Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - UFood Restaurant Group, Inc. | c08267exv32w1.htm |
EX-10.4 - EXHIBIT NO. 10.4 - UFood Restaurant Group, Inc. | c08267exv10w4.htm |
EX-31.1 - EXHIBIT 31.1 - UFood Restaurant Group, Inc. | c08267exv31w1.htm |
EX-10.6 - EXHIBIT NO. 10.6 - UFood Restaurant Group, Inc. | c08267exv10w6.htm |
EX-10.5 - EXHIBIT NO. 10.5 - UFood Restaurant Group, Inc. | c08267exv10w5.htm |
EX-31.2 - EXHIBIT 31.2 - UFood Restaurant Group, Inc. | c08267exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - UFood Restaurant Group, Inc. | c08267exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2010
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For
the transition period from
to
Commission File Number: 333-136167
UFOOD RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada | 20-4463582 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
255 Washington Street, Suite 100
Newton, MA 02458
(Address of principal executive offices)
Newton, MA 02458
(Address of principal executive offices)
(617) 787-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the issuer (1) 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. þ Yes o 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 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 þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). þ Yes
o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of November 8, 2010, there were 40,427,293 shares of the Registrants common stock, par value
$0.001 per share, issued and outstanding.
TABLE OF CONTENTS
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34 | ||||||||
35 | ||||||||
36 | ||||||||
Exhibit No. 10.4 | ||||||||
Exhibit No. 10.5 | ||||||||
Exhibit No. 10.6 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Consolidated Financial Statements
4 5 | ||||
6 | ||||
7 | ||||
8 | ||||
9 20 |
3
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 26, 2010 and December 27, 2009
September 26, 2010 and December 27, 2009
Assets
September 26, | December 27, | |||||||
2010 | 2009 | |||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 518,140 | $ | 2,278,427 | ||||
Restricted cash |
40,041 | 60,425 | ||||||
Accounts receivable |
22,208 | 180,134 | ||||||
Inventories |
145,110 | 123,648 | ||||||
Prepaid expenses and other current assets |
31,807 | 68,605 | ||||||
Total current assets |
757,306 | 2,711,239 | ||||||
Property and equipment: |
||||||||
Equipment |
984,368 | 937,857 | ||||||
Furniture and fixtures |
209,120 | 202,205 | ||||||
Leasehold improvements |
1,721,044 | 1,744,594 | ||||||
Website development costs |
27,050 | 37,050 | ||||||
Fixed assets |
2,941,582 | 2,921,706 | ||||||
Accumulated depreciation and amortization |
1,781,907 | 1,560,402 | ||||||
Property and equipment, net |
1,159,675 | 1,361,304 | ||||||
Other assets: |
||||||||
Deferred financing costs, net |
570,491 | 757,873 | ||||||
Goodwill |
75,363 | 75,363 | ||||||
Other |
83,782 | 86,560 | ||||||
Total other assets |
729,636 | 919,796 | ||||||
Total assets |
$ | 2,646,617 | $ | 4,992,339 | ||||
See accompanying notes.
4
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 26, 2010 and December 27, 2009
September 26, 2010 and December 27, 2009
Liabilities and Stockholders Equity (Deficit)
September 26, | December 27, | |||||||
2010 | 2009 | |||||||
(unaudited) | (audited) | |||||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 450,000 | $ | 857,882 | ||||
Current portion of capital lease obligations |
38,792 | 58,820 | ||||||
Accounts payable |
349,387 | 285,150 | ||||||
Deferred franchise revenue |
111,421 | 157,500 | ||||||
Accrued dividends |
19,778 | | ||||||
Accrued expenses and other current liabilities |
189,698 | 157,870 | ||||||
Total current liabilities |
1,159,076 | 1,517,222 | ||||||
Long-term liabilities: |
||||||||
Long-term debt |
3,549,091 | 3,044,001 | ||||||
Derivative warrant liability |
2,195,596 | 3,750 | ||||||
Capital lease obligations |
21,040 | 39,071 | ||||||
Other noncurrent liabilities |
95,480 | 276,920 | ||||||
Total long term liabilities |
5,861,207 | 3,363,742 | ||||||
Total liabilities |
7,020,283 | 4,880,964 | ||||||
EQUITY |
||||||||
Stockholders equity (deficit): |
||||||||
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, 10,000 shares issued and outstanding |
10 | | ||||||
Common stock, $0.001 par value, 300,000,000 shares
authorized, 40,427,294 shares issued and outstanding |
40,427 | 37,935 | ||||||
Additional paid-in capital |
28,049,167 | 25,589,311 | ||||||
Accumulated deficit |
(32,463,270 | ) | (25,515,871 | ) | ||||
Total stockholders equity (deficit) |
(4,373,666 | ) | 111,375 | |||||
Total liabilities and stockholders equity (deficit) |
$ | 2,646,617 | $ | 4,992,339 | ||||
See accompanying notes.
5
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Unaudited
For the Three and Nine Month Periods Ended September 26, 2010 and September 27, 2009
For the Three and Nine Month Periods Ended September 26, 2010 and September 27, 2009
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Store sales |
$ | 1,178,874 | $ | 1,214,220 | $ | 3,447,118 | $ | 3,548,216 | ||||||||
Franchise royalties and fees |
115,119 | 59,589 | 249,795 | 329,107 | ||||||||||||
Other revenue |
| (456 | ) | 22,298 | 2,239 | |||||||||||
1,293,993 | 1,273,353 | 3,719,211 | 3,879,562 | |||||||||||||
Costs and expenses: |
||||||||||||||||
Store operating expenses: |
||||||||||||||||
Food and paper costs |
356,628 | 344,270 | 1,016,192 | 1,016,855 | ||||||||||||
Cost of nutritional products |
70,787 | 84,796 | 255,140 | 269,665 | ||||||||||||
Labor |
332,455 | 339,100 | 957,840 | 1,044,773 | ||||||||||||
Occupancy |
74,847 | 135,114 | 309,571 | 427,721 | ||||||||||||
Other store operating expenses |
192,575 | 195,568 | 613,518 | 575,666 | ||||||||||||
General and administrative expenses |
2,081,235 | 887,424 | 3,691,616 | 2,879,496 | ||||||||||||
Advertising, marketing and promotion expenses |
42,638 | 67,880 | 152,972 | 172,635 | ||||||||||||
Depreciation and amortization |
80,636 | 100,894 | 244,711 | 309,705 | ||||||||||||
Loss on disposal of assets |
25,782 | 15,043 | 25,782 | 77,941 | ||||||||||||
Total costs and expenses |
3,257,583 | 2,170,089 | 7,267,342 | 6,774,457 | ||||||||||||
Operating loss |
(1,963,590 | ) | (896,736 | ) | (3,548,131 | ) | (2,894,895 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
672 | 6,147 | 4,829 | 16,678 | ||||||||||||
Interest expense |
(408,434 | ) | (231,596 | ) | (1,192,473 | ) | (532,828 | ) | ||||||||
Other income (expense) |
(1,969,761 | ) | (13,076 | ) | (2,191,846 | ) | 316,701 | |||||||||
Other income (expense), net |
(2,377,523 | ) | (238,525 | ) | (3,379,490 | ) | (199,449 | ) | ||||||||
Loss before income taxes |
(4,341,113 | ) | (1,135,261 | ) | (6,927,621 | ) | (3,094,344 | ) | ||||||||
Income taxes |
| | | | ||||||||||||
Net loss |
$ | (4,341,113 | ) | $ | (1,135,261 | ) | $ | (6,927,621 | ) | $ | (3,094,344 | ) | ||||
Dividends on preferred stock |
19,778 | | 19,778 | | ||||||||||||
Net loss attributable to common stockholders |
$ | (4,360,891 | ) | $ | (1,135,261 | ) | $ | (6,947,399 | ) | $ | (3,094,344 | ) | ||||
Basic and diluted loss per share |
$ | (0.11 | ) | $ | (0.03 | ) | $ | (0.18 | ) | $ | (0.09 | ) | ||||
See accompanying notes.
6
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Unaudited
For the Nine Months Ended September 26, 2010 and September 27, 2009
For the Nine Months Ended September 26, 2010 and September 27, 2009
Nine months Ended | ||||||||
September 26, | September 27, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (6,927,621 | ) | $ | (3,094,344 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
244,711 | 309,705 | ||||||
Amortization of the beneficial conversion feature |
569,090 | 190,270 | ||||||
Deferred financing costs |
257,263 | 175,991 | ||||||
Change in value of warrant liability |
2,191,846 | (325,882 | ) | |||||
Provision for doubtful accounts |
(66,322 | ) | 92,027 | |||||
Loss on disposal of assets |
25,782 | 77,941 | ||||||
Stock-based compensation |
853,083 | 392,253 | ||||||
Non-cash promotion, marketing and advertising expenses |
1,178,545 | 146,811 | ||||||
Non-cash interest payments |
312,884 | 206,844 | ||||||
Gain on extinguishment of debt |
| (74,969 | ) | |||||
Increase (decrease) in cash from changes in assets and liabilities: |
||||||||
Accounts receivable |
224,247 | (79,924 | ) | |||||
Inventories |
(21,464 | ) | 17,629 | |||||
Prepaid expenses and other current assets |
46,798 | 30,518 | ||||||
Other assets and noncurrent liabilities |
2,779 | (72,994 | ) | |||||
Accounts payable |
64,236 | ( 255,541 | ) | |||||
Franchisee deposits |
(46,079 | ) | (120,291 | ) | ||||
Accrued expenses and other current liabilities |
(149,611 | ) | (182,073 | ) | ||||
Net cash used in operating activities |
(1,239,833 | ) | (2,566,029 | ) | ||||
Cash flows from investing activities: |
||||||||
Proceeds from the disposal of assets |
| 5,000 | ||||||
Acquisition of property and equipment |
(70,700 | ) | (102,304 | ) | ||||
Net cash used in investing activities |
(70,700 | ) | (97,304 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of convertible debt |
| 5,874,000 | ||||||
Proceeds from warrants exercise |
53,846 | | ||||||
Payments for financing costs |
(69,881 | ) | (983,656 | ) | ||||
Payments on long-term debt |
(407,882 | ) | (280,450 | ) | ||||
Payments on capital lease obligations |
(46,221 | ) | (46,265 | ) | ||||
Decrease in restricted cash, net |
20,384 | 357,213 | ||||||
Net cash provided by (used for) financing activities |
(449,754 | ) | 4,920,842 | |||||
Increase (decrease) in cash and cash equivalents |
(1,760,287 | ) | 2,257,509 | |||||
Cash and cash equivalents beginning of year |
2,278,427 | 787,551 | ||||||
Cash and cash equivalents end of period |
$ | 518,140 | $ | 3,045,060 | ||||
See accompanying notes.
7
Table of Contents
UFOOD RESTAURANT GROUP, INC.
and SUBSIDIARY
and SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity
For the Nine Months ended September 26, 2010 (unaudited)
For the Nine Months ended September 26, 2010 (unaudited)
Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Value | Shares | Value | Capital | Deficit | Total | ||||||||||||||||||||||
Balances, December 27, 2009 |
| | 37,934,907 | $ | 37,935 | $ | 25,589,311 | $ | (25,515,871 | ) | $ | 111,375 | ||||||||||||||||
Preferred stock issued for promotional services |
10,000 | 10 | | | 999,990 | | 1,000,000 | |||||||||||||||||||||
Common stock issued for consulting ,marketing & promotional services |
| 320,000 | 320 | 178,225 | | 178,545 | ||||||||||||||||||||||
Common stock issued for interest payment |
| | 1,297,236 | 1,297 | 311,587 | | 312,884 | |||||||||||||||||||||
Common stock-based compensation |
| | | | 853,083 | | 853,083 | |||||||||||||||||||||
Forfeitures of common stock |
| | (1,773 | ) | (2 | ) | 2 | | | |||||||||||||||||||
Conversion of debentures & warrants into common stock |
| | 876,924 | 877 | 116,969 | | 117,846 | |||||||||||||||||||||
Dividends on preferred stock |
| | | | | (19,778 | ) | (19,778 | ) | |||||||||||||||||||
Net loss for nine months ended September 26, 2010 |
| | | | | (6,927,621 | ) | (6,927,621 | ) | |||||||||||||||||||
Balances, September 26, 2010 |
10,000 | $ | 10 | 40,427,294 | $ | 40,427 | $ | 28,049,167 | $ | (32,463,270 | ) | $ | (4,373,666 | ) | ||||||||||||||
8
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements Unaudited-
1. | Nature of Operations and Basis of Presentation |
Nature of Operations
UFood Restaurant Group, Inc. (UFood or the Company) was incorporated in the State of Nevada
on February 8, 2006 as Axxent Media Corp. Prior to December 18, 2007, UFood was a development
stage company headquartered in Vancouver, Canada. As Axxent Media Corp., the Companys
business was to obtain reproduction and distribution rights to foreign films within North
America and also to obtain the foreign rights to North American films for reproduction and
distribution to foreign countries. On August 8, 2007, the Company changed its name to UFood
Franchise Company, Inc., and on September 25, 2007 changed its name to UFood Restaurant
Group, Inc. (UFood or the Company). Following the Merger described below, the Company
abandoned its plans to obtain reproduction and distribution rights to foreign films within
North America and to obtain the foreign rights to North American films for reproduction and
distribution to foreign countries.
