**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

|   | WASHINGTON, D.C. 20549 |
|--------|------------------------|

 

|   | **Form 10-Q** |
|--------|---------------|

 

(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, 2009**

 

| [   | ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---------------|-------------------------------------------------------------------------------------------|

For the transition period from ______________________________ to ______________________________ 

 

Commission File Number **000-53672**

 

| **WASATCH FOOD SERVICES, INC.**                                                     |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in charter)                                  |
|                                                                                |   |
| **NEVADA**                                                                          | **20-8121712** |
| (State or other jurisdiction of incorporation or organization)                      | (I.R.S. Employer Identification No.) |
|                                                                                |   |
| **1492 Entertainment Avenue, Boise, Idaho**                                         | **83709** |
| (Address of principal executive offices)                                            | (Zip Code) |
|                                                                                |   |
| **(208) 377-3200**                                                                  |
| (Issuer’s telephone number, including area code)                              |
|                                                                                |   |
| **Not Applicable**                                                                  |
| (Former name, former address, and former fiscal year, if changed since last report) |

 

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 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 o |
|--------|------------------|------|

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). The            registrant has not yet been phased into the Interactive Data reporting system.

|   | Yes o  | No o |
|--------|------------------|------|

 

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

 

|   | Large accelerated filer | o | Accelerated filer | o |
|--------|-------------------------|---|-------------------|---|

|   | Non-accelerated filer | o | Smaller reporting company | x |
|--------|-----------------------|---|---------------------------|---|

 

Indicate by check mark whether the issuer is a shell company (as defined in rule 12b-2 of the Exchange Act).

|   | Yes  o | No x |
|--------|------------------|------|

 

As of November 8, 2009, the issuer had outstanding 31,038,692 shares of common stock, par value $0.001.

 

1

 

 

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**WASATCH FOOD SERVICES, INC.**

**FORM 10-Q**

 

**FOR THE QUARTER ENDED SEPTEMBER 30, 2009**

 

**INDEX**

 

| **PART I**  **Financial Information** |
|-------------------------------------------------|

 

| **Item 1**. | Financial Statements (Unaudited) |
|-------------|----------------------------------|

|   | Condensed Consolidated Balance Sheets | 3 |
|--------|---------------------------------------|---|

|   | Condensed Consolidated Statements of Operations | 4 |
|--------|-------------------------------------------------|---|

|   | Condensed Consolidated Statements of Cash Flows | 5 |
|--------|-------------------------------------------------|---|

|   | Notes to Condensed Consolidated Financial Statements | 6 |
|--------|------------------------------------------------------|---|

 

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

|   | and Results of Operations | 10 |
|--------|---------------------------|----|

 

| **Item 3**. Quantitative and Qualitative Disclosures About Market Risk | 16 |
|------------------------------------------------------------------------|----|

 

| **Item 4T**. Controls and Procedures | 16 |
|--------------------------------------|----|

 

**PART II Other Information**

 

| **Item 1**. Legal Proceedings | 17 |
|-------------------------------|----|

 

| **Item 1A**. Risk Factors | 17 |
|---------------------------|----|

 

| **Item 2**. Unregistered Sales of Equity Securities and Use of Proceeds | 17 |
|-------------------------------------------------------------------------|----|

 

| **Item 3**. Defaults Upon Senior Securities | 17 |
|---------------------------------------------|----|

 

| **Item 4**. Submission of Matters to a Vote of Security Holders | 17 |
|-----------------------------------------------------------------|----|

 

| **Item 5**. Other Information | 17 |
|-------------------------------|----|

 

| **Item 6**. Exhibits | 18 |
|----------------------|----|

 

| **SIGNATURE** | 18 |
|---------------|----|

 

 

2

 

 

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

| **WASATCH FOOD SERVICES, INC. AND SUBSIDIARY**                                                                                                                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Condensed Consolidated Balance Sheets**

