Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2014
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ___________ to __________
Commission File No. 0-18958
Grote Molen, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
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20-1282850
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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322 West Griffith Road
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Pocatello, Idaho 83201
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(Address of principal executive offices, including zip code)
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(208) 234-9352
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(Registrant’s telephone number, including area code)
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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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company ý
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý
As of November 14, 2014, there were 22,200,000 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.
GROTE MOLEN, INC. AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2014
PART I - Financial Information
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
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2
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Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2014 and 2013 (unaudited)
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3
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)
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4
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Notes to Condensed Consolidated Financial Statements (unaudited)
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5
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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17 | |
Item 4. Controls and Procedures
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17 | |
PART II - Other Information | ||
Item 1. Legal Proceedings
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17 | |
Item 1A. Risk Factors
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18 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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18 | |
Item 3. Defaults upon Senior Securities
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18 | |
Item 4. Mine Safety Disclosures
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18 | |
Item 5. Other Information
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18 | |
Item 6. Exhibits
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19 | |
Signatures
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20 |
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GROTE MOLEN, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
2014
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December 31,
2013
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ASSETS
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(Unaudited)
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Current Assets:
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Cash
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$ | 113,918 | $ | 79,069 | ||||
Accounts Receivable
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55,530 | 53,892 | ||||||
Inventories
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390,529 | 288,519 | ||||||
Deposits
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232,031 | 203,635 | ||||||
Prepaid Expenses
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70,538 | 45,133 | ||||||
Total Current Assets
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862,546 | 670,248 | ||||||
Property and Equipment, net
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160,928 | 160,940 | ||||||
Intangible Assets, net
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64,383 | 65,172 | ||||||
Total Assets
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$ | 1,087,857 | $ | 896,360 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities:
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Accounts Payable and Accrued Expenses
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$ | 119,766 | $ | 71,284 | ||||
Accrued Interest Payable – Related Parties
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42,443 | 35,554 | ||||||
Accrued Interest Payable
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13,101 | 8,421 | ||||||
Current Portion of Long-Term Debt – Related Party
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44,986 | 42,702 | ||||||
Notes Payable – Related Parties
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165,627 | 119,627 | ||||||
Notes Payable
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81,600 | 72,000 | ||||||
Total Current Liabilities
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467,523 | 349,588 | ||||||
Long-Term Debt:
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Note Payable
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148,174 | - | ||||||
Long-Term Debt – Related Party
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18,646 | 52,677 | ||||||
Total Long-Term Debt
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166,820 | 52,677 | ||||||
Total Liabilities
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634,343 | 402,265 | ||||||
Stockholders’ Equity:
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Preferred Stock, $.001 Par Value, 5,000,000 Shares Authorized, No Shares Issued and Outstanding
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- | - | ||||||
Common Stock, $.001 Par Value, 100,000,000 Shares Authorized, 22,200,000 and 21,000,000 Shares Issued and Outstanding, Respectively
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22,200 | 21,000 | ||||||
Additional Paid-In Capital
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147,800 | 89,000 | ||||||
Retained Earnings
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283,514 | 384,095 | ||||||
Total Stockholders’ Equity
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453,514 | 494,095 | ||||||
Total Liabilities and Stockholders’ Equity
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$ | 1,087,857 | $ | 896,360 |
See Notes to Condensed Consolidated Financial Statements
2
GROTE MOLEN, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales
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$ | 321,918 | $ | 344,905 | $ | 808,883 | $ | 1,104,411 | ||||||||
Cost of Sales