On December 18, 2007 (the Merger Date) , pursuant to the terms of an Agreement and Plan of
Merger and Reorganization, a wholly-owned subsidiary of the Company merged with and into
KnowFat Franchise Company, Inc. (KnowFat). Following the merger (the Merger), UFood continued
KnowFats business operations as a franchisor and operator of fast-casual food service
restaurants that capitalize on consumer demands for great tasting food with healthy
attributes. As of September 26, 2010, the Companys operations consisted of four
Company-owned restaurants and four franchisee-owned restaurants. On the Merger Date, each
share of KnowFat common stock issued and outstanding immediately prior to the Merger was
exchanged for 1.52350763 shares of UFood Common Stock. All share amounts have been adjusted
to reflect the effect of the share exchange.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim
financial information and with the rules and regulations of the Securities and Exchange
Commission. They include the activity and balances of UFood and its subsidiaries but do not
include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The interim consolidated
financial statements are unaudited; however, they include all normal recurring accruals and
adjustments that, in the opinion of management, are necessary to present fairly UFoods
financial position at September 26, 2010, and the results of its operations and cash flows
for the three and nine month periods ended September 26, 2010 and September 27, 2009. The
results of operations for the three and nine month periods ended September 26, 2010 are not
necessarily indicative of the results to be expected for future quarters or the full year.
The interim consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes thereto for the fiscal year ended December
27, 2009 included in the Companys Annual Report on Form 10-K.
As shown in the accompanying consolidated financial statements, the Company has incurred
recurring losses from operations and negative cash flows from operations. Over the past few
years, the Companys operations have been funded through a combination of private equity and
debt financing. As of September 26, 2010, the Company had approximately $518,000 of
unrestricted cash. These factors raise substantial doubt about the Companys ability to
continue as a going concern. Based on current trends, management believes that additional
franchises will be sold within the next twelve months, and that the additional capital raised
will be sufficient to support activities though 2011. The Company is subject to a number of
risks similar to those of other companies in its industry, including dependence on key
individuals, competition from substitute products, the successful attraction of franchisee,
and the ability to obtain adequate additional financing necessary to fund continuing
operations. On October 29, 2010, the Company completed an Offering to accredited investors,
which sold an aggregate of 34,400 shares of Series B Preferred Stock for aggregate gross
proceeds of $3,440,000 (see the subsequent events footnote for more details). The
accompanying financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
9
Table of Contents
2. | Summary of Significant Accounting Policies |
Fiscal Quarters
In 2010, our fiscal quarters end on March 28th, June 27th, September
26th and January 2nd, 2011. In 2009, our fiscal quarters ended on March
28th, June 28th, September 27th and December
27th.
Principles of Consolidation
The consolidated financial statements include the assets, liabilities and results of
operations of UFood Restaurant Group, Inc. and its subsidiary. All significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the 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 amount of
revenues and expenses during the reporting period. Actual amounts could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to conform previously reported data to the current
presentation.
Deferred Financing Costs
Deferred financing costs represent costs paid to third parties in order to obtain long-term
financing and have been included in other assets. Deferred financing costs are amortized over
the life of the related debt. Amortization expense related to these costs was $257,263 and
$175,991 for the nine months ended September 26, 2010 and September 27, 2009, respectively,
and is included in interest expense. The amortization expense recorded by the Company for the
three months ended September 26, 2010 was $83,435 and $88,116 for the three months ended
September 27, 2009.
Valuation of Goodwill
We account for goodwill and other intangible assets under ASC No. 805, Business Combinations,
and ASC No. 350-20 to 30, Goodwill and Other Intangible Assets. ASC No. 805 requires that the
purchase method of accounting be used for all business combinations initiated after June 30,
2001, and that certain intangible assets acquired in a business combination be recognized as
assets apart from goodwill. Under ASC No. 350-20 to 30, purchased goodwill and intangible
assets with indefinite lives are not amortized, but instead tested for impairment at least
annually or whenever events or changes in circumstances indicate the carrying value may not
be recoverable. Goodwill attributable to our franchise operations segment is evaluated by
comparing the Companys fair market value, determined based upon quoted market prices of the
Companys equity securities, to the carrying amount of goodwill. Goodwill attributable to our
store operations segment is evaluated on a restaurant-by-restaurant basis by comparing the
restaurants estimated fair value to the carrying value of the restaurants underlying net
assets inclusive of goodwill. Fair value is determined based upon the restaurants estimated
future cash flows. Future cash flows are estimated based upon a restaurants historical
operating performance and managements estimates of future revenues and expenses over the
period of time that the Company expects to operate the restaurant, which generally coincides
with the initial term of the restaurants lease but which may take into account the
restaurants first lease renewal period up to 5 years. The estimate of a restaurants future
cash flows may also include an estimate of the restaurants terminal value, determined by
applying a capitalization rate to the restaurants estimated cash flows during the last year
of the forecast period. The capitalization rate used by the Company was determined based upon
the restaurants location, cash flows and growth prospects.
Goodwill is vested for impairment annually on the first day of the
fourth quarter. The carrying amount of goodwill
may be impaired in the future if our actual operating results and cash flows fall short of
our expectations.
Impairment of Long-Lived Assets
In accordance with ASC No. 360 Property, Plant and Equipment, when impairment indicators
exist, the Company evaluates its long-lived assets for potential impairment. Potential
impairment is assessed when there is evidence that events or changes in circumstances have
occurred that indicate the carrying amount of an asset may not be recovered. When events or
changes in circumstances have occurred that indicate a long-lived asset may be impaired, the
Company uses estimates of future cash flows on a restaurant-by-restaurant basis to test the
recoverability of its long-lived assets. Future cash flows are estimated based upon the
restaurants historical operating performance and managements projections of future revenues
and expenses and may take into account the restaurants estimated terminal value. Long-lived
assets may be impaired in the future if our actual operating results and cash flows fall
short of our expectations.
10
Table of Contents
Revenue Recognition
The Company records revenue for Company-owned store sales upon the delivery of the related
food and other products to the customer.
The Company follows the accounting guidance of ASC No. 952-605-25 and 952-340-25,
Franchisors. Franchisee deposits represent advances on initial franchise fees prior to the
opening of the franchisee location. We recognize initial franchise fee revenue when all
material services we are required to perform and all material conditions we are required to
satisfy have been substantially completed, which is generally the opening of the franchised
location. The Company defers direct costs related to franchise sales until the related
revenue is recognized; however, the deferred costs shall not exceed anticipated revenue less
estimated additional related costs. Such costs include training, facilities design, menu
planning and marketing. Franchise royalty revenues are recognized in the same period the
relevant franchisee sales occur.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured
lease term as defined in ASC No. 840-20, Leases. The reasonably assured lease term on most
of the Companys leases is the initial non-cancelable lease term, which generally equates to
between 5 and 10 years. In addition, certain of the Companys lease agreements provide for
scheduled rent increases during the lease terms or for rental payments commencing at a date
other than the date of initial occupancy. The Company includes any rent escalations and other
rent holidays in its determination of straight-line rent expense. Therefore, rent expense for
new locations is charged to expense upon the commencement date of the lease.
Earnings Per Share Data
Earnings per share are based on the weighted average number of shares outstanding during the
period after consideration of the dilutive effect, if any, for common stock equivalents,
including stock options, restricted stock, and other stock-based compensation. Earnings per
common share are computed in accordance with ASC No. 260-10, Earnings Per Share, which
requires companies to present basic earnings per share and diluted earnings per share. Basic
earnings per share are computed by dividing net income allocable to common stockholders by
the weighted average number of shares of common stock outstanding during
the year. Diluted earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding and dilutive securities
outstanding during the year.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and other accrued expenses and debt
obligations approximate their fair values due to the short-term maturity of these
instruments.
Stock-Based Compensation
The Company maintains two stock-based incentive plans. The Company grants options to purchase
common stock at an option price equal to the market value of the stock at the date of grant.
Options generally vest over a three year period beginning on the date of grant and have a ten
year contractual term.
The Company applies the fair value recognition provisions of ASC No. 718, Compensation-Stock
Compensation, which requires all stock-based compensation, including grants of employee stock
options, to be recognized in the statement of operations based on their fair values. The
Company uses the Black-Scholes option pricing model which requires extensive use of
accounting judgment and financial estimates, including estimates of the expected term
participants will retain their vested stock options before exercising them and the estimated
volatility of the Companys common stock price over the expected term.
Stock-based compensation expense to employees recognized during the three months ended
September 26, 2010 totaled approximately $599,364 for stock options. Stock-based compensation
expense recognized during the nine months ended September 26, 2010 totaled approximately
$853,083 for stock options. Stock-based compensation expense was included in general and
administrative expenses in the accompanying Consolidated Statements of Operations.
Subsequent Events
The Company has evaluated all events or transactions occurring between the balance sheet date
and the date of issuance of the consolidated financial statements. Refer to Note 10 for
information related to subsequent events.
11
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3. | Long Term Debt and Warrants |
2008 Investor Warrants
On December 18 and 21, 2007, January 22, 2008, February 6, 2008, and March 30, 2008, the
Company sold 5,720,000, 440,000, 863,000, 1,927,000, and 1,991,000 units (Units),
respectively, of its securities at a price of $1.00 per Unit, in connection with five
separate closings (the Closings) of its private placement of securities (the Offering). Each
Unit consists of one share of common stock of the Company, par value $.001 per share (Common
Stock), and a warrant to purchase one-half of one share of Common Stock (the 2008 Investor
Warrants). A total of 5,470,500 2008 Investor Warrants were issued in conjunction with the
closings.
The 2008 Investor Warrants provide for the purchase of shares of Common Stock for five years
at an original exercise price of $1.25 per share. The 2008 Investor Warrants, at the option
of the holder, may be exercised by cash payment of the exercise price. The Company will not
receive additional proceeds to the extent that 2008 Investor Warrants are exercised by
cashless exercise. As a result of the Companys private placement on March-April 2009, the
exercise price of the 2008 Investor Warrants was reduced to $0.59 pursuant to the terms of
such warrants.
The exercise price and number of shares of Common Stock issuable on exercise of the 2008
Investor Warrants may be adjusted in certain circumstances including in the event of a stock
dividend, or our recapitalization, reorganization, merger or consolidation. The 2008 Investor
Warrants are also subject to a weighted average price protection for the term of the Investor
Warrants.
Through March of 2008, the Company paid the placement agent retained in connection with the
Offering (the 2008 Placement Agent) a commission of 10% of the funds raised from the
investors in connection with the Closings. In addition, the 2008 Placement Agent received
warrants (the 2008 Placement Agent Warrants) to purchase a number of shares of Common Stock
equal to 20% of the shares of Common Stock included in the Units sold to investors. As a
result of the foregoing, the 2008 Placement Agent was paid commissions of $1,294,100 and
received warrants to purchase 2,988,200 shares of Common Stock. The terms of these warrants
were similar to those
of the 2008 Investor Warrants, except that they had a seven-year term and $1.00 original exercise price. As a result of the Companys private placement on March-April 2009, the exercise price of the 2008 Placement Agent Warrants was reduced to $0.49 pursuant to the terms of such warrants.
of the 2008 Investor Warrants, except that they had a seven-year term and $1.00 original exercise price. As a result of the Companys private placement on March-April 2009, the exercise price of the 2008 Placement Agent Warrants was reduced to $0.49 pursuant to the terms of such warrants.
