UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment # 2
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2011
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-136167
UFOOD RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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20-4463582 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
255 Washington Street, Suite 100
Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
(617) 787-6000
Registrants telephone number
Securities registered under Section 12(b) of the Exchange Act:
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Title of each class
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Name of each exchange on which registered |
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None
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None |
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. þ Yes o No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site if any, every interactive data 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). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant was
approximately $10,176,259 based on the last sale price of the common stock as of June 27, 2010.
Shares held by each officer and director and by each person who owns 10% or more of the
outstanding common stock have been excluded in that such person may be deemed to be affiliates.
The determination of affiliate status is not necessarily a conclusive determination for other
purposes.
There were 40,621,840 shares of our Common Stock issued and outstanding as May 16, 2011.
EXPLANATORY NOTE
Our annual report on Form 10-K of UFood Restaurant Group, Inc. (UFood, we, our, us, or the
Company) for the year ended January 2, 2011, was originally filed with the Securities and
Exchange Commission (the SEC) on March 21, 2011, and this Amendment No. 2 is being filed to
correctly reflect the embedded beneficial conversion feature in connection with our most recent
financing of Series B Preferred Stock.
As required by Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, our Chief
Executive Officer and Chief Financial Officer are providing Rule 13a-14(a) certifications dated
May 18, 2011 in connection with this Form 10-K/A and written statements pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 dated May 18, 2011.
We have amended Items 1A, 7 and 8 of our Report on Form 10-K to reflect the correction explained
above. These amended items are set forth in this amendment two.
This Form 10-K/A has not been updated for other events or information subsequent to the date of the
filing of the original Form 10-K, except as above. Accordingly, this Form 10-K/A should be read in
conjunction with our other filings made with the SEC subsequent to the filing of our original
Report on Form 10-K.
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Forward-Looking Statements
Matters discussed in this report and in our public disclosures, whether written or oral, relating
to future events or our future performance, including any discussion express or implied, of our
anticipated growth, operating results, future earnings per share, plans and objectives, contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, or Exchange Act. These statements are often
identified by the words believe, positioned, estimate, project, target, continue,
intend, expect, future, anticipate, and similar expressions that are not statements of
historical fact. These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing
of certain events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those set forth under
Risk Factors and elsewhere in this report and in our other public filings with the Securities and
Exchange Commission, or SEC. It is routine for internal projections and expectations to change as
the year or each quarter in the year progresses, and therefore it should be clearly understood that
all forward-looking statements and the internal projections and beliefs upon which we base our
expectations included in this report or other periodic reports are made only as of the date made
and may change. While we may elect to update forward-looking statements at some point in the
future, we do not undertake any obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
PART I
We are a franchisor and operator of fast-casual food service restaurants that capitalize on what we
believe are the developing trends toward healthier living and eating and the increasing consumer
demands for restaurant fare that offers appetizing food with healthy attributes. We believe our
menu items are made with higher quality ingredients and healthier cooking techniques than ordinary
quick serve food. Delivering great taste and an overall pleasing dining experience for an
individual customer is the focus of UFoods mission and concept.
We were incorporated in the State of Nevada on February 8, 2006, as Axxent Media Corporation. Prior
to December 18, 2007, we were a development stage company. On August 8, 2007, we changed our name
to UFood Franchise Company, and on September 25, 2007, we changed our name to UFood Restaurant
Group, Inc.
On December 18, 2007, a wholly-owned subsidiary of our Company merged with and into KnowFat
Franchise Company, Inc., with KnowFat surviving the merger as our wholly-owned subsidiary.
Following the merger, we continued KnowFats business operations. KnowFat was founded in 2004 to
capitalize on the popularity of a chain of fast-casual concept restaurants operating under the
trade name Lo Fat Know Fat in the greater Boston area, as well as the trend we believe is
developing in the United States towards healthier living and eating. After operating for three
years as KnowFat! Lifestyle Grille, while continuously modifying and improving the concept,
management decided that future locations will operate under the name UFood Grill. During the third
quarter of 2008, the four remaining KnowFat! Lifestyle Grille locations were converted to UFood
Grill outlets. All of our Company-owned restaurants and franchise-owned locations now operate, and
all future locations will operate, under the name UFood Grill.
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Three of our four Company-owned restaurants that were originally KnowFat! Lifestyle Grilles
included an integrated convenience-style retail store that carried a variety of health-oriented
nutritional products, such as
supplements, vitamins, nutrition bars, energy drinks and healthy snacks. As part of the process of
conversion to UFood Grill outlets, floor space formerly devoted to the sale of nutritional products
in two of these stores was reconfigured to accommodate the sale of smoothie drinks and frozen
yogurt, because we believe that these products will generate higher revenues in these locations.
None of our franchise locations currently carries nutrition products, and only our Watertown,
Massachusetts Company-owned location carries nutritional products. We will continue to evaluate the
placement of nutrition products in our existing and future locations based on our assessment of
demand in the particular location and, in the case of franchise locations, the franchisees
preferences.
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 four area development agreements and three franchise agreements
covering 57 franchise units in the following states: Texas, Ohio, Massachusetts, Florida 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 57
units include four franchise locations currently open and operating, and requiring an additional 53
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 believe the sale of franchises allows us to expand the UFood Grill brand faster than the
construction and operation of Company-owned outlets due to the Companys limited human and
financial resources, while allowing us to collect franchise fees and royalties. Under our area
development and franchise agreements, we receive royalties on gross franchise sales as described
above, and we do not pay any of the construction, opening (other than the training and advice
described above), operating or marketing costs. We do not provide or arrange financing to
franchisees or area developers.
All of our Company-owned restaurants and franchise-owned locations now operate, and all future
locations will operate, under the name UFood Grill.
We operate in 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 that licenses qualified operators to conduct business under the UFood Grill tradename
and monitors the operations of these business units. Certain financial information for each segment
is set forth in Note 14, Segment Data, of Notes to Consolidated Financial Statements.
Our headquarters are located at 255 Washington Street, Suite 150, Newton, Massachusetts 02458. Our
telephone number is (617) 787-6000.
Concept and Strategy
We are a franchisor and operator of fast-casual food service restaurants that capitalize on what we
believe are the developing trend toward healthier living and eating and the increased consumer
demands for restaurant fare that offers appetizing food with healthy attributes. We believe our
menu items are made using higher quality ingredients and healthier cooking techniques than ordinary
quick serve food. Consequently, we believe our menu provides customers with a delicious and healthy
alternative to typical fast food options. Guests order at a counter and wait three to five minutes
for their meals to be prepared. At UFood Grill, we bake, grill or steam our menu offerings; we
never fry our food. Our sauces, cheeses and salad dressings are reduced-fat. We serve whole-grain
breads and side dishes and, where we can do so while still charging our customers a reasonable
price, organic meats and vegetables (meeting U.S. Food and Drug Administration standards for
organic). The food is served on ceramic plates with metal utensils and is taken to the table by
each guest. Delivering great taste and an overall pleasing dining experience for an individual
customer is the focus of UFoods mission and concept.
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The UFood Grill concept attempts to provide each customer segment with the features it seeks in a
quick service restaurant. Understanding the market segmentation model allows us to focus on those
market segments that afford the greatest sales opportunities. The UFood Grill brand has four
pillars on which it rests:
U Love Great Food
U Are Always on the Go
U Want It Your Way
U Want to Look and Feel Great
Approximately half of all our sales are prepared for take-out, with the guest either calling ahead
or ordering in the restaurant. Nearly 60% of customers frequent our restaurants for lunch, with the
remaining 40% enjoying our fare at dinner time. Most of our restaurants are not open for breakfast
service. We are required to offer breakfast service at our UFood Grill outlet at Logan
International Airport in Boston.
We believe the UFood concept has significant growth potential, which we hope to realize through a
combination of company and franchisee efforts. Franchising will be a key component of our success.
There are currently a total of eight UFood Grill restaurant locations open. Four of the locations
are in the greater Boston area, with one location in Cleveland, Ohio, and two locations in the area
of the Dallas/Ft. Worth Texas.
