10-Q 1 compound10q123108.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2008 Commission File No. 000-53383 COMPOUND NATURAL FOODS, INC. ---------------------------------------------- (Name of Registrant as specified in its charter) Nevada 84-1418566 ------------------------------- ------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identi- Incorporation or Organization) fication No.) 9312 Meredith Court, Lone Tree, Colorado 80124 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including area code: (303) 662-8118 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant 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 [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of February 13, 2009, 66,386,000 shares of common stock were outstanding. COMPOUND NATURAL FOODS, INC. FORM 10-Q INDEX Page Number PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets December 31, 2008, September 30, 2008 and 2007 ......... 3 Consolidated Statements of Operations Three Months Ended December 31, 2008 and 2007 .......... 4 Consolidated Statements of Cash Flows Three Months Ended December 31, 2008 and 2007 .......... 5 Consolidated Statements of Changes in Shareholders Equity (Deficit) ....................................... 6 Notes to Consolidated Financial Statements ............. 8 Item 2. Management's Discussion and Analysis or Plan of Operation ...................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................ 12 Item 4. Controls and Procedures ................................ 12 PART II: OTHER INFORMATION Item 1. Legal Proceedings ...................................... 13 Item 1A. Risk Factors ........................................... 13 Item 2. Changes in Securities .................................. 13 Item 3. Defaults Upon Senior Securities ........................ 13 Item 4. Submission of Matters to a Vote of Security Holders ................................................ 13 Item 5. Other Information ...................................... 13 Item 6. Exhibits and Reports on Form 8-K ....................... 13 SIGNATURES ...................................................... 14 COMPOUND NATURAL FOODS, INC. (A Development Stage Company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 6 Consolidated Statement of Stockholders' (Deficit) 7 Notes to Consolidated Financial Statements 8 2

6 Compound Natural Foods, Inc. (A Development Stage Company) Notes to Consolidated Financial Statements December 31, 2008 and 2007 (Unaudited) Note 1 - Nature of Operations and Summary of Significant Accounting Policies This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who are responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States of America and have been consistently applied in the preparation of the financial statements. Organization and Description of Business Compound Natural Foods, Inc. (formerly Zurich American Financial, S.A., Inc.) a Nevada corporation and its wholly-owned subsidiary, Pure Nature, LLC, a Colorado limited liability corporation organized August 12, 1999, (collectively, the Company) formerly provided nutritional food, beverage and supplemental products that promote a healthy and active lifestyle. The Company entered into a development stage effective October 1, 2006, when the Company commenced its efforts to become a publicly reporting company, ultimately to seek a business combination. On September 29, 2004, the Company acquired all of the outstanding shares of Compound Healthcare, Inc. (formerly Job Tip Lotto, Inc.), a California "C" Corporation for 60,000,000 shares of the Company's common stock in a reverse acquisition. The Company simultaneously canceled 16,000,000 shares of common stock held by one of the founders. After the reverse acquisition and certificate cancellation, the Company had 66,085,000 common shares issued and outstanding, 60,000,000 of which were held by the former shareholders of Compound Healthcare, Inc. On October 8, 2004, the Company issued 2,000,000 shares of common stock in exchange for 1,930,490 units of Pure Nature, LLC, resulting in the LLC becoming a wholly owned subsidiary. On April 18, 2005, the Company's President acquired 60,000,000 shares from the other shareholders for $400,000, resulting in a change in control. The $400,000 was borrowed from another shareholder, which borrowings are collateralized by the 60,000,000 shares. Principles of Consolidation The consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, Pure Nature, LLC. All significant inter-company balances and transactions have been eliminated in the consolidation. 7 Development Stage Company Based on the Company's business plan, it is a development stage company since planned principle operations have not yet commenced. Accordingly, the Company presents its financial statements in conformity with the accounting principles generally accepted in the United States of America that apply to developing enterprises. As a development stage company, the Company discloses its retained earnings (or accumulated deficit) during the development stage and the cumulative statements of operations and cash flows from commencement of development stage to the current balance sheet date. The development stage began on October 1, 2006, when the Company ceased operations and commenced its efforts to become a publicly reporting company, ultimately to seek a business combination. Cash and Cash Equivalents The Company considers cash in banks, deposits in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents. Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts payable, accrued liabilities, and notes payable approximates fair value because of the short maturity of these instruments. Revenue Recognition The Company recognized prior to discontinuance of its prior business, revenue from goods sold once all of the following criteria for revenue recognition have been met: 1) pervasive evidence of an agreement exists; 2) the goods have been delivered; 3) the price is fixed and determinable and not subject to refund or adjustment; and 4) collection of the amounts due is reasonably assured. The Company derived its revenue primarily from the wholesale sale of goods to retailers such as supermarkets and health food stores. Marketing/Advertising Costs The costs of advertising are charged to marketing/advertising expense as incurred. The Company incurred marketing/advertising expense of $22,500 for the fiscal year ended September 30, 2008, and $45,000 for the twelve months ended September 30, 2007. Per Share Amounts SFAS 128, "Earnings per Share," provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (or loss) by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company, similar to fully diluted earnings per share. During 2007 and 2006, the Company has not issued any potential dilutive securities. 8 Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the asset and liability method of computing deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the book basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Concentrations The Company is not currently a party to any financial instruments that potentially subject it to concentrations of credit risk. Discontinued Operations Due to general economic conditions and other factors, on October 1, 2006, the company decided to terminate its operations. When the Company discontinued its operations, it became required under generally accepted accounting principles ("GAAP") to reset the development stage period of the Company to a start date of October 1, 2006. The transactions related to these former operations are disclosed as discontinued operations. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited Financial Information The financial statements as of December 31, 2008 are unaudited and, in the opinion of management, include all adjustments (consisting of normal reoccurring adjustments and accruals) necessary to present fairly the financial statements for periods presented in accordance with generally accepted accounting principles. Note 2 - Basis of Presentation Generally accepted accounting principles in the United States of America contemplate the continuation of the Company as a going concern. However, the Company has accumulated operating losses since its inception and has negative working capital and stockholders' deficits, which raise substantial doubt about the Company's ability to continue as a going concern. Management plans to meet the cash requirements of the Company through the development stage by raising additional capital as needed. Failure to raise capital could result in the Company having to curtail or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of 9 recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. Note 3 - Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value Measurements". This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years and earlier application is encouraged. The Company has adopted this Statement and this adoption did not impact the Company's financial position, results of operations, or cash flows. Various additional accounting pronouncements have been issued during 2006, 2007 and 2008, none of which are expected to have any material effect on the financial statements of the Company. Note 4 - Acquisitions and Purchases of Assets On September 29, 2004, the Company acquired all of the outstanding share of Compound Healthcare, Inc., a California C corporation in exchange for 60,000,000 common shares of the Company in a reverse acquisition. On October 8, 2004, the Company acquired all of the outstanding units of Pure Nature, LLC, a Colorado limited liability corporation in exchange for 2,000,000 common shares of the Company. Note 5 - Capital Stock The Company has authorized 1,000,000,000 shares of $.001 par value common stock. As of December 31, 2008, there were 66,386,000 shares issued and outstanding. Note 6 - Income Taxes Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company's deferred tax assets consist entirely of the benefit from net operating loss (NOL) carry forwards. The net operating loss carry forward, if not used, will expire in various years through 2028, and is subject to restrictions imposed by the Internal Revenue Code. The Company's deferred tax assets are offset by a valuation allowance due to the uncertainty of the realization of the net operating loss carry forwards. Net operating loss carry forwards may only be utilized to offset future taxable income, if any, and may be further limited by other provisions of the tax laws, including changes in control of the Company. 10