The Company is subject to a derivative warrant liability instrument due to the fact that the
related contract is not indexed to its own stock, as specified by ASC No. 815-40 Derivatives
and Hedging-Contract in Entitys Own Equity. The derivative is accounted for and classified
as a Derivative warrant liability within the liabilities section of the consolidated
balance sheet. The change in the fair value of the derivative is included within Other
income (loss) in the consolidated statements of operations. The change in the fair value of
the derivative instrument affects the Change in fair value of derivative warrant liability
line in the Cash flows from operating activities section of the consolidated statements of
cash flows.
At the date of issuance of the 2008 Investor Warrants and 2008 Placement Agent Warrants,
based upon evaluation under applicable ASC No. 815-10 Derivatives and Hedging guidance, the
Company initially determined that the financial instrument did not constitute a derivative,
and, accordingly, reflected the balance within additional paid-in capital as of December 28,
2008 in the Companys Form 10-K. During the quarter ended March 29, 2009, the Company
re-assessed this categorization based upon the clarified indexed to an entitys own stock
criteria specified within ASC No. 815-40, which is effective for fiscal years beginning after
December 15, 2008, and concluded that the financial instrument constituted a derivative. The
aggregate fair value of the derivative at inception was determined to be $3,512,272, which
was recorded as a derivative liability during the quarter ended March 29, 2009. At December
29, 2008, the aggregate fair value of the derivatives was $353,248. The decrease in the fair
value of the derivative in the aggregate amount of $3,159,024 upon adoption of ASC No.
815-40 was recorded in the consolidated statements of changes in stockholders equity as a
cumulative adjustment gain on derivative during the three months ended March 29, 2009.
At September 26, 2010, the aggregate fair value of the derivative was $2,195,596. The
increase in the fair value of the derivative was in the aggregate amount of $2,191,846 during
the nine months ended September 26, 2010. The increase in the fair value of the derivative
for the three months ended September 26, 2010 was $1,969,761. The increase in the fair value
of the derivate was recorded in the consolidated statement of operations as other expense.
The derivative is not intended to hedge any specific risk exposures, such as fluctuating interest rates, exchange rates, commodity prices,
etc. Therefore, the derivative constitutes neither a cash flow hedge, nor a fair value hedge. The volume of derivative activity relates
solely to the derivative warrant liability instrument itself, and changes in fair value thereon.
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Tabular disclosure of the fair value of the derivative instrument in the consolidated balance sheets, and the effect of the derivative
instrument on the consolidated balance sheets follows:
As of September 26, 2010 | ||||||||
Liability Derivatives | ||||||||
Balance Sheet | ||||||||
Location | Fair Value | |||||||
Derivatives designated as
hedging instruments under ASC
No. 815-10: |
||||||||
None |
||||||||
Derivatives not designated as
hedging instruments under ASC
No. 815-10: |
||||||||
Derivative warrant liability |
Long-term liabilities | $ | 2,195,596 | |||||
Total derivatives |
$ | 2,195,596 | ||||||
The effect of the derivative instrument on the consolidated statements of operations for the
quarter ended September 26, 2010 follows
Amount of Gain | Amount of Gain | |||||||||||
(Loss) Recognized in | (Loss) Recognized in | |||||||||||
Location of Gain (Loss) | Income on Derivative | Income on Derivative | ||||||||||
Recognized in Income on | Three Months Ended | Nine Months Ended | ||||||||||
Derivative | September 26, 2010 | September 26, 2010 | ||||||||||
Derivatives not
designated as
hedging instruments
under ASC No.
815-10: |
||||||||||||
Derivative
warrant
liability |
Other Income (Expense) | $ | (1,969,761 | ) | $ | (2,191,846 | ) | |||||
Total |
$ | (1,969,761 | ) | $ | (2,191,846 | ) |
The fair value of the warrant liability was determined using the Black Scholes Option Pricing
method. The valuation methodology uses a combination of observable (Level 2) and unobservable
(Level 3) inputs in calculating fair value. As required by ASC 820-10, assets are classified in
their entirety based on the lowest level of input that is significant to the fair value
measurement.
The fair value of the warrant liability was estimated on the date of issuance, as of December 29,
2008, and as of September 26, 2010, using the following assumptions:
At Issuance | December 29, 2008 | September 26, 2010 | ||||||||||
Expected term (years) |
5 -7 Years | 5 -7 Years | 3-5 Years | |||||||||
Expected volatility |
32.34 | % | 34.87 | % | 119.17 | %(1) | ||||||
Risk-free interest rate |
2.46 | % | 1.55 | % | 1.37 | % | ||||||
Expected annual dividend |
0.00 | % | 0.00 | % | 0.00 | % |
(1) | The Company has utilized its own volatility history blended with peers in the industry in
order to cover the term for what this instrument carries. The prior period volatility was
primarily based on peer groups. |
The table below sets forth a summary of changes in the fair value of the Companys level 3
derivative at December 27, 2009, and for the quarter ended September 26, 2010:
Balance as of December 27, 2009 |
$ | 3,750 | ||
Increase in fair value during quarter ended March 28, 2010 |
68,901 | |||
Increase in fair value during quarter ended June 27, 2010 |
153,184 | |||
Increase in fair value during quarter ended September 26, 2010 |
1,969,761 | |||
Balance as of September 26, 2010 |
$ | 2,195,596 |
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2009 Warrants
On March 19, 2009, the Company sold 8% Senior Secured Convertible Debentures (the Debentures) to investors in the principal amount of
$3,315,000 and issued warrants (the 2009 Warrants and, collectively with the Debentures, the Securities) to purchase 12,750,000 shares of our
Common Stock to such investors in connection with first closing of our private placement of securities (the 2009 Offering). On April 20,
2009, the Company sold an additional $2,559,000 of Debentures in connection with the final closing of its private offering to accredited
investors. The addition of both closings is $5,874,000 of Debentures. The Debentures bear interest at a rate of 8% and are due three years
from the date they are issued. The Debentures are convertible into shares of Common Stock at $0.13 per share. In addition, each investor will
receive 5-year detachable warrants to purchase a number of shares of Common Stock equal to 50% of the shares underlying the Investors
Debenture. Interest on the Debentures a rate of 8% per annum is payable on a quarterly basis. Subject to certain conditions, the Company has
the right to pay interest on the Debentures in either cash or shares of Common Stock, or in a combination of cash and Common Stock. After the
one year anniversary of the first closing of the 2009 Offering, the Company has the right to redeem the Debentures at a 20% premium, subject
to certain conditions. Subject to certain conditions, the Company has the right to force conversion of the Debentures into shares of Common
Stock. The Company has filed a registration statement with the Securities and Exchange Commission covering all shares of Common Stock
issuable upon conversion of the Debentures and/or exercise of the 2009 Warrants.
The Company paid Garden State Securities, Inc., the placement agent retained in connection with the 2009 Offering (the 2009 Placement Agent),
(i) a commission of 10% of the aggregate subscription amount of the Securities sold in the 2009 Offering, plus (ii) $50,000 for its legal
fees and expenses, plus (iii) a non-accountable expense allowance equal to 3% of the aggregate subscription amount of the Securities sold in
the 2009 Offering. In addition, the 2009 Placement Agent (or its assigns) received warrants (the 2009 Placement Agent Warrants) to purchase a
number of shares of Common Stock equal to twenty percent (20%) of the maximum number of shares of Common Stock underlying the Debentures and
2009 Warrants sold in the 2009 Offering. As a result of the foregoing, the 2009 Placement Agent was paid a commission of $587,400 plus a
non-accountable expense allowance of $176,220 and received warrants to purchase 5,100,000 shares of Common Stock for March 2009 first
closing, and 3,936,923 for April 2009 second and final closing in connection with the 2009 Offering. The terms of these warrants were
similar to those of the 2009 Warrants.
In conjunction with the Debentures and the 2009 Warrants, the Company recorded debt discount of $3,130,200 associated with a beneficial
conversion feature on the debt, which is being accreted using the effective interest method over the three year term of the debentures. For
the quarter ended September 26, 2010, the Company recorded interest expense of $205,078 in conjunction with accreting the debt discount on
the warrants and the beneficial conversion feature over the debt term. For the nine months ended September 26, 2010, the Company recorded
interest expense of $569,090 in connection with the debt discount on the warrants and the beneficial conversion feature over the debt term.
4. | Stock-Based Compensation |
During the three and nine month periods ended September 26, 2010, the Company recognized
$1,633,271 and $2,031,628, respectively, of stock-based compensation expense for equity
awards to employees, consultants and vendors. During the three and nine month periods ended
September 27, 2009, the Company recognized $97,473 and $539,064 respectively of stock-based
compensation expense.
The Company estimates the fair value of stock options using a Black Scholes option pricing
model with the assumptions noted in the following table. Key inputs used to estimate the fair
value of stock options include the exercise price of the award, the expected option term, the
expected volatility of the Companys stock over the options expected term, the risk-free
interest rate over the options expected term, and the Companys expected annual dividend
yield.
The fair value of each stock option granted during the three and nine month periods ended
September 26, 2010 was estimated on the date of grant using the following assumptions:
Expected term (years) |
5 | |||
Expected volatility |
112.26 | % | ||
Risk-free interest rate |
1.79 | % | ||
Expected annual dividend |
None |
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The expected term is based on the remaining vesting term and the contractual term. The
Company used its own historical volatility and the volatility of published common stock
prices over the last two years of comparable publicly held companies in order to calculate
the Expected Volatility. The risk-free interest rate for the expected term of the stock
option is based on the U.S. Treasury yield. The
Company believes that the valuation technique and the approach utilized to develop the
underlying assumptions are appropriate in calculating the fair values of stock options
granted during the three and nine month periods ended September 26, 2010. Estimates of fair
value are not intended to predict actual future events or the value ultimately realized by
persons who receive equity awards.
The 2004 Plan
Under the terms of the 2004 Plan, the Company was authorized to grant incentive stock options
(ISOs), non-qualified stock options and restricted stock for up to 304,702 shares of Common
Stock in the aggregate, to employees, officers, directors, consultants and agents of the
Company. There were no options granted or exercised, however there were 82,347 options
forfeited under the 2004 Plan during the nine months ended September 27, 2009. On May 13,
2009 the Companys Board of Directors approved the cancellation of 181,981 stock options of
current employees under the 2004 Plan and issuance of new stock options under the 2007 Plan
for the same individuals, with a vesting schedule identical to the remaining vesting schedule
of the canceled options at an exercise price of $0.20 per share. At September 26, 2010,
there were 32,757 options outstanding under the 2004 Plan. All of the outstanding options are
exercisable as of September 26, 2010. There was no unrecognized compensation expense related
to options outstanding under the 2004 Plan at September 26, 2010.
The 2007 Plan
There were no awards under the 2007 Plan prior to December 18, 2007. Awards of ISOs,
non-qualified stock options, stock appreciation rights, restricted stock units, restricted
stock or performance units may be made under the 2007 Plan of up to a maximum of 6,000,000
shares of Common Stock to employees, directors, consultants and agents of the Company. During
our annual shareholders meeting held on July 1st, 2010, our shareholders approved
the increase in the number of shares of common stock reserved for issuance under the 2007
Plan to 9,000,000 shares. The Company believes awards under the 2007 Plan align the interests
of its employees with those of its shareholders. On April 1, 2010 the Companys Board of
Directors approved the grant of 2,070,000 stock options to employees and officers of the
Company, fully vested at an exercise price of $0.16 per share. The Company recognized a
compensation expense of $140,822 in connection with this grant. At September 26, 2010, there
were 5,884,990 stock options outstanding under the 2007 Plan. At September 26, 2010, options
to purchase 5,713,048 shares of Common Stock were exercisable at a weighted average exercise
price of $0.18. An additional 171,942 options will vest over the next 5 months.
Activity under the 2007 Plan from December 27, 2009 through September 26, 2010 is presented
below:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Outstanding at December 27, 2009 |
3,919,990 | $ | 0.20 | 7.5 | $ | -0- | ||||||||||
Granted |
2,070,000 | 0.16 | 9.6 | |||||||||||||
Forfeited |
(105,000 | ) | 0.20 | | ||||||||||||
Canceled |
| |||||||||||||||
Outstanding at September 26, 2010 |
5,884,990 | $ | 0.18 | 8.2 | $ | 906,699 | ||||||||||
The options outstanding and exercisable at September 26, 2010 were as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | ||||||||||||||||||||
Remaining | ||||||||||||||||||||
Number of | Exercise | Contractual | Number of | |||||||||||||||||
Options | Price | Term | Options | Exercise Price | ||||||||||||||||
3,814,990 | $ | 0.20 | 7.5 | 3,643,048 | $ | 0.20 | ||||||||||||||
2,070,000 | $ | 0.16 | 9.5 | 2,070,000 | $ | 0.16 |
15
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The aggregate intrinsic value in the table above represents the total intrinsic value, based
on the Companys closing stock price of $0.34 as of September 26, 2010 which would have been
received by the options holders had all option holders exercise their options as of that
date.