Industry Background
The United States restaurant industry is benefitting from a long-term trend of consumers eating out
more frequently. According to the National Restaurant Association, the restaurant industrys share
of consumer food expenditures has increased from 25% in 1955 to 49% in 2009, and restaurant sales
are expected to reach $604 billion in 2011, an increase of 2.5% over 2010 sales. The leading
factors contributing to the recent growth have been the growing population, the trend toward busier
lifestyles, greater spending on dining and entertainment activities and the increased availability
of high-quality dining options.
The recent emergence of the fast-casual dining sector has capitalized significantly on the
industrys expansion. This group, led by companies such as Chipotle Mexican Grill and Panera Bread
Company, caters to customers who desire the convenience of fast food, and who are willing to pay a
premium for higher quality, differentiated menu items. According to the National Restaurant
Association, these consumer preferences have made fast-casual one of the fastest growing
sub-sectors within the restaurant industry.
However, the increase in eating out has also contributed to a general deterioration in the health
of Americans. Today, obesity has reached epidemic proportions in the United States. According to
the Centers for Disease Control and Prevention (CDC), approximately 34% of American adults aged 20
and over, or 72 million people, met the criterion for obesity in 2007-2008. In 2009, only Colorado
and the District of Columbia had a prevalence of obesity less than 20%. In addition, a CDC study
indicates that in the past 30 years, the occurrence of obesity in children has doubled, and it is
now estimated that one in five children in the United States is overweight. According to published
studies, obese children are more likely to be obese as adults, which leads to an increased risk for
a number of diseases including stroke, cardiovascular disease, hypertension, diabetes and some
cancers. Obesity also contributes to additional negative health consequences, including Type 2
Diabetes, high total and LDL (bad) cholesterol and triglyceride levels in the blood, low HDL (good)
cholesterol levels in the blood, sleep apnea and inflammation of the liver. Poor food choices, such
as diets high in calories (including fats and simple sugars) and lower in fruits and vegetables are
linked with being overweight.
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Menu
We believe our menu items are made with higher quality ingredients and healthier cooking techniques
than ordinary quick serve food. Consequently, we believe our menu provides customers with a
delicious and healthy alternative to typical fast food options. Guests order at a counter and wait
three to five minutes for their meals to be prepared. At UFood Grill, we bake, grill or steam our
menu offerings; we never fry our food. Our sauces, cheeses and salad dressings are reduced-fat. We
serve whole-grain breads and side dishes and, where we can do so while still charging our customers
a reasonable price, organic meats and vegetables (meeting U.S. Food and Drug Administration
standards for organic). The food is served on ceramic plates with metal utensils and is taken to
the table by each guest. Delivering great taste and an overall pleasing dining experience for an
individual customer is the focus of UFoods mission and concept.
With our innovative menu, we are targeting mainstream customers as well as health conscious
customers. We believe the taste and quality of our food offerings will have wide market appeal.
Our menu contains a wide variety of food types, including hot entrees, burgers, salads, sandwiches,
wraps, smoothies, and desserts, each of which is united in the theme that the food is better for
you than many other dining-out options. Each item is prepared with healthier alternatives in mind,
whether an ingredient or a method of preparation, and has better nutritional qualities than the
equivalent item a consumer might find at a typical quick serve establishment.
Growth Strategy
We plan to further expand our franchising network as well as open other Company-owned stores. We
have increased our focus on nontraditional locations such as airports, hospitals, colleges and
travel plazas. We anticipate announcing several new nontraditional locations in the coming months.
Franchise sales are led by our chairman and chief executive officer, George Naddaff. In addition,
we have entered into a services agreement with George Foreman, the well-known world heavyweight
boxing champion, businessman and celebrity, to be a spokesperson for the brand as well as to assist
in generating interest in franchising the UFood concept. Under the terms of an agreement, Mr.
Foreman has agreed to lend his name and likeness and assist in marketing and branding efforts of
UFood restaurants. Mr. Foreman is expected initially to be involved in helping to sell franchises.
The agreement expires in June 2011.
Outside of the Boston area, we plan to award only multi-unit territories to sophisticated,
experienced owner-operators. These operators will sign area development agreements wherein they
will obtain an exclusive territory in which to build UFood outlets. Upon signing these agreements,
the operators will pay an upfront fee for the rights to their territory, and they will then be
bound to a timeline over which they must open the units. Currently we have four area developers who
have committed to building and operating 57 franchise locations (including 4 locations currently
open and operating) in four areas:
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Dallas-Fort Worth International Airport and Parkland Hospital in Dallas, Texas. |
We seek to sell franchises to sophisticated, experienced restaurant operators who already know
their markets, having operated other restaurants in their territories. We believe these
sophisticated operators will enable our concept to grow rapidly and help establish the UFood brand
across the country. We do not allow sub-franchising. All franchise agreements are directly with us.
We also intend to grow our store base through the building of Company-owned stores. Our current
plan calls for approximately 10% of our stores to be Company-owned. The primary purpose of this
effort is to ensure that management understands how the stores evolve and operate and has its own
kitchen to test new initiatives (menu items, loyalty programs etc.) in front of real customers.
We have transitioned our loyalty program to an email club to communicate with our guests and send
out special offers. To leverage the current geographical concentration of UFood stores in the
Boston area, we plan to locate the new Company-owned stores in the New England area, close to our
headquarters.
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We have developed two prototype stores that we believe are suitable to differing site and
demographic conditions: 1) 1,200 2,200 sq. feet units (currently four stores); and 2) 800
1,000 sq. feet units that are kiosks in airports, bus and train stations, hospitals and other
high-traffic locations (currently three store). We cannot currently estimate the proportion of our
planned future locations that will fall in each of these categories
Franchise Operations
UFood has pursued a broad-based franchising program since 2004. UFood continues to extend its
franchise relationships beyond its current franchisees. Pursuant to federal and state regulations,
UFood annually updates its Franchise Disclosure Document, which includes a disclosure statement, a
Franchise Agreement, and an Area Development Agreement, to facilitate sales of additional franchise
and area development licenses. The UFood franchise agreement typically requires the payment of a
franchise fee of $35,000 per restaurant, royalties of 5.0% of gross sales and contributions to a
system-wide advertising fund of 1.5% of gross sales. The franchisee is also required to spend 1.5%
of gross sales on local marketing. In general, 50% of the franchise fee is payable at the time the
Franchise Agreement is signed and the balance is due at the time each store opens. Each Franchise
Agreement generally provides for a term of 15 years and two, five-year renewal options.
The Area Development Agreement is similar to the Franchise Agreement in its terms. In order for an
area developer to acquire the rights to a territory, the developer must pay one-half of the
franchise fee up front for each unit that developer agrees to build in the territory. In some
agreements, UFood has deferred the payment of the upfront fee, so that the developer pays up-front
fees for the first few stores upon the execution of the agreement and fees for the stores opening
in phase 2 of the build-out at a later date. UFood estimates that it costs between $400,000 and
$650,000 to open one of its outlets.
To ensure that the UFood concept is consistent across all geographic areas, we have fully built out
the corporate support system for franchisees. New franchisees get assistance on all levels,
including build-out specifications, operational guidance, and menu and recipes. We also provide a
three week training program for each of our new franchisees and employees prior to new store
openings.
Suppliers
We strive to obtain consistent high-quality ingredients at competitive prices from reliable
sources. To obtain operating efficiencies and to provide fresh ingredients for our food products
while obtaining the lowest possible ingredient prices for the required quality, we purchase over
70% of our restaurant supplies from a single supplier, Sysco, Inc. The balance of our restaurant
supplies come from local vegetable and bread suppliers. Most food, produce and other products are
shipped from Syscos distribution facility directly to our restaurant locations two to three times
per week. We do not maintain a central food product warehouse or commissary. We do not have any
long-term contracts with our food suppliers. In the past, we have not experienced delays in
receiving our food and beverage inventories, restaurant supplies or equipment.