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237,747 | 275,253 | 622,277 | 815,773 | ||||||||||||
Gross Profit
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84,171 | 69,652 | 186,606 | 288,638 | ||||||||||||
Operating Costs and Expenses:
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Selling, General and Administrative
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95,527 | 88,440 | 290,220 | 296,739 | ||||||||||||
Depreciation and Amortization
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749 | 710 | 2,224 | 2,098 | ||||||||||||
Total Operating Costs and Expenses
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96,276 | 89,150 | 292,444 | 298,837 | ||||||||||||
Loss From Operations
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(12,105 | ) | (19,498 | ) | (105,838 | ) | (10,199 | ) | ||||||||
Other Expense: | ||||||||||||||||
Interest Expense – Related Parties
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3,904 | 3,675 | 11,142 | 11,544 | ||||||||||||
Interest Expense
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3,252 | 1,080 | 8,923 | 2,708 | ||||||||||||
Total Other Expense
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7,156 | 4,755 | 20,065 | 14,252 | ||||||||||||
Loss Before Income Taxes
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(19,261 | ) | (24,253 | ) | (125,903 | ) | (24,451 | ) | ||||||||
Income Tax Benefit
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3,648 | 4,723 | 25,322 | 3,796 | ||||||||||||
Net Loss
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$ | (15,613 | ) | $ | (19,530 | ) | $ | (100,581 | ) | $ | (20,655 | ) | ||||
Net Loss Per Common Share -
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Basic and Diluted
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$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
Weighted Average Shares Outstanding -
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Basic and Diluted
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22,200,000 | 21,000,000 | 21,761,173 | 21,000,000 |
See Notes to Condensed Consolidated Financial Statements
3
GROTE MOLEN, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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Nine Months Ended
September 30,
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2014
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2013
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Net Loss
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$ | (100,581 | ) | $ | (20,655 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
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Depreciation and Amortization
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2,224 | 2,098 | ||||||
Interest added to Note Payable Principal
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2,531 | - | ||||||
(Increase) Decrease in:
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Accounts Receivable
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(1,638 | ) | 2,977 | |||||
Inventories
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(102,010 | ) | (74,153 | ) | ||||
Deposits
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(28,396 | ) | 35,930 | |||||
Prepaid Expenses
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(25,405 | ) | (45,864 | ) | ||||
Increase (Decrease) in:
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Accounts Payable and Accrued Expenses
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48,482 | 24,587 | ||||||
Accrued Interest Payable – Related Parties
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6,889 | 5,160 | ||||||
Accrued Interest Payable
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4,680 | 2,707 | ||||||
Income Taxes Payable
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- | (29,723 | ) | |||||
Net Cash Used in Operating Activities
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(193,224 | ) | (96,936 | ) | ||||
Cash flows from Investing Activities:
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Purchase of Property and Equipment
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(1,423 | ) | - | |||||
Net Cash Used in Investing Activities
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(1,423 | ) | - | |||||
Cash Flows from Financing Activities:
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Proceeds from Long-Term Note Payable
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151,930 | - | ||||||
Proceeds from Notes Payable – Related Parties
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50,000 | - | ||||||
Proceeds from Notes Payable
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9,600 | 27,000 | ||||||
Proceeds from Issuance of Common Stock
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60,000 | - | ||||||
Repayment of Notes Payable – Related Parties
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(4,000 | ) | - | |||||
Repayment of Long-Term Debt – Related Party
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(31,746 | ) | (29,617 | ) | ||||
Repayment of Long-Term Note Payable
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(6,288 | ) | - | |||||
Net Cash Provided by (Used in) Financing Activities
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229,496 | (2,617 | ) | |||||
Net Increase (Decrease) in Cash
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34,849 | (99,553 | ) | |||||
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Cash, Beginning of the Period
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79,069 | 237,678 | ||||||
Cash, End of the Period
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$ | 113,918 | $ | 138,125 |
See Notes to Condensed Consolidated Financial Statements
4
GROTE MOLEN, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS PRESENTED AS OF SEPTEMBER 30, 2014 AND FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 ARE UNAUDITED)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNICANT ACCOUNTING POLICIES
Organization
Grote Molen, Inc. (“Grote Molen”) was incorporated under the laws of the State of Nevada on March 15, 2004. BrownWick, LLC (“BrownWick”), a wholly owned subsidiary, was formed in the State of Idaho on June 5, 2005. The principal business of Grote Molen and BrownWick (collectively the “Company”) is to distribute grain mills and related accessories for home use.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Grote Molen and BrownWick. All significant inter-company balances and transactions have been eliminated.