At September 26, 2010 there was $82,926 of total unrecognized compensation cost related to
non-vested options granted under the 2007 Plan. This cost will be recognized over
approximately 5 months.
Other Equity Awards
On April 1st, 2010 the Companys Board of Directors approved the grant of
non-qualified stock options to purchase 600,000 shares of the Companys common stock with an
exercise price of $0.19 and a vesting schedule of equal amounts over the next four months to
Mr. Richard Fisher. This grant was pursuant to the terms of his consulting agreement with
the Company. As a result of this grant the Company recognized an expense of $39,853.
Also on June 12, 2010, the Board of Directors approved the grant of 10,000 Series B
Preferred Shares to Summit Trading Limited according to their service agreement to provide
Investor Relations and Public Relations services to the Company. These preferred shares were
fully vested at the execution of the agreement. As a result of this grant, General and
Administrative expenses include $1,000,000 of stock-based compensation expense. The face
value of the preferred shares is $100 per share and the conversion price to common stock is
$0.23.
On June 30th, 2010 the Companys Board of Directors awarded to its vendors,
executives, Board of Directors and employees, non-qualified stock options to purchase
7,703,673 shares of the Companys common stock with an exercise price of $0.19. The vesting
schedule varies from one year through three years. As a result of this grant, the Company
will recognize an expense in the total amount of $1,519,255 over the vesting period. At
September 26, 2010 there was $972,355 of total unrecognized compensation cost related to
non-vested options granted outside of any Plan. This cost will be recognized over
approximately 34 months.
Activity of Non-Qualified Stock Options outside of any plan from December 27, 2009 through
September 26, 2010 is presented below:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Outstanding at December 27, 2009 |
175,000 | $ | 0.15 | 7.4 | $ | -0- | ||||||||||
Granted |
8,303,673 | 0.19 | 9.7 | |||||||||||||
Forfeited |
| | | |||||||||||||
Canceled |
| |||||||||||||||
Outstanding at September 26, 2010 |
8,478,673 | $ | 0.19 | 9.5 | $ | 1,260,434 | ||||||||||
5. | Income Taxes |
The Company applies the provisions of ASC No. 740-10-25, Accounting for Uncertainty in Income
Taxes which requires that the impact of tax positions taken by the Company be recognized in
the financial statements if they are more likely than not of being sustained based upon the
technical merits of the position. The Company has a valuation allowance against the full
amount of its net deferred taxes. The Company currently provides a valuation allowance
against deferred taxes when it is more likely than not that some portion, or all, of its
deferred tax assets will not be realized.
No provision for current income taxes has been recorded for 2009 and 2008 due to the
Companys cumulative net losses. Significant components of deferred tax assets are net
operating loss carryforwards; start-up costs and organizational costs capitalized for tax
purposes, and deferred revenue. Significant component of deferred tax liabilities is
depreciation of property and equipment.
Management has evaluated the evidence bearing upon the realization of its deferred tax assets
and has determined that it is more likely than not that the Company will not recognize the
benefits of its federal and state deferred tax assets. As a result, the Company has recorded a full valuation allowance against its deferred tax assets. If the Company should
generate sustained future taxable income against which these tax attributes might be applied,
some portion or all of the valuation allowance would be reversed.
16
Table of Contents
The Companys income tax returns have not been audited by the Internal Revenue Service (IRS)
or any state taxing authority. The years 2007 through 2009 remain open to examination by the
IRS and state taxing authority. The Company believes it is not subject to any tax exposure
beyond the preceding discussion. The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense
6. | Commitments and Contingencies |
We are subject to legal proceedings and claims which arise in the normal course of business.
Although there can be no assurance as to the ultimate outcome, we generally have denied, or
believe we have a meritorious defense and will deny, liability in all significant cases
pending against us, including the matters described below, and we intend to defend vigorously
each such case. However, losses may be material to our operating results for any particular
future period, depending on the level of our income for such period. In the opinion of
management, the ultimate liabilities with respect to these actions will not have a material
adverse effect on the Companys financial position, results of operations or cash flow.
Employment Agreements
On June 30, 2010, the Company has decided to amend its chief executive officer employment
agreement to extend the employment period through October 15, 2013. As part of the
amendment of the agreement, Mr. Naddaff received non-qualified stock options to purchase
3,250,000 shares of the Companys common stock at an exercise price of $0.19, and half of
options are vested at grant and the other half over a period of three years. Also, the
employment agreement for its chief operating officer was amended to extend the term to
continue through January 22, 2013. In connection with the execution of this amendment, the
Company granted non-qualified stock options to purchase 1,205,673 shares of the Companys
common stock at an exercise price of $0.19 per share. One half of the options shall vest upon
the date of the grant and the other half of the options shall vest in equal amounts on the
first day of each month for thirty-six months following the date of the grant.
7. | Supplemental Disclosures of Cash Flow Information |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cash paid during the period for interest |
$ | 15,174 | $ | 8,659 | $ | 51,993 | $ | 39,025 | ||||||||
Accrued dividens on preferred stock |
$ | 19,778 | $ | | $ | 19,778 | $ | | ||||||||
Property and equipment acquired with
capital lease |
$ | | $ | 12,357 | $ | 8,163 | $ | 12,357 | ||||||||
8. | Loss Per Share |
The amounts used for basic and diluted per share calculations are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (4,341,113 | ) | $ | (1,135,261 | ) | $ | (6,927,621 | ) | $ | (3,094,344 | ) | ||||
Dividends on preferred stock |
19,778 | | 19,778 | | ||||||||||||
Net loss attributable to common stockholders |
$ | (4,360,891 | ) | $ | (1,135,261 | ) | $ | (6,947,399 | ) | $ | (3,094,344 | ) | ||||
Weighted average number of shares
outstanding basic and diluted |
40,014,225 | 35,597,756 | 39,039,355 | 34,950,705 | ||||||||||||
Basic and diluted per common share |
$ | (0.11 | ) | $ | (0.03 | ) | $ | (0.18 | ) | $ | (0.09 | ) | ||||
17
Table of Contents
Diluted (loss) per share are not presented since the effect of the assumed exercise of
options and warrants to purchase common stock would have been anti-dilutive. A total of a
59,768,715 and 49,847,276 potential common shares from the assumed exercise of options and
warrants were excluded from the calculation of diluted net loss per share for the three and
nine month periods ended September 26, 2010 and September 27, 2009, because their inclusion
would have been anti-dilutive.
9. | Segment Data |
The Company operates two business segments: Store Operations and Franchise Operations. The
Store Operations segment comprises the operating activities of restaurants owned or operated
by the Company. The Franchise Operations segment is comprised of the
operating activities of the franchise business unit which licenses qualified operators to
conduct business under the KnowFat and UFood Grill tradenames and also costs to monitor the
operations of these business units. Under the terms of the franchise agreements, the licensed
operators pay royalties and fees to the Company in return for the use of the KnowFat and
UFood Grill tradenames.
The accounting policies of the segments are the same. Interest expense has been allocated
based on operating results and total assets employed in each segment.
Inter-segment transactions are uncommon and not material. Therefore, they have not been
separately reflected in the financial table below. The totals of the reportable segments
revenues and net loss agree with the comparable amounts contained in the Companys
consolidated financial statements.
Segment information for the Companys two business segments follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Store operations |
$ | 1,178,874 | $ | 1,214,220 | $ | 3,447,118 | $ | 3,548,216 | ||||||||
Franchise operations |
115,119 | 59,133 | 272,093 | 331,346 | ||||||||||||
Total revenue |
$ | 1,293,993 | $ | 1,273,353 | $ | 3,719,211 | $ | 3,879,562 | ||||||||
Segment income (loss): |
||||||||||||||||
Store operations |
$ | 100,472 | $ | 36,519 | $ | 132,426 | $ | (5,439 | ) | |||||||
Franchise operations |
(484,213 | ) | (209,057 | ) | (779,545 | ) | (716,277 | ) | ||||||||
Total segment loss |
(383,741 | ) | (172,538 | ) | (647,119 | ) | (721,716 | ) | ||||||||
Unallocated general and administrative expenses |
1,456,575 | 555,424 | 2,503,329 | 1,690,839 | ||||||||||||
Advertising, marketing and promotion |
42,638 | 67,880 | 152,972 | 172,635 | ||||||||||||
Depreciation and amortization |
80,636 | 100,894 | 244,711 | 309,705 | ||||||||||||
Interest (income) expense, net |
407,762 | 225,449 | 1,187,644 | 516,150 | ||||||||||||
Other (income) expense |
1,969,761 | 13,076 | 2,191,846 | (316,701 | ) | |||||||||||
Net loss |
$ | (4,341,113 | ) | $ | (1,135,261 | ) | $ | (6,927,621 | ) | $ | (3,094,344 | ) | ||||
10. | Subsequent Events |
Debenture Exchange
On October 1, 2010, the Company consummated the extinguishment of approximately
ninety-eight percent (98%) of its outstanding 8% Senior Secured Convertible Debentures
in exchange for shares of the Companys Series A 8% Convertible Preferred Stock (the
Series A Preferred Stock). An aggregate principal amount of $5,692,500 of outstanding
Debentures was extinguished in exchange for 56,925 shares of Series A Preferred Stock.
The holders of Series A Preferred Stock will be entitled to receive, before any cash is
paid out or set aside for any shares of the Companys Common Stock (but on an equal
basis with the Companys Series B 8% Redeemable Convertible Preferred Stock) dividends
at the annual rate of 8% of the Stated Value of the Preferred Shares, subject to
adjustment for stock splits, etc. The dividends will be accruing and cumulative and will
be paid upon the occurrence of a liquidation, deemed liquidation, dissolution or
redemption if not previously declared and paid.
18
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Effective immediately with respect to one-half of the shares of Series A Preferred Stock
issued in connection with the Debenture Exchange, and effective January 1, 2011 with
respect to the remaining shares of Series A Preferred Stock issued in connection with
the Debenture Exchange, each holder of Series A Preferred Stock may convert his, her or
its shares of Series A Preferred Stock into shares of Common Stock at a conversion price
equal to $0.13. The number of shares of common stock into which the Series A Preferred
Stock is convertible is subject to adjustment to prevent dilution in the event of a
stock split or stock dividend. The Series A Conversion Price is also subject to a
weighted average price protection. Effective January 1, 2011, the Company may, at its
election, require the conversion of the Series A Preferred Stock to shares of Common
Stock at the Series A Conversion Price if the closing price of the Common Stock for 10
consecutive trading days equals or exceeds 300% of the Series A Conversion Price and the
average daily volume of the shares of Common Stock for the same period exceeds 250,000
shares.
Approximately $2,200,869 of the debt discount relating to the beneficial conversion
option and the 2009 Warrants issued to the Debenture holders will be recorded to
interest expense as a result of the extinguishment of the Debentures. Furthermore, the
intrinsic value of the beneficial conversion feature at the date of extinguishment was
calculated to be approximately $5,692,500 and, as such, we recorded a gain on
extinguishment of debt for that amount.
We have evaluated the Series A Preferred Stock issued and have recorded the intrinsic
value of the embedded beneficial conversion feature of $5,692,443 as additional paid in
capital. The embedded beneficial conversion feature was treated as a deemed dividend
and, as such, has been recorded to retained earnings.
In conjunction with the extinguishment of debt, the Company modified the exercise price
of the 2009 Warrants. The exercise price was reduced from $0.14 to $0.09 per share of
Common Stock. As such, we have calculated the fair value of the warrants on the date of
the modification to be approximately $6,181,501 and recorded the increase in fair value
of $4,616,401 as an addition to additional paid-in capital. The fair value of the
warrants was computed using the Black-Scholes option pricing model. The Company assumed
a risk-free interest rate of 1.17%, no dividends, expected volatility of approximately
118.45%, which was calculated based on a combination of historical volatility and the
history of comparable peer companies, and an expected warrant life of approximately 5
years.