Competition
The restaurant industry is intensely competitive. There are many different sectors within the
restaurant industry that are distinguished by types of service, food types and price/value
relationships. We position our restaurants in the highly competitive and fragmented fast-casual
sector of the restaurant industry. In addition to competing against other fast-casual restaurants,
we compete against other sectors of the restaurant industry, including fast-food restaurants and
casual dining restaurants. The number, size and strength of competitors within each sector vary by
region. We compete based on a number of factors including taste, product quality, speed of service,
value, name recognition, restaurant condition and ambiance, location and customer service. Although
we believe we compete favorably with respect to each of these factors, many of our direct and
indirect competitors are well-established national, regional or local chains and have substantially
greater financial, marketing, personnel and other resources.
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Customers seeking a healthier meal at a foodservice establishment, have several choices available
to them throughout the country. However, we are not aware of any national chains of health-oriented
quick-service restaurants that geographically cover the whole United States or even a number of
states.
The following is a list of restaurants that position themselves as healthier and compete in the
quick-serve environment, mostly on a local level. The largest chain has thirty three stores.
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Better Burger (New York City) |
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Energy Kitchen (New York City) |
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The Pump (New York City) |
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The Muscle Maker (New Jersey) |
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Evos (California, Florida, Nevada, North Carolina) |
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Healthy Bites (Florida) |
Of the restaurants listed above, only b. good operates in the Boston area. A number of fast food
chains and local eateries operating in the greater Boston area offer similar products and services
as UFood Grill but without the emphasis on health. b. good operates five locations in the Boston
area. In addition to b. good, there are several vegetarian and raw vegan restaurants in the Boston
area as well as several health food stores. These outlets offer healthy food but not in a
quick-serve environment.
We also compete with these and many other retail establishments for desirable site locations. See
Risk FactorsThere is intensive competition in our industry, and we will be competing with
national and regional chains and independent restaurant operators.
Employees
As of January 2, 2011, we employed approximately 32 full-time associates (defined as associates who
average 32 hours or more per week), of whom 11 were employed in general or administrative
functions, principally at our headquarters in Newton, Massachusetts, and approximately 21 were
employed in our four Company-operated restaurant locations in the Boston area as managers and
associates. UFood does not have any collective bargaining agreements with its employees and
considers its employee relations to be good. UFood places a priority on staffing its restaurant and
store operations with skilled associates and invests in training programs to ensure the quality of
its operations.
Trademarks
We have registered the following trademarks with the United States Patents and Trademarks Office:
Unfries, UFood Grill, Proccino, KnowFat! Lifestyle Grille, KnowFat, Prolatta,
UBerry, Ubowls, Smuuthies, and LoFat KnowFat. We believe that our trademarks and other
proprietary rights have significant value and are important to the marketing of our restaurant
concept.
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Seasonality
While our business is not significantly seasonal, revenues in the first two quarters of the
calendar year are slightly higher than the last two quarters of the year.
Government Regulation
Our restaurants are subject to licensing and regulation by state and local health, sanitation,
safety, fire and other authorities, including licensing and permit requirements for the sale of
food. To date we have not experienced an inability to obtain or maintain any necessary licenses,
permits or approvals. In addition, the development and construction of additional units are also
subject to compliance with applicable zoning, land use and environmental regulations. See Risk
FactorsOur food service business and the restaurant industry are subject to extensive government
regulation.
Environmental Regulation
Our business is subject to federal, state and local environmental laws and regulations concerning
the discharge, storage, handling, release and disposal of hazardous or toxic substances. These
environmental laws provide for significant fines, penalties and liabilities, sometimes without
regard to whether the owner or operator of the property knew of, or was responsible for, the
release or presence of the hazardous or toxic substances. Third parties may also make claims
against owners or operators of properties for personal injuries and property damage associated with
releases of, or actual or alleged exposure to, such substances. To date, our stores have not been
the subject of any material environmental matters. See Risk FactorsWe have not conducted a
comprehensive review of all the potential environmental liabilities at our properties.
Risks Related to Our Company and Our Business
We have a limited operating history and are subject to all of the risks inherent in the expansion
of an early-stage business.
We were formed approximately six years ago, and we have a short operating history upon which an
investor can evaluate our performance. Our proposed operations are subject to all of the risks
inherent in the expansion of an early-stage business enterprise, including higher-than-expected
expenses and uncertain revenues. The likelihood of our success must be considered in light of the
problems, expenses, difficulties, complications and delays frequently encountered in connection
with the expansion of an early-stage business and the competitive environment in which we operate.
We have had no profits to date, and there can be no assurance of future profits. As a result of the
expansion-stage nature of our business and the fact that we will incur significant expenses in
connection with our activities, we can be expected to sustain operating losses for the foreseeable
future.
We have not been profitable to date and expect our operating losses to continue for the foreseeable
future; we may never be profitable.
We have incurred annual operating losses and generated negative cash flows since our inception and
have financed our operations principally through equity investments and borrowings. At this time,
our ability to generate sufficient revenues to fund operations is uncertain. For the fiscal year
ended January 2, 2011, we had revenue of $4,942,939 and incurred a net loss of $8,189,022. For the
fiscal year ended December 27, 2009, we had revenue of $5,450,836 and incurred a net loss of
$3,957,351. Our total accumulated deficit through January 2, 2011, was $41,416,598.
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As a result of our brief operating history, revenue is difficult to predict with certainty. Current
and projected expense levels are based largely on estimates of future revenue. We expect expenses
to increase in the future as we expand our sales, marketing and administrative activities and incur
the expenses of being a public company. As a result, we expect to incur additional losses for at
least the next 18 months. We cannot assure you that we will be profitable in the future or generate
future revenues. Accordingly, the extent of our future losses and the time required to achieve
profitability, if ever, is uncertain. Failure to achieve profitability could materially and
adversely affect the value of our Company and our ability to affect additional financings. The
success of the business depends on our ability to increase revenues to offset expenses. If our
revenues fall short of projections, our business, financial condition and operating results will be
materially adversely affected. If we are unable to generate positive cash flow from our
Company-owned restaurants or if the market price of our common stock declines, we may be required
to recognize an impairment loss with respect to the assets of our Company-owned restaurants or our
goodwill.
There are risks inherent in expansion of operations, including our ability to sell franchises,
generate profits from new restaurants, find suitable sites and develop and construct stores in a
timely and cost-effective way.
We cannot project with certainty, nor do we make any representations regarding, the number of
franchises we will be able to sell or the number of new restaurants we and our franchisees will
open in accordance with our present plans and within the timeline or the budgets that we currently
project. While our business plan focuses primarily on the sale of franchises rather than building
and operating additional Company-owned stores, sales at Company-owned stores represented over 91.4%
of our total revenues for the year ended January 2, 2011. Our failure to sell the projected number
of franchises would adversely affect our ability to execute our business plan by, among other
things, reducing our revenues and profits and preventing us from realizing our strategy of being
the first major franchiser of retail outlets offering a combination of food service featuring
low-fat, low-carbohydrate and low-calorie food items, selected beverages to the general public.
Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins
consistent with those currently operated by us and our franchisees or that our restaurants will be
operated profitably.
During the year ended January 2, 2011, our store operations business segment generated revenue of
$4,518,308 and an operating profit of $142,762. During the year ended December 27, 2009, our store
operations business segment generated revenue of $4,632,651 and an operating loss of $13,056.
We will rely primarily upon area developers to open and operate franchise units. The number of
openings and the performance of new stores will depend on various factors, including:
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the availability of suitable sites for new stores; |
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our and our franchisees ability to negotiate acceptable lease or purchase terms for
new locations, obtain adequate financing, on favorable terms, requires to construct,
build-out and operate new stores and meet construction schedules, and hire and train and
retain qualified store managers and personnel; |
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managing construction and development costs of new stores at affordable levels; |
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the establishment of brand awareness in new markets; and |
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the ability of our Company and our area developers to manage this anticipated
expansion. |
While the impact varies with the location and the qualifications of the franchisee, tight credit
markets are generally making financing for construction and operation of restaurants more difficult
to obtain on favorable terms.
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Competition for suitable store sites in target markets is intense and lease costs are increasing
(particularly for urban locations). Not all of these factors are within our control or the control
of our franchisees, and there can be no assurance that we will be able to accelerate our growth or
that we will be able to manage the anticipated expansion of our operations effectively.