Basis of Presentation
The accompanying condensed consolidated financial statements as of September 30, 2014 and for the three months and nine months ended September 30, 2014 and 2013 are unaudited. In the opinion of management, all adjustments have been made, consisting of normal recurring items, that are necessary to present fairly the consolidated financial position as of September 30, 2014 as well as the consolidated results of operations for the three months and nine months ended September 30, 2014 and cash flows for the nine months ended September 30, 2014 and 2013 in accordance with U.S. generally accepted accounting principles. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. The interim condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2013.
Earnings Per Share
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period.
The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period. Common stock equivalents are not included in the diluted earnings per share calculation when their effect is anti-dilutive. We have not granted any stock options or warrants since inception of the Company.
Comprehensive Income (Loss)
Comprehensive income (loss) is the same as net income (loss).
5
NOTE 2 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable consist of the following:
September 30,
2014
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December 31,
2013
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(Unaudited)
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Trade accounts receivable – related parties
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$ | 15,573 | $ | 4,847 | ||||
Trade accounts receivable
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34,957 | 44,045 | ||||||
Employee advances
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5,000 | 5,000 | ||||||
$ | 55,530 | $ | 53,892 |
Property and equipment consist of the following:
September 30,
2014
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December 31,
2013
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(Unaudited)
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Office equipment
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$ | 4,335 | $ | 4,335 | ||||
Warehouse equipment
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16,927 | 15,504 | ||||||
Website development
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2,000 | 2,000 | ||||||
Construction in progress
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150,615 | 150,615 | ||||||
173,877 | 172,454 | |||||||
Accumulated depreciation
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(12,949 | ) | (11,514 | ) | ||||
$ | 160,928 | $ | 160,940 |
Intangible assets consist of the following:
September 30,
2014
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December 31,
2013
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(Unaudited)
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License – definitive life
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$ | 10,500 | $ | 10,500 | ||||
License – indefinitive life
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62,720 | 62,720 | ||||||
Patent
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100 | 100 | ||||||
73,320 | 73,320 | |||||||
Accumulated amortization
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(8,937 | ) | (8,148 | ) | ||||
$ | 64,383 | $ | 65,172 |
6
NOTE 3 – RELATED PARTY DEBT
Notes payable – related parties are unsecured and are comprised of the following:
September 30,
2014
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December 31,
2013
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(Unaudited)
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Note payable to a stockholder, due on demand, with interest at 6% per annum
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$ | 30,000 | $ | 30,000 | ||||
Note payable to a stockholder, due on demand, with interest at 6% per annum
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3,500 | 3,500 | ||||||
Note payable to a stockholder, due on demand, with interest at 6% per annum
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38,000 | 38,000 | ||||||
Note payable to a stockholder, due on demand, with interest at 6% per annum
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10,000 | 10,000 | ||||||
Note payable to a stockholder, due on demand, with interest at 6% per annum
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5,000 | 5,000 | ||||||
Note payable to a stockholder, due on demand, with interest at 8% per annum
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9,000 | 9,000 | ||||||
Note payable to a stockholder, due on demand, with interest at 8% per annum
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15,000 | 15,000 | ||||||
Note payable to a stockholder, due on demand, with interest at 8% per annum
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46,000 | - | ||||||
Non-interest bearing advances from stockholders, with no formal repayment terms
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9,127 | 9,127 | ||||||
Total
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$ | 165,627 | $ | 119,627 |
Long-term debt – related party is comprised of the following:
September 30,
2014
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December 31,
2013
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(Unaudited)
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Note payable to a stockholder, due in monthly installments of $4,000 through February 2016, with interest at 6.97% per annum
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$ | 63,632 | $ | 95,379 | ||||
Less current portion
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(44,986 | ) | (42,702 | ) | ||||
Long-term portion
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$ | 18,646 | $ | 52,677 |
Interest expense on related party debt was $3,904 and $3,675 for the three months ended September 30, 2014 and 2013 and $11,142 and $11,544 for the nine months ended September 30, 2014 and 2013, respectively. Accrued interest payable to related parties was $42,443 and $35,554 at September 30, 2014 and December 31, 2013, respectively.