Private Placement
On October 4 and October 29, 2010, the Company issued and sold 27,950 shares and 6,450
shares, respectively, of Series B 8% Convertible Preferred Stock, par value $0.001 per
share (the Series B Preferred Stock), at $100.00 per share for a total of $3,440,000.
Effective January 1, 2011, each holder of the Series B Preferred Stock may convert his,
her or its shares of Series B Preferred Stock into shares of Common Stock at a
conversion price equal to $0.23. Each investor who participated in the Offering also
received a warrant to purchase 100 shares of common stock of the Company, par value
$0.001 per share, per share of Preferred Stock purchased. The number of shares of Common
Stock into which the Series B Preferred Stock is convertible is subject to adjustment to
prevent dilution in the event of a stock split or stock dividend. The Series B
Conversion Price is also subject to a weighted average price protection. The Company
paid the placement agent retained in connection with the offering a commission of
$344,000 and granted warrants to purchase 2,243,478 shares of Common Stock in connection
with the offering.
The holders of Series B Preferred Stock will be entitled to receive, before any cash is
paid out or set aside for any shares of the Companys Common Stock (but on an equal
basis with the Companys Series A 8% Redeemable Convertible Preferred Stock) dividends
at the annual rate of 8% of the Stated Value of the Preferred Shares, subject to
adjustment for stock splits, etc. The dividends will be accruing and cumulative and will
be paid upon the occurrence of a liquidation, deemed liquidation, dissolution or
redemption if not previously declared and paid.
The Investor Warrants provide for the purchase of shares of Common Stock for five years
at an exercise price of $0.29 per whole share. The Investor Warrants, at the option of
the holder, may be exercised by cash payment of the exercise price or by cashless
exercise to the extent that a registration statement covering the shares of Common
Stock underlying the Investor Warrants is not in effect following the one year
anniversary of issuance. A cashless exercise means that in lieu of paying the
aggregate purchase price for the shares being purchased upon exercise of the Investor
Warrants in cash, the holder will forfeit a number of shares underlying the Investor
Warrants with a fair market value equal to such aggregate exercise price. The Company
will not receive additional proceeds to the extent that Investor Warrants are exercised
by cashless exercise.
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The exercise price and number of shares of Common Stock issuable on exercise of the
Investor Warrants may be adjusted in certain circumstances including in the event of a
stock dividend, or our recapitalization, reorganization, merger or consolidation. The
Investor Warrants are also subject to a weighted average price protection for the term
of the Investor Warrants. The Placement Agent Warrants are substantially identical to
the terms of the Investor Warrants except that the Placement Agent
Warrants have cashless exercise rights to the extent that a registration statement
covering the shares of Common Stock underlying the Placement Agent Warrants is not in
effect six months following the date of issuance.
We evaluated the Series B Preferred Stock issued and have recorded the intrinsic value
of the embedded beneficial conversion feature of $226,936 as additional paid in capital.
The embedded beneficial conversion feature was treated as a deemed dividend and, as
such, has been recorded to retained earnings.
Furthermore, we have calculated the relative fair value of the warrants on their date of
grant, which was determined to be approximately $873,498 and was recorded as additional
paid-in capital. The fair value of the warrants was computed using the Black-Scholes
option pricing model. The Company assumed a risk-free interest rate of 1.26%, no
dividends, expected volatility of approximately 118.45%, which was calculated based on a
combination of historical volatility and the history of comparable peer companies, and
an expected warrant life of approximately 5 years.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our financial statements and related notes included elsewhere in
this report. This discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors discussed in
Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 31, 2009 and elsewhere in this report.
The information contained in this Report on Form 10-Q and in other public statements by the
Company and Company Officers include or may contain forward-looking statements. All
statements other than statements of historical facts contained in this Report on Form 10-Q,
including statements regarding our future financial position, business strategy and plans and
objectives of management for future operations, are forward-looking statements. The words
anticipate, believe, estimate, will, may, future, plan, intend, and expect
and similar expressions generally identify forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in the forward-looking statements are
reasonable, we cannot be sure that they will be achieved. Actual results may differ
materially from the forward-looking statements contained herein due to a number of factors.
Overview
Our operations currently consist of eight restaurants in the Boston area and Dallas Forth
Worth, TX and Cleveland, OH; comprising four Company-owned restaurants and four
franchise-owned locations. We have entered into a total of five area development agreements
and three franchise agreements covering 61 franchise units in the following states: Florida,
Texas, Ohio, Massachusetts and the Washington, DC area. Furthermore, two of the area
development agreements are for non-traditional locations such as airports, colleges, travel
plazas, and hospitals across the United States. The 61 units include four franchise locations
currently open and operating, and requiring an additional 57 future UFood Grill outlets to be
developed by franchisees. The Naples, FL location was closed on July 24, 2010. On July 17,
2010 the Cleveland Hopkins International Airport location was open.
We view ourselves primarily as a franchisor and continually review our restaurant ownership
mix (our mix among Company-owned, franchised and joint venture) in an endeavor to deliver a
pleasant customer experience and drive profitability. In most cases, franchising is the best
way to achieve both goals. In our Company-owned stores, and in collaboration with our
franchisees, we further develop and refine operating standards, marketing concepts and
product and pricing strategies, so that we introduce system-wide only initiatives that we
believe are most beneficial.
We include in this discussion information on Company, franchisee, and/or system-wide
comparable sales. System-wide sales are a non-GAAP financial measure that includes sales at
all Company-owned and franchise-operated stores, as reported by franchisees. Management uses
system-wide sales information internally in connection with store development decisions,
planning and budgeting analysis. Management believes system-wide sales are useful in
assessing customer acceptance of our brand and facilitating an understanding of financial
performance as our franchisees pay royalties and contribute to marketing funds based on a
percentage of their sales.
We derive revenues from three sources: (i) store sales which include sales of hot and cold
prepared food in a fast casual dining environment as well as sales of health and nutrition
related products; (ii) franchise royalties and fees represent amounts earned under franchise
and area development agreements; and (iii) other revenues derived primarily from the sale of
marketing materials to franchisees. Store operating expenses include the cost of goods, food
and paper products sold in Company-owned stores as well as labor and other operating costs
incurred to operate Company-owned stores. General and administrative expenses, advertising,
marketing and promotion expenses and depreciation expense relate to all three revenue
sources.
Critical Accounting Policies & Estimates
The discussion and analysis of our financial condition and results of operations is based
upon our consolidated financial statements for the three and nine months ended September 26,
2010 and September 27, 2009 which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of the consolidated financial
statements requires us to make estimates, judgments and assumptions, which we believe to be
reasonable, based on the information available. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses. Variances in the estimates or
assumptions used could yield materially different accounting results. On an ongoing basis, we
evaluate the continued appropriateness of our accounting policies and resulting estimates to
make adjustments we consider appropriate under the facts and circumstances.
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We have chosen accounting policies we believe are appropriate to report accurately and fairly
our operating results and financial position, and we apply those accounting policies in a
consistent manner.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the 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 amount of
revenues and expenses during the reporting period. Actual amounts could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to conform previously reported data to the current
presentation.
Deferred Financing Costs
Deferred financing costs represent costs paid to third parties in order to obtain long-term
financing and have been included in other assets. Deferred financing costs are amortized over
the life of the related debt. Amortization expense related to these costs was $257,263 and
$175,991 for the nine months ended September 26, 2010 and September 27, 2009, respectively,
and is included in interest expense. The amortization expense recorded by the Company for the
three months ended September 26, 2010 was $83,435 and $88,116 for the three months ended
September 27, 2009.
Valuation of Goodwill
We account for goodwill and other intangible assets under ASC No. 805, Business Combinations,
and ASC No. 350-20 to 30, Goodwill and Other Intangible Assets. ASC No. 805 requires that the
purchase method of accounting be used for all business combinations initiated after June 30,
2001, and that certain intangible assets acquired in a business combination be recognized as
assets apart from goodwill. Under ASC No. 350-20 to 30, purchased goodwill and intangible
assets with indefinite lives are not amortized, but instead tested for impairment at least
annually or whenever events or changes in circumstances indicate the carrying value may not
be recoverable. Goodwill attributable to our franchise operations segment is evaluated by
comparing the Companys fair market value, determined based upon quoted market prices of the
Companys equity securities, to the carrying amount of goodwill. Goodwill attributable to our
store operations segment is evaluated on a restaurant-by-restaurant basis by comparing the
restaurants estimated fair value to the carrying value of the restaurants underlying net
assets inclusive of goodwill. Fair value is determined based upon the restaurants estimated
future cash flows. Future cash flows are estimated based upon a restaurants historical
operating performance and managements estimates of future revenues and expenses over the
period of time that the Company expects to operate the restaurant, which generally coincides
with the initial term of the restaurants lease but which may take into account the
restaurants first lease renewal period up to 5 years. The estimate of a restaurants future
cash flows may also include an estimate of the restaurants terminal value, determined by
applying a capitalization rate to the restaurants estimated cash flows during the last year
of the forecast period. The capitalization rate used by the Company was determined based upon
the restaurants location, cash flows and growth prospects. The carrying amount of goodwill
may be impaired in the future if our actual operating results and cash flows fall short of
our expectations.
Impairment of Long-Lived Assets
In accordance with ASC No. 360 Property, Plant and Equipment, when impairment indicators
exist, the Company evaluates its long-lived assets for potential impairment. Potential
impairment is assessed when there is evidence that events or changes in circumstances have
occurred that indicate the carrying amount of an asset may not be recovered. When events or
changes in circumstances have occurred that indicate a long-lived asset may be impaired, the
Company uses estimates of future cash flows on a restaurant-by-restaurant basis to test the
recoverability of its long-lived assets. Future cash flows are estimated based upon the
restaurants historical operating performance and managements projections of future revenues
and expenses and may take into account the restaurants estimated terminal value. Long-lived
assets may be impaired in the future if our actual operating results and cash flows fall
short of our expectations.
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Revenue Recognition
The Company records revenue for Company-owned store sales upon the delivery of the related
food and other products to the customer.
The Company follows the accounting guidance of ASC No. 952-605-25 and 952-340-25,
Franchisors. Franchisee deposits represent advances on initial franchise fees prior to the
opening of the franchisee location. We recognize initial franchise fee revenue when all
material services we are required to perform and all material conditions we are required to
satisfy have been substantially completed, which is generally the opening of the franchised
location. The Company defers direct costs related to franchise sales until the related
revenue is recognized; however, the deferred costs shall not exceed anticipated revenue less
estimated additional related costs. Such costs include training, facilities design, menu
planning and marketing. Franchise royalty revenues are recognized in the same period the
relevant franchisee sales occur.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured
lease term as defined in ASC No. 840-20, Leases. The reasonably assured lease term on most of
the Companys leases is the initial non-cancelable lease term, which generally equates to
between 5 and 10 years. In addition, certain of the Companys lease agreements provide for
scheduled rent increases during the lease terms or for rental payments commencing at a date
other than the date of initial occupancy. The Company includes any rent escalations and other
rent holidays in its determination of straight-line rent expense. Therefore, rent expense for
new locations is charged to expense upon the commencement date of the lease.
Earnings Per Share Data
Earnings per share are based on the weighted average number of shares outstanding during the
period after consideration of the dilutive effect, if any, for common stock equivalents,
including stock options, restricted stock, and other stock-based compensation. Earnings per
common share are computed in accordance with ASC No. 260-10, Earnings Per Share, which
requires companies to present basic earnings per share and diluted earnings per share. Basic
earnings per share are computed by dividing net income allocable to common stockholders by
the weighted average number of shares of common stock outstanding during
the year. Diluted earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding and dilutive securities
outstanding during the year.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and other accrued expenses and debt
obligations approximate their fair values due to the short-term maturity of these
instruments.
Stock-Based Compensation
The Company maintains two stock-based incentive plans. The Company grants options to purchase
common stock at an option price equal to the market value of the stock at the date of grant.
Options generally vest over a three year period beginning on the date of grant and have a ten
year contractual term.
The Company applies the fair value recognition provisions of ASC No. 718, Compensation-Stock
Compensation, which requires all stock-based compensation, including grants of employee stock
options, to be recognized in the statement of operations based on their fair values. The
Company uses the Black-Scholes option pricing model which requires extensive use of
accounting judgment and financial estimates, including estimates of the expected term
participants will retain their vested stock options before exercising them and the estimated
volatility of the Companys common stock price over the expected term.