We will depend on contractors and real estate developers to construct our stores. Many factors may
adversely affect the cost and time associated with the development and construction of our stores,
including:
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shortages of materials or skilled labor; |
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requirements to use union labor; |
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unforeseen engineering problems; |
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environmental problems; |
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construction or zoning problems; |
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local government regulations; |
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modifications in design; and |
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other unanticipated increases in costs. |
Any of these factors could give rise to delays or cost overruns, which may prevent us from
developing additional stores within our anticipated budgets or time periods or at all. Any such
failure could cause our business, results of operations and financial condition to suffer. The
recent volatility in certain commodity markets, such as those for energy, grains and dairy
products, which have experienced significant increases in prices, may be generally causing
franchisees in our industry to delay construction of new restaurants and/or causing potential new
franchisees to reconsider entering into franchise agreements.
Our business plan is dependent on the franchising model; therefore, our success will generally
depend on the success of our franchisees and the profitability of their stores.
Because royalties from franchisees sales are a principal component of our revenue base, our
success is dependent upon our ability to attract highly qualified franchisees and the ability of
our franchisees to promote and capitalize upon UFoods concept. Our franchisees generally depend
upon financing from banks and other financial institutions to finance the cost of opening a new
restaurant. If franchisees cannot obtain reasonable financing and restaurants do not open, our
royalties from those restaurants will not exist. Even if we are successful in selling franchise
units, the contemplated expansion may entail difficulty in maintaining quality standards, operating
controls and communications, and in attracting qualified restaurant operators. Locations for units
will be based on theoretical projections of market demand with no assurance that such locations
will prove successful. As a result, franchise units may not attain desired levels of revenues or
may attain them more slowly than projected, and this would adversely affect our results of
operations. Since we are dependent on franchisee royalties, we are also at risk for the
non-performance by our franchisees of their payment and other obligations under our franchise
agreements. For example, in May 2008, we terminated a 2005 franchise agreement with our franchisee
operator in Dade and Broward Counties, Florida, covering 24 unopened franchise locations because
the franchisee did not meet the opening timeline specified in the agreement, and we have reclaimed
the franchise territory. In 2007, two agreements covering two operating and four unopened locations
were terminated after the stores ceased operations. Two other agreements covering twelve unopened
locations were also terminated when the area developers did not meet the opening timeline set forth
in their agreements. In 2009, we terminated three Area Development Agreements that included the
following states Colorado, Utah, Montana, Wyoming, Idaho, Illinois, and the Houston, TX area. Also,
during 2009 we terminated two franchise agreements for stores in DesMoines, IA and Burlington, MA.
During 2010, we terminated two Area Development Agreements for the territories covering San Jose,
CA and Naples, FL. Similar defaults or failures by other franchisees could materially adversely
affect our growth plans and our business, financial condition and operating results.
12
Our past and future operating losses may make it more difficult for us to attract new franchisees.
Potential new franchisees may be reluctant to commit to develop new UFood Grill restaurants as long
as we are not profitable. As stated above, we have not been profitable to date and expect our
operating losses to continue for at least the next 18 months. Until we have demonstrated the
ability to be profitable, we may find it difficult to attract new franchisees, who are required to
expend substantial sums to develop, construct and operate new restaurants, if they perceive that
there is a risk that we will not continue in business or that our lack of profitability will impair
their ability to make a profit.
We may be subject to general risk factors affecting the restaurant industry, including current
economic climate, costs of labor, food prices, gasoline prices and the unemployment levels.
If we grow as anticipated, our Company and our franchisees may be affected by risks inherent in the
restaurant industry, including:
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adverse changes in national, regional or local economic or market conditions; |
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increased costs of labor (including increases in the minimum wage); |
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increased costs of food products; |
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availability of, and ability to obtain, adequate supplies of ingredients that meet
our quality standards; |
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increased energy costs; |
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management problems; |
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increases in the number and density of competitors; |
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limited alternative uses for properties and equipment; |
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changing consumer tastes, habits and spending priorities; |
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the cost and availability of insurance coverage; |
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changes in government regulation; |
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changing traffic patterns; |
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weather conditions; and |
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local, regional or national health and safety matters. |
13
Our Company and our franchisees may be the subject of litigation based on discrimination, personal
injury or other claims. We can be adversely affected by publicity resulting from food quality,
illness, injury or other health concerns or operating issues resulting from one restaurant or a
limited number of restaurants in our system. None of these factors can be predicted with any degree
of certainty, and any one or more of these factors could have a material adverse effect on our
Company.
There is intensive competition in our industry, and we will be competing with national and regional
chains and independent restaurant operators.
The restaurant industry is intensely competitive. There are several healthy-food themed
restaurants, most of which have fewer than six units. Moreover, the retail food industry in
general, which is highly competitive and includes highly sophisticated national and regional
chains, has begun to offer healthier alternatives to its typical menu offerings. We operate in
the fast-casual sector of the retail food industry. This sector is highly competitive with respect
to, among other things, taste, price, food quality and presentation, service, location and the
ambiance and condition of each restaurant. Some of the restaurants and franchises have substantial
financial resources, name recognition and reputations. While we strive to differentiate ourselves
from major restaurants and food-service establishments through the nutritional attributes of the
items we offer on our menu (all-natural and hormone-free meat, reduced fat sauces, cheeses and
salad dressings, whole grain breads, and whenever possible, organic vegetables), the manner in
which those items are prepared (baked, steamed or grilled) and the environment in which they are
offered, we will, nonetheless, be required to compete with national and regional chains and with
independent operators for market share, access to desirable locations and recruitment of personnel.
Many of our competitors have existed longer and have a more established market presence with
substantially greater financial, marketing, personnel and other resources than us. No assurances
can be given that we will have the financial resources, distribution ability, depth of key
personnel or marketing expertise to compete successfully in these markets.
Our business has been adversely affected by declines in discretionary spending and may be affected
by changes in consumer preferences.
Our success depends, in part, upon the popularity of our food products and our ability to develop
new menu items that appeal to consumers. Shifts in consumer preferences away from our restaurants
or cuisine, our inability to develop new menu items that appeal to consumers or changes in our menu
that eliminate items popular with some consumers could harm our business. Also, our success depends
to a significant extent on discretionary consumer spending, which is influenced by general economic
conditions and the availability of discretionary income. Accordingly, we may experience declines in
sales during economic downturns or during periods of uncertainty like that which followed the 2001
terrorist attacks on the United States and the possibility of further terrorist attacks. A
continuing decline in the amount of discretionary spending could have a material adverse effect on
our sales, results of operations, business and financial condition.
For the twelve months ended January 2, 2011, comparable store sales for our Company-owned stores
decreased by 2.4%. We believe higher gasoline prices, inflationary pressures on groceries and
utilities, increased unemployment, home foreclosures and tightening credit conditions have all
reduced consumer discretionary spending which in turn has adversely impacted our revenues and may
continue to do so.
14
Increases in costs, including food, labor and energy prices, will adversely affect our results of
operations.
Our profitability is dependent on our ability to anticipate and react to changes in our operating
costs, including food, labor, occupancy (including utilities and energy), insurance and supplies
costs. Various factors beyond our control, including climatic changes and government regulations,
may affect food costs. Specifically, our dependence on frequent, timely deliveries of fresh meat
and produce subject us to the risks of possible shortages or interruptions in supply caused by
adverse weather or other conditions which could adversely affect the availability and cost of any
such items. In the past, we have been able to recover some of our higher operating costs 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. The recent volatility in certain commodity markets, such as those for
energy, grains and dairy products, which have experienced significant increases in prices, may have
an adverse effect on us in the fiscal 2011 and beyond and may cause franchisees in our industry to
delay construction of new restaurants and/or cause potential new franchisees to reconsider entering
into franchise agreements. The extent of the impact may depend on our ability to increase our menu
prices and the timing thereof.
Our stores are concentrated in a small geographic area.