                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                               | **September 30, 2009** | **December 31,** |
|                                                                                                                                                                                                                                                               | **(Unaudited)** | **2008** |
| **ASSETS**                                                                                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                                               |   |   |
| Current assets:                                                                                                                                                                                                                                                    |   |   |
| Cash                                                                                                                                                                                                                                                               | $           4,038  | $           7,365  |
| Inventories                                                                                                                                                                                                                                                        | 5,667  | 3,534  |
| Prepaid expenses                                                                                                                                                                                                                                                   | 1,514  | 1,029  |
| Income taxes receivable                                                                                                                                                                                                                                            | 2,269  | 6,733  |
|                                                                                                                                                                                                                                                               |   |   |
| Total current assets                                                                                                                                                                                                                                               | 13,488  | 18,661  |
|                                                                                                                                                                                                                                                               |   |   |
| Property and equipment, net                                                                                                                                                                                                                                        | 302,783  | 335,961  |
| Other assets - deposits                                                                                                                                                                                                                                            | 11,568  | 11,434  |
|                                                                                                                                                                                                                                                               |   |   |
|                                                                                                                                                                                                                                                               | $       327,839  | $      366,056  |
|                                                                                                                                                                                                                                                               |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                                                                                    |   |
|                                                                                                                                                                                                                                                               |   |   |
| Current liabilities:                                                                                                                                                                                                                                               |   |   |
| Accounts payable                                                                                                                                                                                                                                                   | $         64,648  | $        11,749  |
| Accrued liabilities                                                                                                                                                                                                                                                | 7,967  | 10,285  |
| Deferred revenue                                                                                                                                                                                                                                                   | -  | 1,132  |
| Deferred lease incentives                                                                                                                                                                                                                                          | 15,069  | 15,069  |
| Accrued interest payable – related party                                                                                                                                                                                                                     | 14,566  | 4,074  |
| Notes payable – related party                                                                                                                                                                                                                                | 215,166  | 124,500  |
| Note payable - bank                                                                                                                                                                                                                                                | 193,387  | 196,386  |
|                                                                                                                                                                                                                                                               |   |   |
| Total current liabilities                                                                                                                                                                                                                                          | 510,803  | 363,195  |
|                                                                                                                                                                                                                                                               |   |   |
| Long-term liabilities – deferred lease incentives                                                                                                                                                                                                            | 137,680  | 148,982  |
|                                                                                                                                                                                                                                                               |   |   |
| Total liabilities                                                                                                                                                                                                                                                  | 648,483  | 512,177  |
|                                                                                                                                                                                                                                                               |   |   |
| Stockholders’ deficit:                                                                                                                                                                                                                                       |   |   |
| Preferred stock, $.001 par value; 10,000,000 shares                                  authorized, no shares issued or outstanding                                                                                                     | **-**  | **-**  |
| Common stock; $.001 par value, 150,000,000                                  shares authorized, 31,038,692 and 31,038,692 shares                                   issued and outstanding, respectively | 31,039  | 31,039  |
| Additional paid-in capital                                                                                                                                                                                                                                         | 157,889  | 152,489  |
| Accumulated deficit                                                                                                                                                                                                                                                | (509,572) | (329,649) |
|                                                                                                                                                                                                                                                               |   |   |
| Total stockholders’ deficit                                                                                                                                                                                                                                  | (320,644) | (146,121) |
|                                                                                                                                                                                                                                                               |   |   |
|                                                                                                                                                                                                                                                               | $       327,839  | $       366,056  |
|                                                                                                                                                                                                                                                               |
| See accompanying notes to condensed consolidated financial statements                                                                                                                                                                                              |

 

3

 

 

----

 

| **WASATCH FOOD SERVICES, INC. AND SUBSIDIARY**      |
|-----------------------------------------------------|
| **Condensed Consolidated Statements of Operations** |
| **(Unaudited)**                                     |

 

|                                                                                                           | **Three Months Ended**                                  | **Nine Months Ended**                             |
|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|---------------------------------------------------|
|                                                                                                           | **September 30,**                                       | **September 30,**                                 |
|                                                                                                           | **2009**                                                | **2008**                                          | **2009** | **2008** |
|                                                                                                           |                                                    |                                              |   |   |
| Revenues - restaurant sales                                                                                    | $       82,012  | $     99,217        | $   259,864  | $    306,819  |
|                                                                                                           |                                                    |                                              |   |   |
| Costs and Expenses:                                                                                            |                                                    |                                              |   |   |
| Restaurant operating costs:                                                                                    |                                                    |                                              |   |   |
| Food, beverage and packaging                                                                                   | 27,279                                             | 40,829                                       | 89,332  | 122,523  |
| Labor                                                                                                          | 30,583                                             | 42,215                                       | 102,127  | 124,624  |
| Occupancy                                                                                                      | 20,131                                             | 19,110                                       | 61,107  | 58,446  |
| Other operating costs                                                                                          | 12,425                                             | 21,547                                       | 45,141  | 63,505  |
| General and administrative expenses                                                                            | 50,303                                             | 31,464                                       | 86,040  | 59,266  |
| Depreciation and amortization expense                                                                          | 11,059                                             | 11,106                                       | 33,178  | 33,296  |
|                                                                                                           |                                                    |                                              |   |   |
| Total costs and expenses                                                                                       | 151,780                                            | 166,271                                      | 416,925  | 461,660  |
|                                                                                                           |                                                    |                                              |   |   |
| Loss from operations                                                                                           | (69,768)                                                | (67,054)                                          | (157,061) | (154,841) |
|                                                                                                           |                                                    |                                              |   |   |
| Other Expense – Interest expense                                                                         | (9,080)                                                 | (3,952)                                           | (22,862) | (12,508) |
|                                                                                                           |                                                    |                                              |   |   |
| Loss before income taxes                                                                                       | (78,848)                                                | (71,006)                                          | (179,923) | (167,349) |
|                                                                                                           |                                                    |                                              |   |   |
| Income tax benefit                                                                                             | -                                                  | -                                            | -  | (4,640) |
|                                                                                                           |                                                    |                                              |   |   |
| Net loss                                                                                                       | $      (78,848)           | $     (71,006)           | $   (179,923) | $   (162,709) |
|                                                                                                           |                                                    |                                              |   |   |
|                                                                                                           |                                                    |                                              |   |   |
| Loss per common share, basic and diluted                                                                       | $        (0.00) | $       (0.00) | $       (0.01) | $       (0.01) |
|                                                                                                           |                                                    |                                              |   |   |
| Weighted average number of common shares                              outstanding, basic and diluted | 31,038,692                                         | 30,738,692                                   | 31,038,692  | 30,738,692  |
|                                                                                                           |                                                    |                                              |   |   |
| See accompanying notes to condensed consolidated financial statements                                          |
|                                                                                                           |                                                    |
|                                                                                                                |                                                         |                                                   |  |  |  |