7
NOTE 4 – NOTES PAYABLE
Short-term notes payable to non-related parties are unsecured and are comprised of the following:
September 30,
2014
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December 31,
2013
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(Unaudited)
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Note payable, due on demand, with interest at 8% per annum
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$ | 15,000 | $ | 15,000 | ||||
Note payable, due on demand, with interest at 8% per annum
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20,000 | 20,000 | ||||||
Note payable, due on demand, with interest at 8% per annum
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5,000 | 5,000 | ||||||
Note payable, due on demand, with interest at 8% per annum
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7,000 | 7,000 | ||||||
Note payable, due on demand, with interest at 6% per annum
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15,000 | 15,000 | ||||||
Note payable, due on demand, with interest at 6% per annum
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10,000 | 10,000 | ||||||
Note payable, due on demand, with interest at 6% per annum
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4,000 | - | ||||||
Note payable, due on demand, with interest at 6% per annum
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5,600 | - | ||||||
Total
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$ | 81,600 | $ | 72,000 |
The long-term note payable is a line of credit promissory note bearing interest at an indexed rate, plus 2% (5.25% at September 30, 2014), requiring monthly interest payments, and maturing on May 16, 2021. The note payable has an available line of credit of $150,000, with $148,174 outstanding at September 30, 2014. The note payable is secured by a deed of trust on certain real estate owned by one of the principal stockholders of the Company and by the Company’s inventories, property and equipment, and intangible assets.
Accrued interest payable on the notes payable was $13,101 and $8,421 at September 30, 2014 and December 31, 2013, respectively.
8
NOTE 5 – RELATED PARTY TRANSACTIONS
Pursuant to an agreement effective in February 2011, we pay a monthly management fee to a company owned by one of the major stockholders of the Company to manage our day-to-day business activities and to provide business space. Historically we have paid monthly management fees in varying amounts to this related party pursuant to prior agreements approved by the stockholders of the Company. The agreement is on a month-to-month basis and can be cancelled at any time by the vote of management. Effective February 1, 2011, the monthly fee was increased to $10,700. Also included in management fees are monthly payments of $150 to another major stockholder of the Company for expense reimbursement. Included in selling, general and administrative expenses were management fees totaling $32,100 and $32,550 for the three months ended September 30, 2014 and 2013 and $97,950 and $97,650 for the nine months ended September 30, 2014 and 2013, respectively.
Each of the two principal stockholders of the Company owns a company that is our customer. Sales to these related parties totaled $15,537 and $19,932 for the three months ended September 30, 2014 and 2013, respectively, or approximately 5% and 6%, respectively. Sales to these related parties totaled $31,072 and $55,420 for the nine months ended September 30, 2014 and 2013, respectively, or approximately 4% and 5%, respectively. Accounts receivable from these related parties totaled $15,573 and $4,847 at September 30, 2014 and December 31, 2013, respectively.
See Note 3 for discussion of related party debt and interest expense.
NOTE 6 – CAPITAL STOCK
The Company’s preferred stock may have such rights, preferences and designations and may be issued in such series as determined by our Board of Directors. No shares of preferred stock were issued and outstanding at September 30, 2014 and December 31, 2013.
During the nine months ended September 30, 2014, we sold 1,200,000 shares of our common stock to accredited investors in a private offering at an offering price of $0.05 per share for total proceeds of $60,000.
NOTE 7 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During the nine months ended September 30, 2014 and 2013, we had no non-cash financing and investing activities.
We paid cash for income taxes of $30 and $71,820 for the nine months ended September 30, 2014 and 2013, respectively. We paid cash for interest of $8,496 and $6,383 for the nine months ended September 30, 2014 and 2013, respectively.
