has concluded
that our disclosure controls and procedures were effective as of the end of the
quarter ended September 30, 2004.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable and not absolute assurance of achieving
the desired control objectives. In reaching a reasonable level of assurance,
management was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. In addition, the design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The company held its 2004 Annual Meeting of Stockholders on August 4, 2004
with the following proposal being submitted:
1. To elect six directors of the Company to hold office until their successors
are elected and have been qualified.
2. To approve authorization to the Board of Directors to amend the Certificate
of Incorporation to authorize a reverse split of the outstanding shares of
common stock in any split ratio between 1:2 and 1:25 at the discretion of the
Board of Directors.
3. To approve an increase of authorized capital stock from 10,000,000 shares of
common stock to 30,000,000 shares of common stock and from 1,000,000 shares of
preferred stock to 2,000,000 shares of preferred stock.
4. To approve authorization of the Board of Directors to amend the Certificate
of Incorporation at their discretion to change the name of the Company.
5. To approve Creative Bakeries, Inc. 2004 Stock Incentive Plan.
6. To ratify the appointment of Zeller, Weiss, & Kahn, LLP as Creative Bakeries,
Inc.'s independent auditors for the fiscal year ending December 31, 2004.
7. To transact any other business that may properly come before the meeting or
any adjournment or postponement thereof.
The record date for determining stockholders eligible to vote at the
meeting was June 11, 2004. On the record date, there were 6,501,211 shares of
the Company's common stock outstanding and eligible to vote. There were present
at the meeting 5,425,637 shares, representing 83.46% of the common stock
outstanding.
F-18
Each nominee for the Board of Directors was elected at the 2004 Annual Meeting.
The following number of votes was cast for and against each nominee.
For Against
--- -------
Ronald Schutte 4,556,537 0
Vincent Bocchimmuzzo 4,937,037 0
Anthony Merante 4,937,037 0
Carmelo L. Foti 4,937,037 0
Ben Borsellino 4,937,037 0
David Rabe 4,937.037 0
The stockholders also approved the five remaining proposals. The following votes
were tabulated.
For Against Abstain
--- ------- -------
Proposal 2 4,921,312 23,500 480,825
Proposal 3 4,551,537 394,100 480,000
Proposal 4 4,939,037 6,600 480,000
Proposal 5 2,947,236 393,900 2,084,501
Proposal 6 4,939,037 4,600 482,000
Proposal 7 4,484,183 389,200 552,254
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of President and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K
None.
F-19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated November 15, 2004
Signatures Title
---------- -----
/s/Ron Schutte President, Chief Executive Officer/Director
-----------------------------
Ron Schutte
F-20