 

4

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| **WASATCH FOOD SERVICES, INC.**                                                                                                            |
|--------------------------------------------------------------------------------------------------------------------------------------------|
| **Condensed Consolidated Statements of Cash Flows**                                                                                        |
| **(Unaudited)**                                                                                                                            |
|                                                                                                                                       | **Nine Months Ended** |
|                                                                                                                                       | **September 30,** |
|                                                                                                                                       | **2009** | **2008** |
|                                                                                                                                       |   |   |
|                                                                                                                                       |   |   |
| Cash flows from operating activities:                                                                                                      |   |   |
| Net loss                                                                                                                                   | $       (179,923) | $       (162,709) |
| Adjustments to reconcile net loss to net cash used in                                  operating activities: |   |   |
| Depreciation and amortization expense                                                                                                      | 33,178  | 33,296  |
| Services contributed to capital                                                                                                            | 5,400  | 5,400  |
| Interest expense added to notes payable principal                                                                                          | 1  | -  |
| (Increase) decrease in:                                                                                                                    |   |   |
| Inventories                                                                                                                                | (2,133) | 2,352  |
| Prepaid expenses                                                                                                                           | (485) | 1,109  |
| Income taxes receivable                                                                                                                    | 4,464  | (6,733) |
| Deposits                                                                                                                                   | (134) | -  |
| Increase (decrease) in:                                                                                                                    |   |   |
| Accounts payable                                                                                                                           | 52,899  | (21,847) |
| Accrued liabilities                                                                                                                        | (2,318) | (3,963) |
| Deferred revenue                                                                                                                           | (1,132) | (2,143) |
| Deferred lease incentives                                                                                                                  | (11,302) | 60,098  |
| Income taxes payable                                                                                                                       | -  | (4,640) |
| Accrued interest payable – related party                                                                                             | 10,492  | 963  |
|                                                                                                                                       |   |   |
| Net cash used in operating activities                                                                                                      | (90,993) | (98,817) |
|                                                                                                                                       |   |   |
| Cash flows from investing activities:                                                                                                      |   |   |
| Purchase of property and equipment                                                                                                         | -  | (2,696) |
|                                                                                                                                       |   |   |
| Net cash used in investing activities                                                                                                      | -  | (2,696) |
|                                                                                                                                       |   |   |
| Cash flows from financing activities:                                                                                                      |   |   |
| Proceeds from the issuance of common stock                                                                                                 | -  | 30,000  |
| Proceeds from notes payable – related party                                                                                          | 90,666  | 62,500  |
| Repayment of notes payable – related party                                                                                           | -  | (77,000) |
| Proceeds from note payable - bank                                                                                                          | 24,147  | 211,895  |
| Repayment of note payable – bank                                                                                                | (27,147) | (119,306)  |
|                                                                                                                                       |   |   |
| Net cash provided by financing activities                                                                                                  | 87,666  | 108,089  |
|                                                                                                                                       |   |   |
| Net increase (decrease) in cash                                                                                                            | (3,327) | 6,576  |
|                                                                                                                                       |   |   |
| Cash, beginning of period                                                                                                                  | 7,365  | 7,502  |
|                                                                                                                                       |   |   |
| Cash, end of period                                                                                                                        | $           4,038  | $          14,078  |
|                                                                                                                                       |   |   |
| See accompanying notes to condensed consolidated financial statements                                                                      |

 

5

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**WASATCH FOOD SERVICES, INC.**

**Notes to Condensed Consolidated Financial Statements**

**(Amounts Presented as of September 30, 2009 and for the Three Months and**

**Nine Months Ended September 30, 2009 and 2008 are Unaudited)**

 

**Note 1 - Organization and Basis of Presentation**

 

**Organization**

 

Wasatch Food Services, Inc., (the Company) was incorporated under the laws of the State of Nevada on December 26, 2006 to operate in the food services industry. The Company was in the development stage through November 1, 2007, when restaurant operations commenced. The Company has elected a year end of December 31 for financial reporting purposes.