NOTE 8 – SIGNIFICANT CUSTOMERS
In addition to the sales to related parties discussed in Note 5, we had sales to one customer that accounted for approximately 8% of total sales for each of the nine-month periods ended September 30, 2014 and 2013.
9
NOTE 9 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements issued during the nine months ended September 30, 2014 and through the date of this filing that we believe are applicable to or would have a material impact on the consolidated financial statements of the Company.
NOTE 10 – SUBSEQUENT EVENTS
We have evaluated events occurring after the date of our accompanying consolidated balance sheets through the date the financial statements were issued. We have identified the following subsequent event that we believe requires disclosure:
Subsequent to September 30, 2014, we received proceeds of $10,000 from a promissory note that is payable on demand and bears interest at an annual rate of 6%.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements reflect the Company’s views with respect to future events based upon information available to it at this time. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from these statements. These uncertainties and other factors include, but are not limited to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2013 in Part I, Item 1A under the caption “Risk Factors.” The words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, changes in assumptions, future events or otherwise.
You should read the following discussion in conjunction with our condensed consolidated financial statements, which are included elsewhere in this report. The following information contains forward-looking statements. (See “Forward-Looking Statements” and “Risk Factors.”)
General
Grote Molen, Inc. (“Grote Molen”) was incorporated under the laws of the State of Nevada on March 15, 2004. BrownWick, LLC (“BrownWick”), a wholly owned subsidiary, was formed in the State of Idaho on June 5, 2005. The principal business of Grote Molen and BrownWick (collectively the “Company”) is to distribute electrical and hand operated grain mills and related accessories for home use.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Accounts Receivable
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. We determine the allowance for doubtful accounts by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded as income when received. We determined that no allowance for doubtful accounts was required at September 30, 2014 and December 31, 2013.
Inventories
Inventories, consisting primarily of grain mills, parts and accessories, are stated at the lower of cost or market, with cost determined using primarily the first-in-first-out (FIFO) method. We purchase substantially all inventories from two foreign suppliers, and have been dependent on those suppliers for substantially all inventory purchases since we commenced operations.
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Deposits
At times, we are required to pay advance deposits toward the purchase of inventories from our principal suppliers. Such advance payments are recorded as deposits, a current asset in the accompanying consolidated financial statements.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, which range from 3 to 10 years. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in operations for the period. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and betterments are capitalized.
Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization. Amortization of definitive lived intangible assets is computed using the straight-line method based on the estimated useful lives or contractual lives of the assets, which range from 10 to 30 years.
Impairment of Long-Lived Assets
We periodically review our long-lived assets, including intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. No events or changes in circumstances have occurred to indicate that the carrying amount of our long-lived assets may not be recoverable. Therefore, no impairment loss was recognized during the three months and nine months ended September 30, 2014 and 2013.
Revenue Recognition
We record revenue from the sales of grain mills and accessories in accordance with the underlying sales agreements when the products are shipped, the selling price is fixed and determinable, and collection is reasonably assured.
Warranties
We provide limited warranties to our customers for certain of our products sold. We perform warranty work at our service center in Pocatello, Idaho or at other authorized service locations. Warranty expenses have not been material to our consolidated financial statements.
Research and Development Costs
Research and development costs are expensed as incurred in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“ASC”) Topic 730, Research and Development. The costs of materials and other costs acquired for research and development activities are charged to expense as incurred. Salaries, wages, and other related costs of personnel, as well as other facility operating costs are allocated to research and development expense through management’s estimate of the percentage of time spent by personnel in research and development activities. We had no material research and development costs for the three months and nine months ended September 30, 2014 and 2013.
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Income Taxes
We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes, using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
FASB ASC Topic 740, Income Taxes, requires us to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, we must measure the tax position to determine the amount to recognize in our consolidated financial statements. We performed a review of our material tax positions in accordance with recognition and measurement standards established by ASC Topic 740 and concluded we had no unrecognized tax benefit that would affect the effective tax rate if recognized for the three months and nine months ended September 30, 2014 and 2013.