Four of our stores are located in the greater Boston area. A downturn in the regional economy or
other significant adverse events in the greater Boston area could have a material adverse effect on
our financial condition and results of operations.
The growth of our Company is dependent on the skills and expertise of management and key personnel.
During the upcoming stages of our Companys growth, we will be entirely dependent upon the
management skills and expertise of our management and key personnel, including George Naddaff, our
current Chairman and Chief Executive Officer, and Charles A. Cocotas, our current President and
Chief Operating Officer. We would be materially adversely affected in the event that the services
of these individuals or other management or key personnel for any reason ceased to be available and
adequate replacement personnel were not found.
Our food service business and the restaurant industry are subject to extensive government
regulation.
We are subject to extensive and varied federal, state and local government regulation, including
regulations relating to public health and safety and zoning codes. We operate each of our stores in
accordance with standards and procedures designed to comply with applicable codes and regulations.
However, if we could not obtain or retain food or other licenses, it would adversely affect our
operations. Although we have not experienced, and do not
anticipate, any significant difficulties, delays or failures in obtaining required licenses,
permits or approvals, any such problem could delay or prevent the opening of, or adversely impact
the viability of, a particular store or group of stores.
Massachusetts, California and most other states and local jurisdictions have enacted laws, rules,
regulations and ordinances which may apply to the operation of a UFood store, including those
which:
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Establish general standards, specifications and requirements for the construction,
design and maintenance of the store premises; |
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regulate matters affecting the health, safety and welfare of our customers, such as
general health and sanitation requirements for restaurants, employee practices concerning
the storage, handling, cooking and preparation of food, special health, food service and
licensing requirements, restrictions on smoking, exposure to tobacco smoke or other
carcinogens or reproductive toxicants and saccharin and availability of and requirements
for public accommodations, including restrooms; |
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set standards pertaining to employee health and safety; |
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set standards and requirements for fire safety emergency preparedness; regulate the
proper use, storage and disposal of waste, insecticides, and other hazardous materials; |
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establish general requirements or restrictions on advertising containing false or
misleading claims, or health and nutrient claims on menus or otherwise, such as low
calorie or fat free, and |
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establish requirements concerning withholdings and employee reporting of taxes on tips. |
15
In addition, some jurisdictions now require menu or other in-store disclosure of calorie and other
nutritional information for each menu item.
In order to develop and construct more stores, we need to comply with applicable zoning, land use
and environmental regulations. Federal and state environmental regulations have not had a material
effect on our operations to date, but more stringent and varied requirements of local governmental
bodies with respect to zoning, land use and environmental factors could delay or even prevent
construction and increase development costs for new stores. We are also required to comply with the
accessibility standards mandated by the U.S. Americans with Disabilities Act, which generally
prohibit discrimination in accommodation or employment based on disability. We may, in the future,
have to modify stores, for example, by adding access ramps or redesigning certain architectural
fixtures, to provide service to or make reasonable accommodations for disabled persons. While these
expenses could be material, our current expectation is that any such action will not require us to
expend substantial funds.
We are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of
1986 and various federal and state laws governing various matters including minimum wages, overtime
and other working conditions. We pay a significant number of our hourly staff at rates consistent
with but higher than the applicable federal or state minimum wage. Accordingly, increases in the
minimum wage would increase our labor cost. We are also subject to various laws and regulations
relating to our current and any future franchise operations.
We are also subject to various federal and state laws that regulate the offer and sale of
franchises and aspects of the licensor-licensee relationships. Many state franchise laws impose
restrictions on the franchise agreement, including the duration and scope of non-competition
provisions, the ability of a franchisor to terminate or refuse to renew and the ability of a
franchisor to designate sources of supply. The Federal Trade Commission, or the FTC, and some
state laws also require that the franchisor furnish to prospective franchisees a franchise offering
circular that contains prescribed information and, in some instances, require the franchisor to
register the franchise offering.
We have not conducted a comprehensive review of all the potential environmental liabilities at our
properties.
We are subject to federal, state and local environmental laws and regulations concerning the
discharge, storage, handling, release and disposal of hazardous or toxic substances. These
environmental laws provide for significant fines, penalties and liabilities, sometimes without
regard to whether the owner or operator of the property knew of, or was responsible for, the
release or presence of the hazardous or toxic substances. Third parties may also make claims
against owners or operators of properties for personal injuries and property damage associated with
releases of, or actual or alleged exposure to, such substances. We cannot predict what
environmental laws will be enacted in the future, how existing or future environmental laws will be
administered or interpreted or the amount of future expenditures that we may need to make to comply
with, or to satisfy claims relating to, environmental laws. While, during the period of their
ownership, lease or operation, our stores have not been subject to any material environmental
matters, we have not conducted a comprehensive environmental review of our properties or
operations. We have not conducted investigations of our properties to identify contamination caused
by third-party operations; in such instances, our landlords would be required to address the
contamination. If the relevant landlord does not identify contamination properly or completely,
then under certain environmental laws, we could be held liable as an owner and operator to address
any remaining contamination. Any such liability could be material.
16
Our success and competitive position depends on our ability to protect our proprietary intellectual
property.
We own certain common law trademark rights and a number of federal trademark and service mark
registrations. We believe that our trademarks and other proprietary rights are important to our
success and our competitive position. We therefore devote what we believe to be appropriate
resources to the protection of our trademarks and proprietary rights. The protective actions that
we take, however, may not be enough to prevent unauthorized usage or imitation by others, which may
cause us to incur significant litigation costs and could harm our image or our brand or competitive
position. To date, we have not been notified that our trademarks or menu offerings infringe upon
the proprietary rights of third parties, but we cannot assure you that third parties will not claim
infringement by us. Any such claim, whether or not it has merit, could be time-consuming, result in
costly litigation, cause product delays or require us to enter into royalty or licensing
agreements. As a result, any such claim could have a material adverse effect on our business,
results of operations and financial condition. As a franchisor, we will grant our franchisees a
limited license to use our trademarks and service marks. The general public could incorrectly
identify our franchisees as controlled by us. In the event that a court determines the franchisee
is not adequately identified as a franchisee, we could be held liable for the misidentified
franchisees debts, obligations and liabilities.
Our plan to rapidly increase the number of stores may make future results unpredictable, as our
success will depend on acceptance of our products in new markets.
We plan to significantly increase the number of our stores in the next three years. This growth
strategy and the substantial investment associated with the development of each new store may cause
operating results to fluctuate and be unpredictable or adversely affect profits. Our future results
depend on various factors, including successful selection of new markets and store locations,
market acceptance of the UFood experience, consumer recognition of the quality of our food and
willingness to pay our prices (which in some instances reflect higher ingredient costs), the
quality of operations and general economic conditions. In addition, as has happened when other
fast-casual restaurant concepts have tried to expand nationally, we may find that the UFood concept
has limited or no appeal to customers in new markets or we may experience a decline in the
popularity of UFood restaurants. Newly opened stores may not succeed, future markets and stores may
not be successful and, even if we are successful, our average store sales may not increase.
New stores, once opened, may not be profitable, and the increases in average store sales and
Company store sales that we have experienced in the past may not be indicative of future results.
Our ability to operate new stores profitably and increase sales will depend on many factors, some
of which are beyond our control, including:
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sales performance of new stores |
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competition, either from competitors in the restaurant industry or our own stores; |
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changes in consumer preferences and discretionary spending; |
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consumer understanding and acceptance of UFood stores; |
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road construction and other factors limiting access to new stores; |
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general economic conditions, which can affect store traffic, local labor costs and
prices we pay for ingredients and other supplies; and |
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changes in government regulation. |
If we fail to open stores as quickly as planned or if new stores do not perform as planned, our
business and future prospects could be harmed. In addition, a decrease in store sales could cause
operating results to vary adversely from expectations.
17
Expansion into new markets may present increased risks due to our unfamiliarity with those areas.
Some of the new stores are planned for markets where we have little or no operating experience.
Those markets may have different competitive conditions, consumer tastes and discretionary spending
patterns than our existing markets. As a result, those new stores may be less successful than
stores in existing markets. Consumers in a new market may not be familiar with the UFood brand, and
we may need to build brand awareness in that market through greater investments in advertising and
promotional activity than we originally planned. We may find it more difficult in new markets to
hire, motivate and keep qualified employees who can project the UFood vision, passion and culture.