Stock-based compensation expense to employees recognized during the three months ended
September 26, 2010 totaled approximately $599,364 for stock options. Stock-based compensation
expense recognized during the nine months ended September 26, 2010 totaled approximately
$853,083 for stock options. Stock-based compensation expense was included in general and
administrative expenses in the accompanying Consolidated Statements of Operations.
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Executive Summary of Results
The following table sets forth the percentage relationship to total revenues, except where
otherwise indicated, of certain items included in our consolidated statements of operations
for the periods indicated. Percentages may not add due to rounding:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Store sales |
91.1 | % | 95.4 | % | 92.7 | % | 91.4 | % | ||||||||
Franchise royalties and fees |
8.9 | 4.6 | 6.7 | 8.5 | ||||||||||||
Other revenue |
| | 0.6 | 0.1 | ||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses: |
||||||||||||||||
Store operating expenses (1): |
||||||||||||||||
Food and paper costs |
33.7 | % | 31.8 | % | 33.3 | % | 32.4 | % | ||||||||
Cost of nutritional products |
6.0 | 7.0 | 7.4 | 7.6 | ||||||||||||
Labor |
28.2 | 27.9 | 27.8 | 29.4 | ||||||||||||
Occupancy |
6.3 | 11.1 | 9.0 | 12.1 | ||||||||||||
Other store operating expenses |
16.3 | 16.1 | 17.8 | 16.2 | ||||||||||||
General and administrative expenses |
160.8 | 69.7 | 99.3 | 74.2 | ||||||||||||
Advertising, marketing and promotion expenses |
3.3 | 5.3 | 4.1 | 4.4 | ||||||||||||
Depreciation and amortization |
6.2 | 7.9 | 6.6 | 8.0 | ||||||||||||
Loss on disposal of assets |
2.0 | 1.2 | 0.7 | 2.0 | ||||||||||||
Total costs and expenses |
251.7 | 170.4 | 195.4 | 174.6 | ||||||||||||
Operating loss |
(151.7 | ) | (70.4 | ) | (95.4 | ) | (74.6 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
0.1 | 0.5 | 0.1 | 0.4 | ||||||||||||
Interest expense |
(31.6 | ) | (18.2 | ) | (32.1 | ) | (13.7 | ) | ||||||||
Other income (expense) |
(152.2 | ) | (1.0 | (58.9 | ) | (8.2 | ) | |||||||||
Other income (expense), net |
(183.7 | ) | (18.7 | ) | (90.9 | ) | (5.1 | ) | ||||||||
Loss before income taxes |
(335.5 | ) | (89.1 | ) | (186.3 | ) | (79.7 | ) | ||||||||
Income taxes |
| | | | ||||||||||||
Net loss |
(335.5) | % | (89.1) | % | (186.3) | % | (79.7) | % | ||||||||
(1) | Food and paper costs are shown as a percentage of food sales. Cost of
nutritional products, labor, occupancy and other store operating
expenses are shown as a percentage of total store sales. |
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The following table sets forth certain data relating to the number of Company-owned,
franchise-operated and system-wide store locations:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Company-owned locations: |
||||||||||||||||
Locations at the beginning of the year |
4 | 4 | 4 | 5 | ||||||||||||
Locations opened |
| | | | ||||||||||||
Locations closed (1) |
| | | (1 | ) | |||||||||||
Locations sold |
| | | | ||||||||||||
Locations transferred |
| | | | ||||||||||||
Locations at the end of the period |
4 | 4 | 4 | 4 | ||||||||||||
Franchise-owned locations: |
||||||||||||||||
Locations at the beginning of the year |
4 | 5 | 4 | 5 | ||||||||||||
Locations opened |
1 | | 2 | 3 | ||||||||||||
Locations closed |
(1 | ) | (2 | ) | (2 | ) | (5 | ) | ||||||||
Locations sold |
| | | | ||||||||||||
Locations transferred |
| | | | ||||||||||||
Locations at the end of the period |
4 | 3 | 4 | 3 | ||||||||||||
System-wide locations |
||||||||||||||||
Locations at the beginning of the year |
8 | 9 | 8 | 10 | ||||||||||||
Locations opened |
1 | | 2 | 3 | ||||||||||||
Locations closed |
(1 | ) | (2 | ) | (2 | ) | (6 | ) | ||||||||
Locations sold |
| | | | ||||||||||||
Locations transferred |
| | | | ||||||||||||
Locations at the end of the period |
8 | 7 | 8 | 7 | ||||||||||||
(1) | In February 1, 2008, the Company agreed to operate one franchise-owned
location pursuant to the terms of a management services agreement.
This store was closed on March 27, 2009. |
Three Months Ended September 26, 2010 Compared to Three Months Ended September 27, 2009
General
For the three months ended September 26, 2010, our comparable store sales for Company owned
stores decreased by 3.1%. Comparable store sales of Company-owned and franchisee-owned
locations were adversely impacted by the economic downturn and as a result the slowdown in
consumer spending. Comparable store sales are based on sales for stores that have been in
operation for the entire period of comparison. Comparable store sales exclude closed
locations.
Results of Operations
Revenues
Total revenues for the three months ended September 26, 2010 increased by $20,640, or 1.6% to
$1,293,993 from $1,273,353 for the three months ended September 27, 2009. The increase in
total revenues for the three months ended September 26, 2010
as compared to the prior year was primarily due to the increase in royalties and fees this
year slightly offset by the decrease in sales of our Company-operated stores.
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Sales at Company-operated stores for the three months ended September 26, 2010 decreased by
$35,346, or 2.9% to $1,178,874 from $1,214,220 for the three months ended September 27, 2009.
As a percentage of total sales revenues, sales at Company-operated stores decreased to 91.1%
of the total revenues for the three months ended September 26, 2010 from 95.4% of the total
revenues for the three months ended September 27, 2009. The decrease in sales at
Company-operated stores for the three months ended September 26, 2010 was primarily due to
the decline in enplanements at our Boston Logan International Airport location, resulting
fewer passengers going through the terminal and less customers at this location.
During the three months ended September 26, 2010, franchise royalties and fees increased by
$55,530, or 93.2% to $115,119 from $59,589 for the three months ended September 27, 2009. The
increase was due to the franchisee fee for the opening of the Cleveland Hopkins Airport and
more franchisee stores open in the system during the three months ended September 26, 2010
than the prior year.
Costs and Expenses
Food and paper costs for the three months ended September 26, 2010 increased by $12,358, or
3.6%, to $356,628 from $344,270 for the three months ended September 27, 2009. The increase
was primarily attributable to heavy discounting of new menu items and bundles of some items
in order to retain and lure customers with less disposable income as a result of the economic
downturn the whole country has experienced. The increase in food and paper costs as a
percentage of food sales was primarily attributable to the introduction of new menu items
heavily discounted and the introduction of new bundle meals.
The cost of nutritional products for the three months ended September 26, 2010 decreased by
$14,009, or 16.5%, to $70,787 from $84,796 for the three months ended September 27, 2009. As
a percentage of store sales, the cost of nutritional products decreased to 6% of store sales
for the three months ended September 26, 2010 from 7.0% of store sales for the three months
ended September 27, 2009. The decrease in the cost of nutritional products as a percentage of
total sales was primarily attributable to decrease in sales for that sector of our business.
Store labor expense for the three months ended September 26, 2010 decreased by $6,645, or
2.0%, to $332,455 from $339,100 for the three months ended September 27, 2009. The decrease
in labor expense was primarily due to the lower sales during this period, resulting in less
labor hours needed to service the lower sales levels. As a percentage of store sales, labor
expense increased slightly to 28.2% of store sales for the three months ended September 26,
2010 from 27.9% of store sales for the three months ended September 27, 2009, again directly
related to the decrease in sales.
Store occupancy costs for the three months ended September 26, 2010 decreased by $60,267, or
44.6%, to $74,847 from $135,114 for the three months ended September 27, 2009. The decrease
in occupancy costs was primarily due to the amendment of the lease of one our locations to
adjust the rent charge to 50% of the current rate with no increments for the remaining term
of the lease; as a result of this amendment the Company booked an adjustment to the straight
line rent of $39,000. Also, some rents are based on a percentage of sales and lower sales
result in lower rent. As a percentage of store sales, occupancy costs decreased to 6.3% of
store sales for the three months ended September 26, 2010 from 11.1% of store sales for the
three months ended September 27, 2009 mainly due to the lease amendment explained above.
Other store operating expenses for the three months ended September 26, 2010 decreased by
$2,993, or 1.5%, to $192,575 from $195,568 for the three months ended September 27, 2009. The
decrease was largely due to lower cost for utilities than last year during the same period.
As a percentage of store sales, other store operating expenses increased to 16.3% of store
sales for the three months ended September 26, 2010 from 16.1% of store sales during the
three months ended September 27, 2009.
General and administrative expenses for the three months ended September 26, 2010 increased
by $1,193,811 or 134.5%, to $2,081,235 from $887,424 for the three months ended September 27,
2009. The increase in general and administrative expenses was primarily due to the service
agreement for investor relations and public relations expenses executed during the three
months ended September 26, 2010. Pursuant to this agreement the Company recorded an expense
of $1,000,000 for the grant of 10,000 shares of Series B preferred stock vested
immediately. Also, the stock-based compensation had an increased of $510,802 due to amendment
of the employment agreements of the Companys chief executive officer and chief operating
officer, where half of their non-qualified stock option grants vested at the execution of
the agreement and half over a three period. These charges were offset by the decrease in
legal, payroll and rent expenses. As a result of the foregoing, general and administrative
expenses
increased to 160.8% of total revenues during the three months ended September 26, 2010 from
69.7% of total revenues for the three months ended September 27, 2009.
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Advertising, marketing and promotion expenses for the three months ended September 26, 2010
decreased by $25,242 or 37.2%, to $42,638 from $67,880 for the three months ended September
27, 2009. The decrease in advertising, marketing and promotion expenses was due to a decrease
in expenses related to a TV campaign in the prior year. Advertising, marketing and promotion
expenses for the three months ended September 26, 2010 and September 27, 2009 include $10,762
and $12,962, respectively, of non-cash, stock-based compensation expense attributable to the
George Foreman Ventures Services Agreement. As a percentage of total revenues, advertising,
marketing and promotion expenses decreased to 3.3% of total revenues in the three months
ended September 26, 2010 down from 5.3% of total revenues in the three months ended September
27, 2009.
Depreciation and amortization expense for the three months ended September 26, 2010 decreased
by $20,258, or 20.1%, to $80,636 from $100,894 for the three months ended September 27, 2009.
As a percentage of total revenues, depreciation and amortization expense decreased to 6.2% of
total revenues for the three months ended September 26, 2010 up from 7.9% of total revenues
for the three months ended September 27, 2009. The decrease was primarily due to some of our
stores equipment fully depreciated and still in use.
Other income and expense for the three months ended September 26, 2010 increased by
$2,138,998, to an expense of $2,377,523 from $238,525 for the three months ended September
27, 2009. The increase was principally attributable to the amortization of the debt discount
and interest payment of the outstanding debentures and the fluctuation of the fair value of
the warrants issued in connection with the private placement offering in 2007-2008. The
fluctuation of the fair value of the warrants was driven by the change in volatility from the
prior period. The volatility is now based on a blend of the Companys volatility and publicly
common stocks from peers. Previously, the Companys history was not long enough to be
considered in the determination the expected volatility.
The net loss for the three months ended September 26, 2010 increased by $3,205,852, to
$4,341,113, from $1,135,261, for the three months ended September 27, 2009. Our net loss
increased primarily due to the stock based compensation granted to vendors, Executives, Board
of Directors and employees of the Company, included in general and administrative expenses
and the fluctuation of the warrant price issued in connection with the 2007 Private placement
memorandum. As a percentage of total revenues, our net loss increased to 335.5% of total
revenues for the three months ended September 26, 2010 from 89.1% of total revenues for the
three months ended September 27, 2009.
Nine Months Ended September 26, 2010 Compared to Nine Months Ended September 27, 2009
General
For the nine months ended September 26, 2010, our comparable store sales for Company owned
stores decreased slightly by 0.3%. Comparable store sales of Company-owned locations were
impacted by the decrease in terminal traffic and customers at the Terminal B in the Boston
Logan Airport location, off set by the increase of comparable sales of other Company-owned
stores in the system. Comparable store sales are based on sales for stores that have been in
operation for the entire period of comparison. Comparable store sales exclude closed
locations.