 

**Principles of Consolidation**

 

The financial statements include the accounts of the Company and its wholly owned subsidiary, Wasatch Food Services Idaho, Inc., an Idaho corporation, operating a franchised BAJIO® restaurant (“WFSI”). All inter-company balances and transactions have been eliminated in consolidation.

 

**Basis of Presentation**

 

The accompanying condensed consolidated financial statements as of September 30, 2009 and for the three months and nine months ended September 30, 2009 and 2008 are unaudited, and the condensed consolidated balance sheet as of December 31, 2008 has been derived from audited financial statements. The accompanying condensed consolidated financial statements have been prepared in            accordance with U. S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense footnotes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. 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, 2009,            the consolidated results of operations for the three months and nine months ended September 30, 2009 and 2008, and consolidated cash flows for the nine months ended September 30, 2009 and 2008 in accordance with U.S. generally accepted accounting principles. The results of operations for any interim period are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated            financial statements and related notes thereto for the years ended December 31, 2008 and 2007.

 

**Reclassifications**

 

Certain amounts in the condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2008 have been reclassified to conform to the presentation used in the three-month and nine-month periods ended September 30, 2009. 

 

6

 

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**Note 2 – Going Concern**

 

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company was only recently formed, has a limited operating history, and has a working capital deficiency of $497,315 and a            stockholders’ deficit of $320,644 at September 30, 2009. These factors raise substantial doubt about the ability of the Company to continue as a going concern. 

 

The Company has obtained working capital from debt and equity financing to fund the Company’s operations, and will require additional working capital from these sources until sufficient revenues can be generated from operations. Management believes that with additional capital to fund marketing and business development expenses, restaurant operations will reach successful            levels. There can be no assurance that the Company will be successful in these efforts, and the condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

**Note 3 – Earnings Per Share**

 

The computation of basic earnings per common share is based on the weighted average number of common shares outstanding during the period.

 

The computation of diluted earnings per common share is based on the weighted average number of common 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. The Company has not issued any stock options or warrants.

 

**Note 4 – Notes Payable – Related Party**

 

The Company had notes payable totaling $159,000 and $104,500 at September 30, 2009 and December 31, 2008, respectively, to Hobble Creek Investments, Inc., a company owned by Ben Peay, President of the Company, The loans are unsecured, bear interest at an annual rate of 8%, and are payable upon demand.

 

The Company had notes payable totaling $56,166 and $20,000 at September 30, 2009 and December 31, 2008, respectively, to West Coast Trees, Inc., a company owned by Ryan Overton, an affiliate of the Company. The loans are unsecured, bear interest at an annual rate of 8%, and are payable upon demand.

 

Interest expense on the related party notes payable for the three months ended September 30, 2009 and 2008 was $4,155 and $1,113, respectively. Interest expense on the related party notes payable for the nine months ended September 30, 2009 and 2008 was $10,492 and $3,370, respectively. Accrued interest payable – related party for these notes was $14,566 and $4,074 at September            30, 2009 and December 31, 2008, respectively.

 

7

 

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**Note 5 – Note Payable - Bank**

 

On July 29, 2009, the Company entered into a promissory note agreement with its bank which replaced a prior revolving line of credit. The original principal amount of the note was $199,387 and the Company is required to make monthly payments of $3,000 plus accrued interest at a rate of approximately 7.5% per annum. The note is collateralized by substantially all tangible and            intangible operating assets of the Company, is personally guaranteed by the major shareholders of the Company, and matures on June 29, 2010. At September 30, 2009, the principal amount of the note was $193,387, and at December 31, 2008, the principal amount of the prior revolving credit line was $196,386. Accrued interest payable on these obligations was $40 and $686 at September 30, 2009 and December 31, 2008, respectively.

 

**Note 6 – Stockholders’ Equity**

 

The Company has authorized 160,000,000 shares of $0.001 par value stock, of which 150,000,000 shares are designated as common shares and 10,000,000 shares are designated as preferred shares. The Board of Directors of the Company is to provide for the issuance of the preferred stock and to designate dividend rates, voting rights, redemption features and other terms. As of September            30, 2009 and December 31, 2008, there were no shares of preferred stock outstanding. 

 

**Note 7 – Supplemental Cash Flow Information**

 

During the nine months ended September 30, 2009 and 2008, the Company paid interest expense of $12,361 and $10,634, respectively. During the nine months ended September 30, 2008, the Company paid income taxes of $6,733. The Company paid no amounts for income taxes during the nine months ended September, 30, 2009.