Stores opened in new markets may also have lower average store sales than stores opened in existing
markets, and may have higher construction, occupancy or operating costs than stores in existing
markets. Sales at stores opened in new markets may take longer to ramp up and reach expected sales
and profit levels, and may never do so, thereby affecting overall profitability.
We may not persuade customers of the benefits of paying higher prices for higher-quality food.
Due to what we believe are our higher quality standards, our food prices may be substantially
higher than those of many of our competitors, particularly those in the fast food sector. Our
success depends in large part on our ability to persuade customers that food and beverages made
with higher-quality ingredients are worth the higher prices they will pay at our stores relative to
prices offered by these competitors. That could require us to change our pricing, advertising or
promotional strategies, which could materially and adversely affect its results or the brand
identity we have tried to create.
Additional instances of avian flu or mad cow disease or other food-borne illnesses could
adversely affect the price and availability of chicken, beef or other meat, cause the temporary
closure of some stores and result in negative publicity, thereby resulting in a decline in sales.
In 2004 and 2005, Asian and European countries experienced outbreaks of avian flu. Incidents of
mad cow disease have occurred in Canadian and U.S. cattle herds. These problems, other food-borne
illnesses (such as E. coli, hepatitis A, trichinosis or salmonella) and illnesses and injuries
caused by food tampering have in the past, and could in the future, adversely affect the price and
availability of affected ingredients and cause customers to shift their preferences, particularly
if we choose to pass any higher ingredient costs along to consumers. As a result, our sales may
decline. Instances of food-borne illnesses, real or perceived, whether at our restaurants or
those of our competitors, could also result in negative publicity about us or the restaurant
industry, which could adversely affect sales. If we react to negative publicity by changing our
menu or other key aspects of our restaurants, we may lose customers who do not accept those
changes, and may not be able to attract enough new customers to produce the revenue needed to make
our stores profitable. If customers become ill from food-borne illnesses, we could face substantial
liability and be forced to temporarily close restaurants.
Our franchisees could take actions that harm our reputation and reduce our royalty revenues.
We do not exercise control over the day-to-day operations of our franchised stores. While we try to
ensure that franchised stores meet the same operating standards demanded of our Company-operated
stores, one or more franchised stores may not do so. Any operational shortcomings of our franchised
stores are likely to be attributed by the public and/or regulators to our system-wide operations
and could adversely affect our reputation and have a direct negative impact on the royalty revenues
received from those stores.
18
We could be party to litigation that could adversely affect us by distracting management,
increasing expenses or subjecting us to material money damages and other remedies.
Customers may occasionally file complaints or lawsuits against us alleging that we are responsible
for some illness or injury they suffered at or after a visit to a restaurant, or that we have
problems with food quality or operations. We could also become subject to a variety of other claims
arising in the ordinary course of business, including personal injury claims, contract claims and
claims alleging violations of federal and state law regarding workplace and employment matters,
discrimination and similar matters, and could become subject to class action or other lawsuits
related to these or different matters in the future. In addition, the restaurant industry has been
subject to a growing number of claims based on the nutritional content of food products they sell
and disclosure and advertising practices. We may also be subject to this type of proceeding in the
future and, even if not, publicity about these matters (particularly directed at the fast food and
fast-casual sectors of the industry) may harm our reputation or prospects and adversely affect our
results.
Unfavorable publicity or consumer perception of our nutritional products and any similar products
distributed by other companies could cause fluctuations in our operating results and could have a
material adverse effect on our reputation, the demand for our products and our ability to generate
revenues.
Consumer perception of products can be significantly influenced by scientific research or findings,
national media attention and other publicity about product use. A product may be received
favorably, resulting in high sales associated with that product that may not be sustainable as
consumer preferences change. Future scientific research or publicity could be unfavorable to the
nutritional products market or any of our particular products and may not be consistent with
earlier favorable research or publicity. A future research report or publicity that is perceived by
our consumers as less favorable or that question such earlier research or publicity could have a
material adverse effect on our ability to generate revenues from nutritional products. For example,
our sales were adversely affected when the Food and Drug Administrations rule banning the sale of
dietary supplements containing ephedra went into effect in 2004. As a result of the above factors,
our revenues from nutritional products may fluctuate significantly from quarter to quarter, which
may impair our overall revenues and profitability. Adverse publicity in the form of published
scientific research or otherwise, whether or not accurate, that associates consumption of our
nutritional products or any other similar products with illness or other adverse effects, that
questions the benefits of
our or similar products or that claims that any such products are ineffective could have a material
adverse effect on our reputation, the demand for our nutritional products and our ability to
generate revenues.
We may incur material product liability claims, which could increase our costs and adversely affect
our reputation, revenues and operating income.
As a retailer of nutritional products designed for human consumption, we are subject to product
liability claims if the use of our products is alleged to have resulted in injury. Our products
include vitamins, minerals, herbs and other ingredients that are classified as foods or dietary
supplements and are not subject to pre-market regulatory approval in the United States. Our
products could contain contaminated substances, and some of our products contain innovative
ingredients that do not have long histories of human consumption. Previously unknown adverse
reactions resulting from human consumption of these ingredients could occur. All of the nutritional
products we sell are produced by third-party manufacturers. Even though we are only a retailer of
nutritional products manufactured by third parties, we may nevertheless be liable for various
product liability claims. We may be subject to various product liability claims, including, among
others, that our products include inadequate instructions for use or inadequate warnings concerning
possible side effects and interactions with other substances. A product liability claim against us
could result in increased costs and could adversely affect our reputation with our customers, which
in turn could adversely affect our revenues and operating income. Any claims would be tendered to
the third-party manufacturer or to our insurer; however, there can be no assurance that the
manufacturer would have sufficient financial resources to satisfy any claim or that a claim would
be covered by or would not exceed the limits of our insurance.
19
We will need to raise additional capital to meet our business requirements in the future, and such
capital raising may be costly or difficult to obtain and could dilute current stockholders
ownership interests.
As of January 2, 2011, we expect we will need to raise additional capital to fund our operating
plan. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity, Funding and Capital Resources below. Additional capital may not be
available on reasonable terms or at all. Our income from operations is unlikely to be sufficient to
fund our business plan. We may need to raise additional funds through borrowings or public or
private debt or equity financings to meet various objectives including, but not limited to:
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pursuing growth opportunities, including more rapid expansion; |
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opening additional Company-owned stores beyond the four we currently operate |
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acquiring complementary businesses |
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making capital improvements to improve our infrastructure; |
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hiring qualified management and key employees; |
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research and development of new products; |
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increased advertising and marketing expenses; |
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responding to competitive pressures; |
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complying with regulatory requirements such as licensing and registration; and |
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maintaining compliance with applicable laws. |
Any future issuance of our equity or equity-backed securities may dilute then-current stockholders
ownership percentages. See You may experience dilution of your ownership interests because of
other future issuance of additional shares of common stock below.
Furthermore, any additional debt or equity financing that we may need may not be available on terms
favorable to us, or at all. If we are unable to obtain required additional capital, we may have to
curtail our growth plans or cut back on existing business and, further, we may not be able to
continue operating if we do not generate sufficient revenues from operations needed to stay in
business.
We may incur substantial costs in pursuing future capital financing, including investment banking
fees, legal fees, accounting fees, securities law compliance fees, printing and distribution
expenses and other costs. We may also be required to recognize non-cash expenses in connection with
certain securities we may issue, such as convertible notes, restricted stock, stock options and
warrants, which may adversely impact our financial condition.
Compliance with the reporting requirements of federal securities laws can be expensive.
We are a public reporting company in the United States, and accordingly, are subject to the
information and reporting requirements of the Securities Exchange Act of 1934 (the Exchange Act)
and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The
costs of preparing and filing annual and quarterly reports and other information with the SEC and
furnishing audited reports to stockholders will cause our expenses to be higher than they would be
if we had remained privately-held.