Income taxes at the statutory rate are reconciled to the Company's actual income taxes as follows: Income tax (benefit) at statutory rate resulting from net operating loss carry forward (15.0%) State tax (benefit) net of Federal benefit (3.5%) Deferred income tax valuation allowance 18.5% ---------- Actual tax rate 0% ========== Note 7 - Related Party Transactions Shareholders have advanced funds to the Company, with balances of $126,304 at December 31, 2008 and $117,514 and $110,775 at September 30, 2008 and September 30, 2007, respectively. Interest of $1,895 was accrued during the three months ended December 31, 2008, and $6,170 and $5,967 was accrued in the respective years. The loans are uncollateralized, bear interest at 6% per annum, and are due on demand. The Company uses the offices of its President for its minimal office facility needs for no consideration. No provision for these costs has been provided since it has been determined that they are immaterial. Note 8 - Commitments and Contingencies At various times during its former operations, the Company entered into various marketing agreements for its products. These agreements indicate perpetual monthly required payments of $3,750 for services, and are cancelable with 30 days written notice. These commitments have been included in accounts payable. The Company believes that since no services are being provided, the contracts have in effect been terminated. However, termination of the contracts is subject to interpretation, and therefore, the financial statements include continuing provisions for the required payments based on the contingencies involved. A contingency exists with respect to this matter, the ultimate resolution of which has not been determined. Prior to September 29, 2004, the Company's wholly-owned subsidiary, Pure Nature LLC, entered into member contribution agreements calling for repayment of up to two times the face amount of the contribution. The repayment was to be prorated among all members and was to be equivalent to 5% of gross sales. The contributions totaled $ 124,750 and 5% of sales up to the discontinuance of operations totaled $2,290. Management believes that these agreements have passed the statute of limitations and consequently no provision has been made. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION LIQUIDITY AND CAPITAL RESOURCES The Company has been able to continue solely by reason of loans from its major shareholder, proceeds of which have been used primarily to pay for professional services and pay certain current liabilities. The Company has had no revenues from operations since October 1, 2006. During the three months ended December 31, 2008, the Company received loans totaling $8,790 from its major shareholder, and received loans of $6,739 during the year ended September 30, 2008. The Company has no prospect of obtaining additional capital or other funding absent some form of reorganization or change of control. The Company's auditors indicated in their report on the financial statements of the Company for the fiscal year ended September 30, 2008 that there is question as to whether the Company can continue as a going concern absent additional funding. At December 21, 2008 the total loan from the shareholder was $126,304. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4. CONTROLS AND PROCEDURES Our management, with the participation of the President, evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. Based on this evaluation, our management, with the participation of the President, concluded that, as of December 31, 2008, our internal control over financial reporting was not effective due to material weaknesses in the system of internal control. Specifically, management identified the following control deficiencies. (1) The Company has not properly segregated duties as one or two individuals to initiate, authorize, and complete all transactions. The Company has not implemented measures that would prevent the individuals from overriding the internal control system. The Company does not believe that this control deficiency has resulted in deficient financial reporting because the Chief Financial Officer is aware of his responsibilities under the SEC's reporting requirements and personally certifies the financial reports. (2) The Company has installed accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and does not provide an adequate audit trail of entries made in the accounting software. The Company does not believe that this control deficiency has resulted in deficient financial reporting because the Company has implemented a series of manual checks and balances to verify that previous reporting periods have not been improperly modified and that no unauthorized entries have been made in the current reporting period. Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles. Management has determined that current resources would be appropriately applied elsewhere and when resources permit, they will alleviate material weaknesses through various steps. 12 Further, since the Company currently has no operations and its expenses are limited primarily to payment for professional services and interest expense, and since the Company has no current funding other than loans from its major shareholder to pay current expenses, the Company plans to delay implementing more extensive internal accounting controls, including the employment of accounting personnel. If and when the Company is reorganized or becomes involved in business activities and/or operations, of which there is no assurance, appropriate internal controls to insure proper financial reporting will be implemented. PART II - OTHER INFORMATION Item 1. Legal Proceedings. There are currently no legal proceedings pending against the Company and management is not aware of any claims being asserted against the Company. Item 1A. Risk Factors. There are no changes to the risk factors included in the Company's last annual report on Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits 31 Certification of Chief Filed herewith electronically Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Filed herewith electronically Executive Officer and Principal Financial Officer Pursuant to Section 18 U.S.C. Section 1350 13 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. COMPOUND NATURAL FOODS, INC. Date: February 24, 2009 By: /s/ Joey Canyon --------------------------------- Joey Canyon, President (Principal Executive Officer) and Treasurer (Principal Financial Officer) 14

Compound Natural Foods Inc. 10-Q