Results of Operations
Revenues
Our total revenues for the nine months ended September 26, 2010 decreased by $160,351, or
4.1%, to $3,719,211 from $3,879,562 for the nine months ended September 27, 2009. The
decrease in total revenues was primarily due to fewer Company-operated stores and a decrease
in franchise fees from new store openings.
Total store sales at Company-owned stores for the nine months ended September 26, 2010
decreased by $101,098, or 2.8%, to $3,447,118 from $3,548,216 for the nine months ended
September 27, 2009. The decrease in sales at the Company-owned stores for the nine months
ended September 26, 2010 was primarily due to the decrease in the number of Company-operated
stores and a slight decrease in comparable sales for Company-operated stores. As a percentage
of total revenues, sales at Company-owned stores increased to 92.7% of total revenues for the
nine months ended September 26, 2010 from 91.4% of total revenues for the nine months ended
September 27, 2009.
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During the nine months ended September 26, 2010, franchise royalties and fees decreased by
$79,312, or 24.1% to $249,795 from $329,107 for the nine months ended September 27, 2009
primarily due to lower revenue from franchise fees from new store openings and fewer stores
operating in the system generating royalties.
Costs and Expenses
Food and paper costs for the nine months ended September 26, 2010 decreased by $663, or 0.1%,
to $1,016,192 from $1,016,855 for the nine months ended September 27, 2009. As a percentage
of food sales, food and paper costs increased to 33.3% of food sales during the nine months
ended September 26, 2010 down from 32.4% of food sales during the nine months ended September
27, 2009. The increase in food and paper costs as a percentage of food sales was primarily
attributable to the introduction of new menu items heavily discounted and discounted bundled
items in order to appeal to customers with less disposable income and to maintain our market
share in a very competitive environment.
The cost of nutritional products for the nine months ended September 26, 2010 decreased by
$14,525, or 5.4%, to $255,140 from $269,665 for the nine months ended September 27, 2009. As
a percentage of store sales, the cost of nutritional products decreased to 7.4% of store
sales for the nine months ended September 26, 2010 down from 7.6% of store sales for the nine
months ended September 27, 2009. The decrease in the cost of nutritional products as a
percentage of store sales was primarily attributable to the increase of retail price of some
key items, resulting in a better margin.
Store labor expense for the nine months ended September 26, 2010 decreased by $86,933, or
8.3%, to $957,840 from $1,044,773 for the nine months ended September 27, 2009. The decrease
in labor expense was primarily attributable to a reduction in the number of Company-operated
stores and lower labor rates in some Company-owned stores. As a percentage of store sales,
labor expense decreased to 27.8% of store sales for the nine months ended September 26, 2010
down from 29.4 % of store sales for the nine months ended September 27, 2009. The decrease in
the labor percentage of store sales is primarily due to the reduction of labor rates in some
of our stores.
Store occupancy costs for the nine months ended September 26, 2010 decreased by $118,150, or
27.6%, to $309,571 from $427,721 for the nine months ended September 27, 2009. The decrease
in store occupancy costs was primarily attributable to fewer Company-operated stores
operating during this period of time compared to the prior year for the same period. Also,
the lease amendment to reduce the rent for the remaining term of the lease of a Company-owned
store and the adjustment of the straight line accrual of another location based on historical
sales reduced store occupancy costs.
Other store operating expenses for the nine months ended September 26, 2010 increased by
$37,852, or 6.6%, to $613,518 from $575,666 for the nine months ended September 27, 2009. The
increase was primarily due to an increase of bank and credit card fees, utilities and
maintenance expenses. As a percentage of store sales, other store operating expenses
increased to 17.8% of store sales for the nine months ended September 26, 2010 from 16.2% of
store sales for the nine months ended September 27, 2009.
General and administrative expenses for the nine months ended September 26, 2010 increased by
$812,120, or 28.2%, to $3,691,616 from $2,879,496 for the nine months ended September 27,
2009. The increase in general and administrative expenses was primarily due to the increase
of investor relations and public relations expenses and the stock-based compensation awarded
to employees, offset by the decline in payroll, insurance, legal and rent expenses. The
explanation for the main changes are:
| The Company signed a service agreement for public and investor relations during
the third quarter of 2010 for $1,000,000 in Series B preferred stock vested
immediately. |
| During the nine months ended September 26, 2010, the Company recognized $853,083
of stock-based compensation expenses attributable to equity awards to employees,
Executives and Directors of the Company compared to $392,253 for the nine months
ended on September 27, 2009. The increase in stock based compensation was primarily
due to the amendment of the employment agreements of the Companys chief executive
officer and chief operating officer awarding 3,250,000 and 1,205,673 non-qualified
stock options respectively, for which half of the options vested at the execution of
the agreements and the other half vest over a three year period for both executives.
The fair value of the stock options granted during the nine months ended September
26, 2010 was calculated with the Black-Scholes model. A key aspect of the
Black-Scholes model is volatility. The Company changed the expected volatility
estimate to an index of the Companys history combined with volatility of peer
companies. The usage of the Companys history of volatility had a significant impact. |
| The rent expenses reduction was as a result of moving the Corporate Offices to a
smaller suite in the same building for about the third of the cost of the previous
lease and an adjustment to the straight-line rent accrual due to the amendment of the
office lease. |
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As a result of the foregoing, general and administrative expenses increased to 99.3% of total
revenues during the nine months ended September 26, 2010 from 74.2% of total revenues for the
nine months ended September 27, 2009.
Advertising, marketing and promotion expenses for the nine months ended September 26, 2010
decreased by $19,663, or 11.4%, to $152,972 from $172,635 for the nine months ended September
27, 2009. The decrease in advertising, marketing and promotion expenses was primarily due to
a decrease in expenses related to a TV Campaign we conducted during 2009. Advertising,
marketing and promotion expenses for the nine months ended September 26, 2010 and September
27, 2009 include $46,086 and $21,519, respectively, of non-cash, stock-based compensation
expense attributable to the George Foreman Ventures Services Agreement. As a percentage of
total revenues, advertising, marketing and promotion expenses decreased to 4.1% of total
revenues during the nine months ended September 26, 2010 from 4.4% of total revenues during
the nine months ended September 27, 2009.
Depreciation and amortization expense for the nine months ended September 26, 2010 decreased
by $64,994, or 21.0%, to $244,711 from $309,705 for the nine months ended September 27, 2009.
As a percentage of total revenues, depreciation and amortization expense decreased to 6.6% of
total revenues for the nine months ended September 26, 2010 down from 8.0% of total revenues
for the nine months ended September 27, 2009. The decrease in depreciation and amortization
expense is primarily due to fully depreciated equipment and still in use.
Other income and expense increased from an expense $199,449 for the nine months ended
September 27, 2009 to an expense $3,379,490 for the nine months ended September 26, 2010. The
increase of $3,180,041 was primarily due to an increase of $2,508,547 generated by the
variance of the warrants fair value that were issued in conjunction the latest private
placement. The fair value calculation of the warrants is updated market to market through the
Black-Scholes model, where the expected volatility is one the assumptions; the Company used
its own volatility history, resulting in a change in the volatility percentage to 119% from
40s% in the prior period. Also, there was an increase of $659,645 for higher interest
expense attributable to the amortization of the deferred financing costs and the beneficial
conversion feature of the outstanding debentures. The Company recognized $1,192,473 of
interest expense for the nine months ended September 26, 2010 compared to $532,828 for the
nine months ended September 27, 2009. As a percentage of total revenues, other expenses
increased to 90.9% of total revenues during the nine months ended September 26, 2010 from
5.1% of total revenues during the nine months ended September 27, 2009.
Our net loss for the nine months ended September 26, 2010 increased by $3,833,277, to
$6,927,621, from $3,094,344, for the nine months ended September 27, 2009. Our net loss
increased primarily due to the increase in general and administrative expenses and other
income and expenses, which were mostly non-cash transactions such as stock-base compensation
to vendors and employees, amortization of deferred financing and beneficial conversion
feature of the outstanding debentures and revised warrant valuation. As a percentage of
total revenues, our net loss increased to 186.3% of total revenues for the nine months ended
September 26, 2010 from 79.7% of total revenues for the nine months ended September 27, 2009.
Liquidity and Capital Resources
Cash and cash equivalents and restricted cash at September 26, 2010 were $558,181 compared to
$2,338,852 at December 27, 2009. Cash is primarily used to fund our (i) capital expenditures
for new and remodeled Company-owned stores, (ii) acquisitions of franchisee-owned stores,
(iii) working capital requirements and (iv) net operating losses. At September 26, 2010,
restricted cash included $40,041 of cash secured by a letter of credit for our office lease.
During the nine months ended September 27, 2009, the Company sold $5,874,000 of Senior
Secured Convertible Debentures (the Debentures) in a private offering to accredited
investors. The Company received net cash proceeds of $4,890,518. The debentures bear interest
at a rate of 8% and are due three years from the date they are issued. The Debentures are
convertible into shares of common stock at $0.13 per share. In addition, each investor will
receive 5-year detachable Warrants to purchase a number of shares of Common Stock equal to
50% of the shares underlying the Investors Debenture. Interest on the Debentures bear a rate
of 8% per annum and is payable on a quarterly basis. Subject to certain conditions, the
Company has the right to pay interest on the Debentures in either cash or shares of Common
Stock, or in a combination of cash and Common Stock.
At September 26, 2010, we had negative working capital of $401,770 compared to working
capital of $1,194,017 at December 27, 2009. The decrease in working capital was primarily due
to the funding of the operating losses.
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We used $1,239,833 of cash to fund our operating activities in the nine months ended
September 26, 2010 compared with $2,566,029 of cash used to fund our operating activities in
nine months ended September 27, 2009. The decrease in net cash used to fund our operating
activities was primarily due to a $543,000 less cash used to fund operating losses and the
reduction in working capital requirements compared to the same period last year.
During the nine months ended September 26, 2010, we spent $70,700 for the acquisition of
equipment compared with $102,304 spent for the acquisition of equipment during the nine
months ended September 27, 2009.
During the nine months ended September 26, 2010, financing activities used $449,754 of cash,
primarily due to the extinguishment of debt with TD bank, payment of capital leases and
financing costs slightly offset by proceeds from warrant exercise. During the nine months
ended provided September 27, 2009, financing activities provided $4,920,842 of cash proceeds
received from the sale of Senior Secured Convertible Debentures described above and the
release and usage of restricted cash partially offset by payments on long term debt.
Historically we have funded our operations, working capital requirements, acquisitions and
capital expenditures with proceeds from the issuance of debt and equity securities. We
believe that cash flow from operations and proceeds from the issuance of debt and equity
securities will be sufficient to fund our operations and capital expenditures for the next
twelve months.
Subsequent events
Debenture Conversion
On October 1, 2010, the Company consummated the extinguishment of approximately ninety-eight
percent (98%) of its outstanding 8% Senior Secured Convertible Debentures in exchange for
shares of the Companys Series A 8% Convertible Preferred Stock (the Series A Preferred
Stock). An aggregate principal amount of $5,692,500 of outstanding Debentures was
extinguished in exchange for 56,925 shares of Series A Preferred Stock. The holders of Series
A Preferred Stock will be entitled to receive, before any cash is paid out or set aside for
any shares of the Companys Common Stock (but on an equal basis with the Companys Series B
8% Redeemable Convertible Preferred Stock) dividends at the annual rate of 8% of the Stated
Value of the Preferred Shares, subject to adjustment for stock splits, etc. The dividends
will be accruing and cumulative and will be paid upon the occurrence of a liquidation, deemed
liquidation, dissolution or redemption if not previously declared and paid.
Effective immediately with respect to one-half of the shares of Series A Preferred Stock
issued in connection with the Debenture Exchange, and effective January 1, 2011 with respect
to the remaining shares of Series A Preferred Stock issued in connection with the Debenture
Exchange, each holder of Series A Preferred Stock may convert his, her or its shares of
Series A Preferred Stock into shares of Common Stock at a conversion price equal to $0.13.
The number of shares of common stock into which the Series A Preferred Stock is convertible
is subject to adjustment to prevent dilution in the event of a stock split or stock dividend.
The Series A Conversion Price is also subject to a weighted average price protection.