We include interest and penalties arising from the underpayment of income taxes, if any, in our consolidated statements of operations in general and administrative expenses. As of September 30, 2014 and December 31, 2013, we had no accrued interest or penalties related to uncertain tax positions.
Fair Value of Financial Instruments
Our financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The carrying amount of cash, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items. We believe the carrying amount of the notes payable approximates fair value because the interest rates on the notes approximate market rates of interest.
Results of Operations
Sales
Our business is not seasonal; however, our quarterly sales, including sales to related parties, may fluctuate materially from period to period. At times, we derive a significant portion of our revenues from sales to related parties. Each of our two principal stockholders owns a company that is a significant customer. Our sales were comprised of the following:
Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2014
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2013
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2014
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2013
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Sales
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$ | 306,381 | $ | 324,973 | $ | 777,811 | $ | 1,048,991 | ||||||||
Sales – related parties
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15,537 | 19,932 | 31,072 | 55,420 | ||||||||||||
Total sales
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$ | 321,918 | $ | 344,905 | $ | 808,883 | $ | 1,104,411 |
Sales to related parties represented approximately 5% and 6% of total sales for the three months ended September 30, 2014 and 2013 and approximately 4% and 5% for the nine months ended September 30, 2014 and 2013, respectively.
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Our total sales decreased $22,987, or approximately 7%, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Our total sales decreased $295,528, or approximately 27%, during the nine months months ended September 30, 2014 compared to the nine months ended September 30, 2013. During 2012, we purchased from a German manufacturer a license to the design and manufacture of its home grain mill. We have developed the molds and completed the design process to allow us to produce the grain mill, and we anticipate we will introduce it to market in the fourth quarter of 2014. We believe the introduction of the new grain mill in 2014 will increase our sales; however, there can be no assurance that we will be successful in these endeavors. We believe the decrease in sales in the current year is due to an overall slow-down in the preparedness market and continued slow economic recovery in the United States.
Cost of Sales
Cost of sales for the three months ended September 30, 2014 was $237,747, compared to $275,253 for the three months ended September 30, 2013, a decrease of $37,506, or approximately 14%. Cost of sales for the nine months ended September 30, 2014 was $622,277, compared to $815,773 for the nine months ended September 30, 2013, a decrease of $193,496, or approximately 24%. The decrease in cost of sales in the current year is primarily attributed to the decrease in sales. Cost of sales as a percentage of sales may fluctuate from period to period, based on the mix of products sold during a particular period and pricing arrangements with our suppliers. Cost of sales as a percentage of sales was approximately 74% for the three months ended September 30, 2014 compared to approximately 80% for the three months ended September 30, 2013. Cost of sales as a percentage of sales was approximately 77% for the nine months ended September 30, 2014 compared to approximately 74% for the nine months ended September 30, 2013. We purchase substantially all inventories from two foreign suppliers, and have been dependent on those suppliers for substantially all inventory purchases since we commenced operations.
Selling, General and Administrative Expenses
Our total selling, general and administrative expenses remained generally constant during the current year compared to the prior year. Selling, general and administrative expenses were $95,527 for the three months ended September 30, 2014, compared to $88,440 for the three months ended September 30, 2013, an increase of $7,087, or approximately 8%. Selling, general and administrative expenses were $290,220 for the nine months ended September 30, 2014, compared to $296,739 for the nine months ended September 30, 2013, a decrease of $6,519, or approximately 2%.
Pursuant to an agreement effective in February 2011, we pay a monthly management fee to a company owned by one of the major stockholders of the Company to manage our day-to-day business activities and to provide business space. Historically we have paid monthly management fees in varying amounts to this related party pursuant to prior agreements approved by the stockholders of the Company. The agreement is on a month-to-month basis and can be cancelled at any time by the vote of management. Effective February 1, 2011, the monthly fee was increased to $10,700. Also included in management fees are monthly payments of $150 to another major stockholder of the Company for expense reimbursement. Included in selling, general and administrative expenses were management fees totaling $32,100 and $32,550 for the three months ended September 30, 2014 and 2013 and $97,950 and $97,650 for the nine months ended September 30, 2014 and 2013, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense currently is not material to our business and has remained relatively constant for all periods presented. Depreciation and amortization expense was $749 and $710 for the three months ended September 30, 2014 and 2013 and $2,224 and $2,098 for the nine months ended September 30, 2014 and 2013, respectively.