 

During the nine months ended September 30, 2009, the Company had no non-cash investing and financing activities. During the nine months ended September 30, 2008, property and equipment decreased by $2,019, inventories increased by $303 and accounts payable decreased by $1,716. 

 

**Note 8 – Recent Accounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (FASB) issued Topic 105, *Generally Accepted Accounting Principles. * This standard establishes the FASB Accounting Standards CodificationTM as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive            releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this standard, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements issued for            interim and annual periods ending after September 15, 2009, or the Company’s quarter ended September 30, 2009. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements.

 

8

 

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In June 2009, the FASB issued a new accounting standard included in Topic 810, *Consolidation*, that changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things,            an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The standard is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning January1, 2010. The Company is currently unable to determine what impact the future application of this standard may have on its consolidated financial            statements.

 

In June 2009, the FASB issued a new accounting standard included in Topic 860, *Transfers and Servicing,* that will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying            special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The standard is effective at the start of a company’s first fiscal year beginning after November 15, 2009 or the Company’s fiscal year beginning January1, 2010. The Company is currently unable to determine what impact the future application of this standard may have on its consolidated financial statements.

 

In May 2009, the FASB issued Topic 855, *Subsequent Events.*This standard is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which            an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The standard is effective for interim and annual periods ending after June 15, 2009, or the            Company’s fiscal quarter ended June 30, 2009. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements.

 

**Note 9 – Subsequent Events**

 

|   | In October 2009, the Company borrowed $33,000 from McKinley Capital, a related party. |
|--------|---------------------------------------------------------------------------------------|

 

In October 2009, the Company borrowed an additional $10,000 from Hobble Creek Investments, Inc., a related party. In October 2009, the Company repaid Hobble Creek Investments, Inc. $23,000 in notes payable and accrued interest.

 

The Company has evaluated subsequent events from the balance sheet date of September 30, 2009 through November 10, 2009.

 

9

 

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

 

***You should read the following discussion in conjunction with our financial statements, which are included elsewhere in this report. The following information contains forward-looking statements. (See “Forward Looking Statements” and “Risk Factors.”)***

 

**General**

 

We acquired rights to franchise and operate BAJIO® Mexican Grill restaurants in a defined geographical area of Idaho in January 2007 when we entered into an assignment agreement with Bajio-Idaho, LLC, an affiliate of our president, pursuant to which Bajio-Idaho assigned to us certain of its rights under an Area Development Agreement and Franchise agreement with Bajio, LLC, the Franchisor.            The agreement requires us to develop a total of four BAJIO® restaurants in the defined area through December 31, 2009, including our first restaurant which we opened in Boise, Idaho on November 1, 2007. We are currently in default under the agreement, and we are in discussions with the Franchisor to extend the opening dates of the remaining three restaurants to be developed pursuant to the agreement.

 

We currently operate our restaurant in Boise, Idaho through our wholly owned subsidiary, Wasatch Food Services Idaho, Inc. (“WFSI”). Our consolidated financial statements include the accounts of the Company and WFSI. All inter-company balances and transactions are eliminated in consolidation. 

 

**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:

 

**Inventories**

 

Inventories, consisting principally of food, beverages and supplies, are valued at cost, using the first-in, first-out (FIFO) method. Certain inventories are purchased from a small number of suppliers.

 

**Deferred Lease Incentives**

 

Payments received as incentives to enter into the Company’s restaurant premises lease have been recorded as deferred lease incentives, current and long-term liabilities, in the accompanying consolidated balance sheets. The deferred lease incentives are amortized, on a straight-line basis, over the life of the lease agreement as a reduction of rent expense.

 

**Franchise Rights**

 

The franchise rights held by WFSI for Bajio restaurants in a defined geographical area of Idaho were purchased from an entity under common ownership control, and were recorded at $0, the predecessor cost, with the $25,000 paid in excess of the predecessor cost recorded as a distribution in additional paid-in capital. 

 

10

 

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**Revenue Recognition**

 

Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities. Deferred revenue is recorded for gift cards that have been sold but not yet redeemed at their anticipated redemption value. The Company recognizes revenue and reduces the related deferred revenue when            the gift cards are redeemed. 

 

**Franchise Fees**

 

Franchise fees, generally equal to 8.5% of revenues including payments to the advertising fund, are accrued and included in other restaurant operating expenses.

 

**Advertising Costs**

 

Advertising is expensed as incurred. Advertising costs are included in other operating expenses and include an advertising fee equal to an agreed-upon percentage of revenues paid to a national advertising fund of the franchisor. The advertising fee was calculated at the following percentages:

 

| Year ended December 31, 2007         | 2.50% |
|--------------------------------------|-------|
| Year ended December 31, 2008         | 2.75% |
| Nine months ended September 30, 2009 | 3.00% |

 

**Income Taxes**

 

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their 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.