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Applicable regulatory requirements, including those contained in and issued under the
Sarbanes-Oxley Act, may make it difficult for us to retain or attract qualified officers and
directors, which could adversely affect the management of our business and our ability to obtain or
retain listing of our common stock.
We may be unable to attract and retain those qualified officers, directors and members of board
committees required to provide for effective management because of the rules and regulations that
govern publicly held companies, including, but not limited to, certifications by principal
executive and financial officers. The enactment of the Sarbanes-Oxley Act has resulted in the
issuance of a series of rules and regulations and the strengthening of existing rules and
regulations by the SEC, as well as the adoption of new and more stringent rules by the stock
exchanges. The perceived increased personal risk associated with these changes may deter qualified
individuals from accepting roles as directors and executive officers.
Further, some of these changes heighten the requirements for board or committee membership,
particularly with respect to an individuals independence from the corporation and level of
experience in finance and accounting matters. We may have difficulty attracting and retaining
directors with the requisite qualifications. If we are unable to attract and retain qualified
officers and directors, the management of our business and our ability to obtain or retain listing
of our common stock on any stock exchange (assuming we elect to seek and are successful in
obtaining such listing) could be adversely affected.
We are a holding company that depends on cash flow from our subsidiaries to meet our obligations
and pay dividends; our subsidiary is restricted from making distributions to us.
We are a holding company with no material assets other than the stock of our wholly-owned
subsidiaries. Accordingly, all of our operations will be conducted by KnowFat, our wholly-owned
subsidiary (and the wholly-owned subsidiaries of KnowFat). We currently expect that the earnings
and cash flow of our subsidiaries will primarily be retained and used by them in their operations,
including servicing any debt obligations they may have
now or in the future. Therefore, our subsidiaries may not be able to generate sufficient cash flow
to distribute funds to us in order to allow us to pay the obligations of UFood Restaurant Group,
Inc., as they become due or, although we do not anticipate paying any dividends in the foreseeable
future, pay future dividends on, or make any distributions with respect to, our common or other
stock. Additionally, our ability to participate as an equity holder in any distribution of assets
of any subsidiary upon liquidation is generally subordinate to the claims of creditors of the
subsidiary.
We have reported a material weakness in our internal control over financial reporting as of January
2, 2011. If we fail to maintain an effective system of internal controls, including internal
controls over financial reporting, we may not be able to accurately report our financial results or
detect fraud. Consequently, investors could lose confidence in our financial reporting and this may
decrease the trading price of our stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by
management on our internal controls over financial reporting. Such report contains, among other
matters, an assessment of the effectiveness of our internal control over financial reporting. Our
managements assessment of the effectiveness of our internal control over financial reporting as of
January 2, 2011, resulted in a determination that we had a material weakness related to our
inability to perform sufficient testing of internal controls over financial reporting.
We must maintain effective internal controls to provide reliable financial reports on a timely
basis and detect fraud. We have been assessing our internal controls to identify areas that need
improvement. During 2011, we plan to implement changes to internal controls to improve segregation
of duties, but have not yet completed implementing these changes. Failure to implement these
changes to our internal controls or any others that we identify as necessary to maintain an
effective system of internal controls could harm our operating results and cause investors to lose
confidence in our reported financial information. Any such loss of confidence would have a negative
effect on the trading price of our stock.
21
Risks Related to Our Securities
There is not now, and there may not ever be, an active market for our common stock.
There currently is a limited public market for our common stock. Further, although the common stock
is currently quoted on the OTC Bulletin Board, trading of our common stock may be extremely
sporadic. For example, several days may pass before any shares may be traded. As a result, an
investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, the
common stock. There can be no assurance that a more active market for the common stock will
develop, or if one should develop, there is no assurance that it will be sustained. This severely
limits the liquidity of the common stock, and would likely have a material adverse effect on the
market price of the common stock and on our ability to raise additional capital.
We cannot assure you that our common stock will become liquid or that it will be listed on a
securities exchange.
Until our common stock is listed on an exchange, we expect the common stock to remain eligible for
quotation on the OTC Bulletin Board, or on another over-the-counter quotation system, or in the
pink sheets. In those venues, however, an investor may find it difficult to obtain accurate
quotations as to the market value of the common stock. In addition, if we fail to meet the criteria
set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who
sell our securities to persons other than established customers and accredited investors.
Consequently, such regulations may deter broker-dealers from recommending or selling the common
stock, which may further affect the liquidity of the common stock. This would also make it more
difficult for us to raise additional capital in the future.
Applicable SEC rules governing the trading of penny stocks limits the trading and liquidity of
our common stock, which may affect the trading price of the common stock.
Our common stock is currently quoted on the OTC Bulletin Board, and trades below $5.00 per share;
therefore, the common stock is considered a penny stock and subject to SEC rules and regulations
which impose limitations upon the manner in which such shares may be publicly traded. These
regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the associated risks. Under these regulations,
certain brokers who recommend such securities to persons other than established customers or
certain accredited investors must make a special written suitability determination regarding such a
purchaser and receive such purchasers written agreement to a transaction prior to sale. These
regulations have the effect of limiting the trading activity of the common stock and reducing the
liquidity of an investment in the common stock.
The price of our common stock may become volatile due to our operating results, products offered by
our competitors and stock market conditions, which could lead to losses by investors and costly
securities litigation.
The trading price of our common stock is likely to be highly volatile and could fluctuate in
response to factors such as:
|
|
|
actual or anticipated variations in our operating results; |
|
|
|
announcements of developments by us or our competitors; |
|
|
|
announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments; |
|
|
|
adoption of new accounting standards affecting our industry; |
|
|
|
additions or departures of key personnel; |
|
|
|
introduction of new products by us or our competitors; |
|
|
|
sales of our common stock or other securities in the open market; and |
|
|
|
other events or factors, many of which are beyond our control. |
22
The stock market in general, and in particular the penny stock market, is subject to significant
price and volume fluctuations. In the past, following periods of volatility in the market price of
a companys securities, securities class action litigation has often been initiated against the
Company. Litigation initiated against us, whether or not successful, could result in substantial
costs and diversion of our managements attention and resources, which could harm our business and
financial condition.
We do not anticipate dividends to be paid on the common stock, and investors may lose the entire
amount of their investment.
Cash dividends have never been declared or paid on our common stock, and we do not anticipate such
a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to
fund business growth. Therefore, stockholders will not receive any funds absent a sale of their
shares. We cannot assure stockholders of a positive return on their investment when they sell their
shares, nor can we assure that stockholders will not lose the entire amount of their investment.
Securities analysts may not initiate coverage or continue to cover our common stock, and this may
have a negative impact on its market price.
The trading market for our common stock will depend on the research and reports that securities
analysts publish about our business and our Company. We do not have any control over these
analysts. There is no guarantee that securities analysts will cover our common stock. If securities
analysts do not cover our common stock, the lack of research coverage may adversely affect its
market price. If we are covered by securities analysts, and our stock is the subject of an
unfavorable report, our stock price would likely decline. If one or more of these analysts ceases
to cover our Company or fails to publish regular reports on us, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to decline. In addition,
because KnowFat became public through a reverse triangular merger, we may have further difficulty
attracting the coverage of securities analysts.
You may experience dilution of your ownership interests because of the future issuance of
additional shares of common stock.
Any future issuance of our equity or equity-backed securities may dilute then-current stockholders
ownership percentages and could also result in a decrease in the fair market value of our equity
securities, because our assets would be owned by a larger pool of outstanding equity. As stated
above, we may need to raise additional capital through public or private offerings of our common or
preferred stock or other securities that are convertible into or exercisable for our common or
preferred stock. We may also issue such securities in connection with hiring or retaining employees
and consultants (including stock options issued under our equity incentive plans), as payment to
providers of goods and services, in connection with future acquisitions or for other business
purposes. Our Board of Directors may at any time authorize the issuance of additional common or
preferred stock without common stockholder approval, subject only to the total number of authorized
common and preferred shares set forth in our articles of incorporation. We are currently authorized
to issue an aggregate of 310,000,000 shares of capital stock, consisting of 300,000,000 shares of
common stock and 10,000,000 shares of preferred stock with preferences and rights to be determined
by our Board of Directors. As of January 2, 2011, there were 40,487,294 shares of common stock
outstanding, 65,597,193 shares of common stock subject to outstanding options and warrants and
96,325 shares of preferred stock. The terms of equity securities issued by us in future
transactions may be more favorable to new investors, and may include dividend and/or liquidation
preferences, superior voting rights and the issuance of warrants or other derivative securities,
which may have a further dilutive effect. Also, the future issuance of any such additional shares
of common or preferred stock or other securities may create downward pressure on the trading price
of the common stock. There can be no assurance that any such future issuances will not be at a
price (or exercise prices) below the price at which shares of the common stock are then traded on
the OTC Bulletin Board or other then-applicable over-the-counter quotation system or exchange.