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Research and Development Expenses
Research and development activities are not currently significant to our business. We did not incur material research and development expenses in the three months and nine months ended September 30, 2014 and 2013.
Other Expense: Interest Expense
Other expense includes interest expense on our indebtedness, a significant portion of which is indebtedness to related parties. Total interest expense – related parties remained fairly constant and was $3,904 and $3,675 for the three months ended September 30, 2014 and 2013 and $11,142 and $11,544 for the nine months ended September 30, 2014 and 2013, respectively.
Other interest expense to non-related parties was $3,252 and $1,080 for the three months ended September 30, 2014 and 2013, and $8,923 and $2,708 for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest expense to non-related parties in the current year is due to additional borrowings in the current year, including line of credit financing.
Liquidity and Capital Resources
As of September 30, 2014 we had total current assets of $862,546, including cash of $113,918, and current liabilities of $467,523, resulting in working capital of $395,023. Our current assets and working capital included inventories of $390,529 and deposits of $232,031. Generally, we are required to pay significant advance deposits toward the purchase of inventories from our principal suppliers.
In addition, as of September 30, 2014, we had total stockholders’ equity of $453,514. We have financed our operations, the acquisition of inventories, and the payment of vendor deposits from our operations, short-term loans from our principal stockholders and non-related parties, a long-term note payable from a bank, and from the issuance of our common stock.
For the nine months ended September 30, 2014, net cash used in operating activities was $193,224, as a result of our net loss of $100,581, increases in accounts receivable of $1,638, inventories of $102,010, deposits of $28,396 and prepaid expenses of $25,405, partially offset by non-cash expenses of $4,755, and increases in accounts payable and accrued expenses of $48,482, accrued interest payable – related parties of $6,889 and accrued interest payable of $4,680.
By comparison, for the nine months ended September 30, 2013, net cash used in operating activities was $96,936, as a result of our net loss of $20,655, increases in inventories of $74,153 and prepaid expenses of $45,864 and a decrease in income taxes payable of $29,723, partially offset by non-cash expenses of $2,098, decreases in accounts receivable of $2,977 and deposits of $35,930, and increases in accounts payable and accrued expenses of $24,587, accrued interest payable – related parties of $5,160 and accrued interest payable of $2,707.
Net cash used in investing activities was $1,423 for the nine months ended September 30, 2014, comprised of the purchase of property and equipment. We had no cash used in or provided by investing activities in the nine months ended September 30, 2013.
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For the nine months ended September 30, 2014, net cash provided by financing activities was $229,496, comprised of proceeds from long-term note payable of $151,930, proceeds from notes payable – related parties of $50,000, proceeds from notes payable of $9,600 and proceeds from the issuance of common stock of $60,000, partially offset by repayment of notes payable – related parties of $4,000, repayment of long-term debt – related party of $31,746 and repayment of long-term note payable of $6,288.
For the nine months ended September 30, 2013, net cash used in financing activities was $2,617, comprised of repayment of long-term debt – related party of $29,617, partially offset by proceeds from the issuance of notes payable of $27,000.
At September 30, 2014, we had short-term notes payable – related parties totaling $165,627, which are payable to our principal stockholders, are unsecured, bear interest at rates ranging from 6% to 8% per annum and are generally due on demand. In addition, at September 30, 2014, we had short-term notes payable to non-related parties totaling $81,600, which are unsecured, bear interest at rates ranging from 6% to 8% per annum and are due on demand.