 

**Going Concern Uncertainty**

 

Our condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company was only recently formed, has a limited operating history, and has a working capital deficiency of $497,315 and a stockholders’ deficit of $320,644 at            September 30, 2009. These factors raise substantial doubt about the ability of the Company to continue as a going concern. 

 

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The Company has obtained working capital from sales of common stock and notes payable to related parties to fund the Company’s operations, and will require additional working capital from these sources until sufficient revenues can be generated from operations. Management believes that with additional capital to fund marketing and business development expenses, restaurant operations will reach            successful levels. There can be no assurance that the Company will be successful in these efforts, and the condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

**Results of Operations**

 

**Revenues – Restaurant Sales**

 

Revenues from restaurant sales were $82,012 for the three months ended September 30, 2009 compared to $99,217 for the three months ended September 30, 2008, a decrease of $17,205, or 17%. Revenues from restaurant sales were $259,864 for the nine months ended September 30, 2009 compared to $306,819 for the nine months ended September 30, 2008, a decrease of $46,955, or 15%. We believe the decrease in            revenues in the current year is primarily attributable to reduced customer headcount resulting from the continuing poor economy.

 

Restaurant sales include sales of food and beverages and are reduced for certain discounts, coupons and other promotional items.

 

**Restaurant Operating Costs**

 

Restaurant operating costs include: food, beverage and packaging costs; labor; occupancy costs; and other operating costs. These costs for the three months and nine months ended September 30, 2009 and 2008 were as follows: 

 

|                         | **Three Months Ended****September 30,**           | **Nine Months Ended****September 30,**            |
|------------------------------|---------------------------------------------------|---------------------------------------------------|
|                         | **2009**                                          | **2008**                                          | **2009** | **2008** |
|                         |                                              |                                              |   |   |
| Food, beverage and packaging | $       27,279 | $       40,829 | $       89,332 | $       122,523 |
| Labor                        | 30,583                                            | 42,215                                            | 102,127 | 124,624 |
| Occupancy                    | 20,131                                            | 19,110                                            | 61,107 | 58,446 |
| Other operating costs        | 12,425                                            | 21,547                                            | 45,141 | 63,505 |
|                         |                                              |                                              |   |   |
| Total                        | $       90,418 | $     123,701            | $     297,707 | $       369,098 |

 

Labor costs include salaries and wages, payroll taxes and employee benefits. Occupancy costs include rent, repairs and maintenance, utilities and property taxes. Other operating costs include advertising and promotion, operating supplies, printing and reproduction, insurance and other expenses.

 

Restaurant operating costs for the three months ended September 30, 2009 decreased $33,283, or 27%, from the three months ended September 30, 2008. Restaurant operating costs for the nine months ended September 30, 2009 decreased $71,391, or 19%, from the nine months ended September 30, 2008. This decrease is primarily attributed to the decrease in restaurant operating levels discussed above. As            restaurant sales have decreased, we have attempted to manage our restaurant operating costs accordingly.

 

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**General and Administrative Expenses**

 

General and administrative expenses consist of legal, accounting, travel, office and management expenses, and were $50,303 and $31,464 for the three months ended September 30, 2009 and 2008, respectively, and $86,040 and $59,266 for the nine months ended September 30, 2009 and 2008, respectively. The increase in these expenses on a year-to-date basis in the current year was due primarily to increases in            accounting, auditing and legal expenses. 

 

**Depreciation and Amortization Expense**

 

Depreciation and amortization expense remained fairly constant and was $11,059 and $11,106 for the three months ended September 30, 2009 and 2008, respectively, and $33,178 and $33,296 for the nine months ended September 30, 2009 and 2008, respectively.

 

**Interest Expense**

 

Interest expense was $9,080 and $3,952 for the three months ended September 30, 2009 and 2008, respectively, and $22,862 and $12,508 for the nine months ended September 30, 2009 and 2008, respectively. The increase in interest expense in the current year is attributable to increased levels of borrowing due to continued operating losses and use of cash in our operations, particularly an increase in notes            payable – related party. 

 

**Liquidity and Capital Resources**

 

Since inception in December 2006 through September 30, 2009, our operating costs and expenses have exceeded our operating revenues, resulting in an accumulated deficit of $509,572. We have funded our start-up costs and the excess of our costs and expenses over our operating revenues primarily from the sale of our common stock and notes payable to related parties and to our bank. As of September 30, 2009,            we had current assets of $13,488 (including cash of $4,038) and current liabilities of $510,803, resulting in a working capital deficiency of $497,315. 