Effective January 1, 2011, the Company may, at its election, require the conversion of the
Series A Preferred Stock to shares of Common Stock at the Series A Conversion Price if the
closing price of the Common Stock for 10 consecutive trading days equals or exceeds 300% of
the Series A Conversion Price and the average daily volume of the shares of Common Stock for
the same period exceeds 250,000 shares.
Approximately $2,200,869 of the debt discount relating to the beneficial conversion option
and the 2009 Warrants issued to the Debenture holders will be recorded to interest expense as
a result of the extinguishment of the Debentures. Furthermore, the intrinsic value of the
beneficial conversion feature at the date of extinguishment was calculated to be
approximately $5,692,500 and, as such, we recorded a gain on extinguishment of debt for that
amount.
We have evaluated the Series A Preferred Stock issued and have recorded the intrinsic value
of the embedded beneficial conversion feature of $5,692,443 as additional paid in capital.
The embedded beneficial conversion feature was treated as a deemed dividend and, as such, has
been recorded to retained earnings.
In conjunction with the extinguishment of debt, the Company modified the exercise price of
the 2009 Warrants. The exercise price was reduced from $0.14 to $0.09 per share of Common
Stock. As such, we have calculated the fair value of the warrants on the date of the
modification to be approximately $6,181,501 and recorded the increase in fair value of
$4,616,401 as an addition to additional paid-in capital. The fair value of the warrants was
computed using the Black-Scholes option pricing model. The Company assumed a risk-free
interest rate of 1.26%, no dividends, expected volatility of approximately 118.45%, which was
calculated based on a combination of historical volatility and the history of comparable peer
companies, and an expected warrant life of approximately 5 years.
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Private Placement
Also, on October 4 and October 29, 2010, the Company issued and sold 27,950 shares and 6,450
shares, respectively, of Series B 8% Convertible Preferred Stock, par value $0.001 per share
(the Series B Preferred Stock), at $100.00 per share for a total of $3,440,000. Effective
January 1, 2011, each holder of the Series B Preferred Stock may convert his, her or its
shares of Series B Preferred Stock into shares of Common Stock at a conversion price equal to
$0.23. Each investor who participated in the Offering also received a warrant to purchase 100
shares of common stock of the Company, par value $0.001 per share, per share of Preferred
Stock purchased. The number of shares of Common Stock into which the Series B Preferred Stock
is convertible is subject to adjustment to prevent dilution in the event of a stock split or
stock dividend. The Series B Conversion Price is also subject to a weighted average price
protection. The Company paid the placement agent retained in connection with the offering a
commission of $344,000 and granted warrants to purchase 2,243,478 shares of Common Stock in
connection with the offering.
The holders of Series B Preferred Stock will be entitled to receive, before any cash is paid
out or set aside for any shares of the Companys Common Stock (but on an equal basis with the
Companys Series A 8% Redeemable Convertible Preferred Stock) dividends at the annual rate of
8% of the Stated Value of the Preferred Shares, subject to adjustment for stock splits, etc.
The dividends will be accruing and cumulative and will be paid upon the occurrence of a
liquidation, deemed liquidation, dissolution or redemption if not previously declared and
paid.
The Investor Warrants provide for the purchase of shares of Common Stock for five years at an
exercise price of $0.29 per whole share. The Investor Warrants, at the option of the holder,
may be exercised by cash payment of the exercise price or by cashless exercise to the
extent that a registration statement covering the shares of Common Stock underlying the
Investor Warrants is not in effect following the one year anniversary of issuance. A
cashless exercise means that in lieu of paying the aggregate purchase price for the shares
being purchased upon exercise of the Investor Warrants in cash, the holder will forfeit a
number of shares underlying the Investor Warrants with a fair market value equal to such
aggregate exercise price. The Company will not receive additional proceeds to the extent
that Investor Warrants are exercised by cashless exercise.
The exercise price and number of shares of Common Stock issuable on exercise of the Investor
Warrants may be adjusted in certain circumstances including in the event of a stock dividend,
or our recapitalization, reorganization, merger or consolidation. The Investor Warrants are
also subject to a weighted average price protection for the term of the Investor Warrants.
The Placement Agent Warrants are substantially identical to the terms of the Investor
Warrants except that the Placement Agent Warrants have cashless exercise rights to the extent
that a registration statement covering the shares of Common Stock underlying the Placement
Agent Warrants is not in effect six months following the date of issuance.
We evaluated the Series B Preferred Stock issued and have recorded the intrinsic value of the
embedded beneficial conversion feature of $226,936 as additional paid in capital. The
embedded beneficial conversion feature was treated as a deemed dividend and, as such, has
been recorded to retained earnings.
Furthermore, we have calculated the relative fair value of the warrants on their date of
grant, which was determined to be approximately $873,498 and was recorded as additional
paid-in capital. The fair value of the warrants was computed using the Black-Scholes option
pricing model. The Company assumed a risk-free interest rate of 1.26%, no dividends,
expected volatility of approximately 118.45%, which was calculated based on a combination of
historical volatility and the history of comparable peer companies, and an expected warrant
life of approximately 5 years.
We have included the pro forma consolidated balance sheet as of September 26, 2010 to
demonstrate the financial impact of the events described above.
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UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheet
as of September 26, 2010
Unaudited
as of September 26, 2010
Unaudited
9/26/2010 | 9/26/2010 | |||||||||||
As Reported | Adjustments | As Adjusted | ||||||||||
Assets |
||||||||||||
Current assets |
||||||||||||
Cash and cash equivalents |
518,140 | 3,096,000 | 3,614,140 | |||||||||
Restricted cash |
40,041 | 40,041 | ||||||||||
Accounts receivable |
22,208 | 22,208 | ||||||||||
Inventories |
145,110 | 145,110 | ||||||||||
Prepaid expenses and other current assets |
31,807 | 31,807 | ||||||||||
757,306 | 3,096,000 | 3,853,306 | ||||||||||
Equipment |
984,368 | 984,368 | ||||||||||
Furniture & Fixtures |
209,120 | 209,120 | ||||||||||
Leasehold Improvements |
1,721,044 | 1,721,044 | ||||||||||
Website Design |
27,050 | 27,050 | ||||||||||
Accum Depr |
(1,781,907 | ) | (1,781,907 | ) | ||||||||
Property and equipment, net |
1,159,675 | | 1,159,675 | |||||||||
Other assets |
||||||||||||
Deferred financing costs, net |
570,491 | (491,348 | ) | 79,143 | ||||||||
Other assets |
83,782 | 83,782 | ||||||||||
Goodwill |
75,363 | 75,363 | ||||||||||
729,636 | (491,348 | ) | 238,288 | |||||||||
Total assets |
2,646,617 | 2,604,652 | 5,251,269 | |||||||||
Liabilities and Stockholders Equity |
||||||||||||
Current liabilities |
||||||||||||
Current portion of capital lease obligations |
450,000 | 450,000 | ||||||||||
Notes Payable |
38,792 | 38,792 | ||||||||||
Accounts payable |
349,387 | 349,387 | ||||||||||
Franchisee deposits |
111,421 | 111,421 | ||||||||||
Accrued Dividends |
19,778 | 19,778 | ||||||||||
Accrued expenses and other current liabilities |
189,698 | 189,698 | ||||||||||
1,159,076 | | 1,159,076 | ||||||||||
Long-term liabilities |
||||||||||||
Convertible Debenture |
3,549,091 | (3,491,631 | ) | 57,460 | ||||||||
Warrant Liability |
2,195,596 | 2,195,596 | ||||||||||
Other non current liabilities |
95,480 | 95,480 | ||||||||||
Capital lease obligations |
21,040 | 21,040 | ||||||||||
5,861,207 | (3,491,631 | ) | 2,369,576 | |||||||||
Total liabilities |
7,020,283 | (3,491,631 | ) | 3,528,652 | ||||||||
Stockholders equity |
||||||||||||
Preferred Stock |
10 | 91 | 101 | |||||||||
common stock |
40,427 | 40,427 | ||||||||||
Additional paid-in capital |
28,049,167 | 13,631,746 | 41,680,913 | |||||||||
Accumulated deficit |
(32,463,270 | ) | (7,535,554 | ) | (39,998,824 | ) | ||||||
(4,373,666 | ) | 6,096,283 | 1,722,617 | |||||||||
Total liabilities and stockholders equity |
2,646,617 | 2,604,652 | 5,251,269 | |||||||||
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Contractual Obligations and Other Commitments
In addition to our capital expenditures requirements, we have certain other contractual and
committed cash obligations. Our contractual cash obligations primarily consist of
non-cancelable operating leases for our stores and administrative offices. Lease terms for
our stores and administrative offices are generally for seven to ten years with renewal
options at most locations and generally require us to pay a proportionate share of real
estate taxes, insurance, common area, and other operating costs. Some store leases provide
for contingent rental (i.e. percentage rent) payments based on sales in excess of specified
amount. Certain of our lease agreements provide for scheduled rent increases during the lease
terms or for rental payments commencing at a date other than the date of initial occupancy.
Effective July 1, 2010, the Company signed an amendment of the lease agreement for our
administrative offices to move to a smaller suite within the same building, as a result of
this amendment there is a significant decrease in Other long term liabilities and an
adjustment to rent expenses for the straight line treatment of the monthly rent payments.
Also, we signed a lease amendment of our Landmark location in Boston, to reduce the basic
rent to half of the current price with no increments for the remaining term of the lease;
this amendment was effective September 1, 2010.
The following table sets forth information as of September 26, 2010, with respect to our
contractual obligations and the effect they are expected to have on our liquidity and cash
flows in future periods:
Less Than | 1 Year to | 4 Years to | More than | |||||||||||||||||
Total | 1 Year | 3 Years | 5 Years | 5 Years | ||||||||||||||||
Long-term debt |
$ | 3,999,091 | $ | 450,000 | (1) | $ | 3,549,091 | $ | | $ | | |||||||||
Capital leases |
59,833 | 38,792 | 21,041 | | | |||||||||||||||
Operating leases |
2,239,573 | 198,953 | 935,274 | 912,970 | 192,376 |
(1) | Long-term debt due in less than 1 year and includes $450,000 that
becomes due upon the sale of the Companys Landmark Center restaurant
and store. The Company currently has no plans to sell its Landmark
Center unit. |
Our capital requirements, including development costs related to the opening or acquisition
of additional stores and maintenance and remodel expenditures, have and will continue to be
significant. Our future capital requirements and the adequacy of available funds will depend
on many factors, including the pace of expansion, real estate markets, site locations, and
the nature of the arrangements negotiated with landlords. We have incurred significant
operating losses since inception and expect to incur a significant operating loss in 2010.
Seasonality
Although our business is not highly seasonal, it can be adversely affected by weather
conditions.
Impact of Inflation
In the past, we have been able to recover inflationary cost and commodity price increases
through increased menu prices. There have been, and there may be in the future, delays in
implementing such menu price increases, and competitive pressures may limit our ability to
recover such cost increases in their entirety. Historically, the effects of inflation on our
operations have not been materially adverse.
Many of our employees are paid hourly rates related to federal and state minimum wage laws.
Although we have and will continue to attempt to pass along any increased labor costs through
food price increases, there can be no assurance that all such increased labor costs can be
reflected in our prices or that increased prices will be absorbed by consumers without
diminishing to some degree consumer spending at our stores. However, we have not experienced
to date a significant reduction in store profit margins as a result of changes in such laws,
and management does not anticipate any related future significant reductions in gross profit
margins.
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Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of
the end of such period, the Companys disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information required to
be disclosed by the Company in the reports that it files or submits under the Exchange Act
and are effective in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to
the Companys management, including the Companys CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
There have been no changes in the Companys internal control over financial reporting during
the last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Table of Contents
Item 6. Exhibits.
Exhibit No. | Description | |
10.4 | Employment Agreement between UFood Restaurant Group, Inc., and George Naddaff |
|
10.5 | Amendment of the employment agreement between UFood Restaurant Group, Inc.,
and Charles A. Cocotas |
|
10.6 | Media Services Agreement dated as of June 29, 2010, between Summit Trading
Limited and UFood Restaurant Group, Inc. |
|
31.1 * | Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 * | Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 * | Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 * | Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith |
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SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
UFOOD RESTAURANT GROUP, INC. |
||||
Date: November 11, 2010 | By: | /s/ George Naddaff | ||
George Naddaff | ||||
Chairman and Chief Executive Officer (principal executive officer) |
||||
Date: November 11, 2010 | By: | /s/ Irma Norton | ||
Irma Norton | ||||
Chief Financial Officer (principal financial officer) |
36