At September 30, 2014 we had a long-term note payable to a bank of $148,174. The long-term note payable is a line of credit promissory note bearing interest at an indexed rate plus 2% (5.25% at September 30, 2014), requiring monthly interest payments, and maturing on May 16, 2021. The note payable has an available line of credit of $150,000, with $148,174 outstanding at September 30, 2014, and is secured by a deed of trust on certain real estate owned by one of the principal stockholders of the Company and by the Company’s inventories, property and equipment, and intangible assets.
At September 30, 2014, we had long-term debt – related party of $63,632, including current portion of $44,986, payable to a principal stockholder, bearing interest at 6.97% per annum and due in monthly installments of $4,000 through February 2016.
Accrued interest payable – related parties was $42,443 and $35,554 at September 30, 2014 and December 31, 2013, respectively. Accrued interest payable to non-related parties was $13,101 and $8,421 at September 30, 2014 and December 31, 2013, respectively.
We believe we may require additional funding from the sale of our common stock or from debt to meet our obligations for the next twelve months in addition to our current cash and projected cash flows from operations.
In the current year, we sold 1,200,000 shares of our common stock to accredited investors in a private offering at an offering price of $0.05 per share for total proceeds of $60,000. The proceeds from the sale of our common stock will be used as working capital.
Recent Accounting Pronouncements
There were no new accounting pronouncements issued during the nine months ended September 30, 2014 and through the date of this filing that we believe are applicable to or would have a material impact on the consolidated financial statements of the Company.
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Off-Balance Sheet Arrangements
Pursuant to an agreement effective in February 2011, we pay a monthly management fee to a company owned by one of the major stockholders of the Company to manage the day-to-day business activities of the Company and provide business space. The agreement is on a month-to-month basis and can be cancelled at any time by the vote of management. We paid monthly management fees in varying amounts to this related party pursuant to prior agreements approved by the stockholders of the Company. Effective February 1, 2011, the monthly fee was increased to $10,700.
We also pay another major stockholder of the Company at the rate of $150 per month for expense reimbursement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable. The Company is a “smaller reporting company.”
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including our President and Treasurer who serves as our principal executive and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”) as of September 30, 2014, the end of the period covered by this report. Based upon that evaluation, our President and Treasurer concluded that our disclosure controls and procedures as of September 30, 2014 were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our President and Treasurer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in internal controls over financial reporting.
There was no change in our internal control over financial reporting during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material pending legal proceedings.
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Item 1A. Risk Factors
See the risk factors described in Item 1A of the Company’s 2013 annual report on Form 10-K filed with the SEC on March 31, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2014 we had no unregistered sales of equity securities.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
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Item 6: Exhibits
The following exhibits are filed as part of this report:
Exhibit No.
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Description of Exhibit
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3.1
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Articles of Incorporation (1)
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3.2
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Bylaws (1)
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10.1
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Promissory Note dated July 31, 2014*
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10.2
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Promissory Note dated August 12, 2014*
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10.3
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Line of Credit Promissory Note dated May 27, 2014*
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31.1
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Section 302 Certification of Chief Executive and Chief Financial Officer*
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32.1
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Section 1350 Certification of Chief Executive Officer and Chief Financial Officer*
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101 INS**
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XBRL Instance Document*
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101SCH**
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XBRL Taxonomy Extension Schema*
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101 CAL**
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XBRL Taxonomy Extension Calculation Linkbase*
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101 DEF**
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XBRL Taxonomy Extension Definition Linkbase*
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101 LAB**
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XBRL Taxonomy Extension Label Linkbase*
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101 PRE**
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XBRL Taxonomy Extension Presentation Linkbase*
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(1) Incorporated by reference from Exhibit Numbers 3.1 and 3.2 of the Company’s registration statement on Form 10 filed with the SEC on May 14, 2010.
* Exhibits filed with this report.
** XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.
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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.
Grote Molen, Inc.
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Dated: November 18, 2014
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By /s/ John B. Hofman
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John B. Hofman
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President, Secretary and Treasurer
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(Principal Executive and Accounting Officer)
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