 

For the nine months ended September 30, 2009, net cash used in operating activities was $90,993, primarily as a result of our net loss of $179,923, partially offset by non-cash depreciation and amortization expense of $33,178 and non-cash services expense contributed to capital of $5,400, and the net change in other operating accounts. By comparison, net cash used in operating activities for the nine            months ended September 30, 2008 was $98,817, primarily as a result of our net loss of $162,709, partially offset by non-cash depreciation and amortization expense of $33,296 and non-cash services expense contributed to capital of $5,400, and the net change in other operating accounts.

 

We had no cash provided by or used in investing activities for the nine months ended September 30, 2009. For the nine months ended September 30, 2008, net cash used in investing activities was $2,696, consisting of purchases of property and equipment.

 

Net cash provided by financing activities was $87,666 for the nine months ended September 30, 2009, comprised of $90,666 proceeds from notes payable – related party partially offset by net payments of $3,000 on our note payable – bank. Net cash provided by financing activities for the nine months ended September 30, 2008 was $108,089, comprised of $30,000 proceeds from the issuance of common            stock, $62,500 proceeds from notes payable – related party and $92,589 net proceeds from our note payable – bank, partially offset by repayments of notes payable – related party of $77,000.

 

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On July 29, 2009, the Company entered into a promissory note agreement with its bank which replaced a prior revolving line of credit. The original principal amount of the note is $199,387 and the Company is required to make monthly payments of $3,000 plus accrued interest at a rate of approximately 7.5% per annum. The note is collateralized by substantially all tangible and intangible operating assets of            the Company, is personally guaranteed by the major shareholders of the Company, and matures on June 29, 2009. At September 30, 2009 and December 31, 2008, we had borrowed $193,387 and $196,386, respectively. Accrued interest payable on the note was $40 and $686 at September 30, 2009 and December 31, 2008, respectively.

 

At September 30, 2009, the Company had notes payable – related party totaling $159,000 to Hobble Creek Investments, Inc., a company owned by Ben Peay, President of the Company, and $56,166 to West Coast Trees, Inc., a company owned by Ryan Overton, the spouse of Megan Overton, Secretary/Treasurer of the Company. The loans are unsecured, bear interest at an annual rate of 8%, and are payable upon            demand. Accrued interest payable – related party for these notes was $14,566 and $4,074 at September 30, 2009 and December 31, 2008, respectively. Subsequent to September 30, 2009, the Company borrowed an additional $10,000 from Hobble Creek Investments, Inc. and repaid Hobble Creek Investments, Inc. $23,000 in notes payable and accrued interest payable. Subsequent to September 30, 2009, the Company also borrowed $33,000 from McKinley Capital, a related party. 

 

Until our restaurant operations reach a successful level where we are able to cover our operating expenses, we will require additional funding from the sale of our common stock or the issuance of debt. In addition, we currently exhausted our borrowing capacity with our bank. 

 

We do not believe we currently have adequate funds to meet our obligations for the next twelve months and we are dependent on the receipt of additional debt or equity capital to fund our operations until such time as our revenues exceed our expenses and we begin to operate at a profit, if ever. We have not entered into any agreement or arrangement for the provision of additional debt or equity funding            and no assurances can be given that such funding will be available to us on acceptable terms or at all. We anticipate that we may have difficulty in obtaining debt financing given the current economic climate and, if we are able to obtain equity financing, it will likely result in significant additional dilution to the interests of our current stockholders. In addition, we may encounter unforeseen events in connection with our operations which affect the estimated amount of            additional funds we require. To date, we have received loans from members of management and their affiliates but such persons have no obligation to provide loans to us in the future and there can be no assurance that such persons will continue to provide the capital we require. In addition, there can be no assurance that operations and operating cash flows will not deteriorate further. If we are unable to achieve profitable operations and positive operating cash flows sufficient to            meet scheduled debt obligations, we will need to seek additional funding or we may be forced to significantly reduce or terminate our operations or pursue other strategic alternatives.

 

**Recent Accounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (FASB) issued Topic 105, *Generally Accepted Accounting Principles.* This standard establishes the FASB Accounting Standards CodificationTM as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of            the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this standard, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements issued for interim            and annual periods ending after September 15, 2009, or the Company’s quarter ended September 30, 2009. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements.

 

14

 

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In June 2009, the FASB issued a new accounting standard included in Topic 810, *Consolidation,* that changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s            purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The standard is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or the Company’s fiscal year beginning January 1, 2010. The Company is currently unable to determine what impact the future application of this standard may have on its consolidated financial            statements.

 

In June 2009, the FASB issued a new accounting standard included in Topic 860, *Transfers and Servicing*, that will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,”            changes the requirements for derecognizing financial assets, and requires additional disclosures. The standard is effective at the start of a company’s first fiscal year beginning after November 15, 2009 or the Company’s fiscal year beginning January 1, 2010. The Company is currently unable to determine what impact the future application of this standard may have on its consolidated financial statements.

 

In May 2009, the FASB issued Topic 855, *Subsequent Events.*This standard is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated            subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The standard is effective for interim and annual periods ending after June 15, 2009, or the Company’s fiscal quarter ended            June 30, 2009. The implementation of this standard did not have a material impact on the Company’s consolidated financial statements.

 

**Off-Balance Sheet Arrangements**

 

The Company operates its restaurant in leased premises. The original term of the lease is ten years, commencing November 2007, with an option to extend the lease for an additional five years. For the first five years of the lease, the Company is obligated to pay minimum rent of $5,157 per month. For the next five years of the lease, the Company is obligated to pay minimum rent of $5,672 per month. For            each year of a lease extension beyond ten years, the minimum monthly rent will be increased 2% annually from the date of the extension. The lease also provides for the payment by the Company of common area maintenance, property taxes, insurance and other use and occupancy costs.

 

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The Company received a one-time tenant location fee of $110,232 in 2007 and a one-time tenant improvement allowance of $71,400 in 2008. These payments have been recorded as deferred lease incentives and amortized, on a straight-line basis, over the life of the lease as a reduction of rent expense.

 

Future minimum lease payments required under the operating lease at December 31, 2008 are as follows:

 

| 2009                         | $      | 61,880  |
|------------------------------|--------|---------|
| 2010                         |   | 61,880  |
| 2011                         |   | 61,880  |
| 2012                         |   | 62,912  |
| 2013                         |   | 68,068  |
| Thereafter                   |   | 260,927 |
|                         |   |    |
| Total minimum lease payments | $      | 577,547 |

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

Not Applicable. The Company is a “smaller reporting company.”

 

**Item 4T. Controls and Procedures.**

 

**Disclosure Controls and Procedures**

 

Under the supervision and with the participation of our management, including our Chief Executive Officer/Chief 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, 2009, the end of the period covered            by this report. Based upon that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2009 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            Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, 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. 

 

**Internal Control over Financial Reporting**

 

Because our Form 10 registration statement only recently became effective in July 2009, our first annual report on Form 10-K will not contain a report of management's assessment regarding internal control over financial reporting with respect to the fiscal year ending December 31, 2009 due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.            Until our first annual assessment regarding internal control over financial reporting has been performed, our quarterly reports on Form 10-Q will not contain an evaluation of any material changes in our internal control over financial reporting that occurred during the fiscal quarter to which such reports pertain. 

 

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**Part II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

The Company is not a party to any material pending legal proceedings and, to the best of its knowledge, its properties are not the subject of any such proceedings.

 

**Item 1A. Risk Factors.**

 

See the risk factors described in Item 1A of the Company’s registration statement on Form 10/A filed with the SEC on July 14, 2009.

 

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

 

Not Applicable.

 

**Item 3. Defaults Upon Senior Securities.**

 

| Not Applicable. |
|-----------------|

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

Not Applicable.

 

**Item 5. Other Information.**

 

Not Applicable.

 

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**Item 6.**         **Exhibits**

 

The following documents are included as exhibits to this report:

 

**(a) Exhibits**

|  

**Exhibit**

**Number** |   | **SEC Reference Number** |   |  

 

**Title of Document**                                                               |   |  

 

**Location** |
|---------------------------------|--------|--------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------|
|                            |   |                     |   |                                                                                                |   |                         |
| 3.1                             |   | 3                        |   | Articles of Incorporation                                                                           |   | Incorporated by Reference*   |
| 3.2                             |   | 3                        |   | Bylaws                                                                                              |   | Incorporated by Reference*   |
| 10.1                            |   | 10                       |   | Promissory Note to Hobble Creek Investments, Inc. dated                            July 22, 2009    |   | This Filing                  |
| 10.2                            |   | 10                       |   | Promissory Note to Zions First National Bank dated July 29, 2009                                    |   | This Filing                  |
| 10.3                            |   | 10                       |   | Promissory Note to Hobble Creek Investments, Inc.                             dated August 31, 2009 |   | This Filing                  |
| 31.1                            |   | 31                       |   | Section 302 Certification of Chief Executive and Chief                            Financial Officer |   | This Filing                  |
| 32.1                            |   | 32                       |   | Section 1350 Certification of Chief Executive and Chief

Financial Officer                          |   | This Filing                  |

*Incorporated by reference to Exhibits 3.1 and 3.2 of the Company’s registration statement on Form 10 filed on May 15, 2009.

 

**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.

 

 

|                    | Wasatch Food Services, Inc..                |
|-------------------------|---------------------------------------------|
|                    |                                        |
|                    |                                        |
| Date: November 12, 2009 | By /s/ Ben Peay                             |
|                    | Ben Peay                                    |
|                    | President and Chief Financial Officer       |
|                    | (Principal Executive and Financial Officer) |

 

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