23
Our corporate headquarters, consisting of approximately 3,800 square feet, are located in Newton,
Massachusetts. We occupy our headquarters under a lease that expires in 2014, with an option to
extend the lease for an additional seven years. We lease each of our restaurant facilities. Our
leases expire on various dates through December 2016. The leases require us to pay our share of the
operating expenses of the leased properties, including taxes, utilities and insurance.
At January 2, 2011, future minimum payments under non-cancelable leases are as follows:
|
|
|
|
|
2011 |
|
$ |
466,000 |
|
2012 |
|
|
470,000 |
|
2013 |
|
|
473,000 |
|
2014 |
|
|
440,000 |
|
2015 |
|
|
157,000 |
|
Thereafter |
|
|
36,000 |
|
|
|
|
|
|
|
$ |
2,042,000 |
|
|
|
|
|
|
|
|
Item 3. |
|
Legal Proceedings |
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. Based on
information currently available, we believe the amount, or range, of reasonably possible losses in
connection with the actions against us, including the matters described below, in excess of
established reserves, in the aggregate, not to be material to our consolidated financial condition
or cash flows. However, losses may be material to our operating results for any particular future
period, depending on the level of our income for such period.
24
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities |
Our common stock is quoted on the OTC Bulletin Board under the symbol UFFC.OB. As of May 16,
2011, there were 40,621,840 shares of our common stock issued and outstanding and 65,250,052 shares
issuable upon exercise of outstanding stock options and warrants. On that date, there were
approximately 376 holders of record of shares of our common stock.
Prior to the merger on December 18, 2007, there was a limited sales history for our common stock,
because it had never been actively traded. As of May 16, 2011, the last reported sale price of our
shares on the OTC Bulletin Board was $0.17. For the periods indicated, the following table sets
forth the range of high and low bid quotations for our common stock, as reported by Nasdaq in the
Info Quotes section of its web site located at www.nasdaq.com. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and
may not represent actual transactions.
The fiscal year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2011 |
|
|
December 27, 2009 |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
First Quarter |
|
$ |
0.21 |
|
|
$ |
0.06 |
|
|
$ |
0.36 |
|
|
$ |
0.10 |
|
Second Quarter |
|
$ |
0.50 |
|
|
$ |
0.16 |
|
|
$ |
0.28 |
|
|
$ |
0.17 |
|
Third Quarter |
|
$ |
0.39 |
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
$ |
0.09 |
|
Fourth Quarter |
|
$ |
0.35 |
|
|
$ |
0.18 |
|
|
$ |
0.14 |
|
|
$ |
0.07 |
|
Dividends
We do not intend to pay cash dividends on our common stock for the foreseeable future, but
currently intend to retain any future earnings to fund the development and growth of our business.
The payment of dividends, if any, on the common stock will rest solely within the discretion of our
Board of Directors and will depend, among other things, upon our earnings, capital requirements,
financial condition, and other relevant factors. We are a holding company with no material assets
and therefore are dependent on our operating subsidiaries to make distributions to us in order to
have cash with which to pay dividends. We currently expect that the earnings and cash flow of our
subsidiaries will primarily be retained and used by them in their operations, including servicing
any debt obligations they may have now or in the future. We are a holding company that depends on
cash flow from our subsidiaries to meet our obligations and pay dividends.
Securities Authorized for Issuance under Equity Compensation Plans
The Company has two share-based, shareholder-approved equity compensation plans, the 2004 Stock
Option Plan (2004 Plan) and the 2007 Equity Incentive Plan (2007 Plan). Descriptions of these
plans, and certain information regarding options issued thereunder, are presented in Note 8,
Stock-Based Compensation, of Notes to Consolidated Financial Statements ended January 2, 2011 and
December 27, 2009.
25
As of the end of fiscal year 2010, we had the following securities authorized for issuance under
our equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of securities |
|
|
|
securities to be |
|
|
|
|
|
|
remaining available for |
|
|
|
issued upon |
|
|
Weighted-average |
|
|
future issuance under |
|
|
|
exercise of |
|
|
exercise price of |
|
|
equity compensation plans |
|
|
|
outstanding |
|
|
outstanding options, |
|
|
(excluding securities |
|
Plan Category |
|
options |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by security holders |
|
|
5,917,747 |
(2) |
|
$ |
0.19 |
|
|
|
3,115,010 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security
holders |
|
|
8,728,673 |
(1) |
|
$ |
0.19 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,646,420 |
|
|
$ |
0.19 |
|
|
|
3,115,010 |
|
|
|
|
(1) |
|
On June 30th, 2010 the Board of Directors approved the grant of options to
purchase 7,683,673 shares of common stock shown in the table. These options were not granted
pursuant to a compensation plan, but instead represent non-qualified stock options granted to
Directors, Officers, and employees. The options granted have various vesting schedules at an
exercise price of $0.19 per share. |
|
(2) |
|
On April 1, 2010, the Board of Directors approved the grant of 2,070,000 options to acquire
shares of the Companys common stock under the Companys 2007 Equity Incentive Plan to
officers and employees, fully vested at an exercise price of $0.16 per share. |
|
(3) |
|
On July 1st, 2010, the shareholders approved the increment of 3,000,000 stock
options available under our 2007 Stock Option Plan for a total of 9,000,000 stock options in
that Plan. |
|
|
|
Item 6. |
|
Selected Financial Data |
N/A
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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 and elsewhere
in this report.
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 four area development agreements and three franchise agreements
covering 57 franchise units in the following states: Texas, Ohio, Massachusetts, Florida 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 57
units include four franchise locations currently open and operating, and requiring an additional 53
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.
26
We view ourselves primarily as a franchisor and continually review our restaurant ownership mix
(that is our mix among Company-owned, franchised and joint venture locations) 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 those 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 it is 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 fiscal years ended January 2, 2011 and December 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.
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.
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 records a liability in the period in which a gift card
is issued and proceeds are received. As gift cards are redeemed, this liability is reduced and
revenue is recognized.
The Company follows the accounting guidance of ASC No. 952 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.
27
Goodwill and Other Intangible Assets
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. The goodwill
attributable to our franchise operations segment was impaired due to the
decision to not renew the lease agreement for a property originally leased as a
training facility. The carrying amount of the goodwill attributable to
franchise operations exceeded its implied fair value and the Company recognized
a non-cash impairment charge of $136,000, during the year ended December 27,
2009. 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.
As of the first day of the fourth quarter of the year ended January 2, 2011
according to our policy we have tested the carrying value of the Goodwill
attributable to our store operations and no impairment was necessary. The
carrying amount of goodwill may be impaired in the future if our actual
operating results and cash flows fall short of our expectations.
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 were $750,155 and $266,176
for the years ended January 2, 2011 and December 27, 2009, respectively, and is included in
interest expense.
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.
28
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term
as defined in ASC No. 840, 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.
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 recognized during the fiscal year ended January 2, 2011 totaled
approximately $1,055,569 for stock options. Stock-based compensation expense recognized during the
fiscal year ended December 27, 2009 totaled approximately $483,625 for stock options. Stock-based
compensation expense was included in general and administrative expenses in the accompanying
consolidated statements of operations.
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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
January 2, |
|
|
December 27, |
|
|
|
2011 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Store sales |
|
|
91.4 |
% |
|
|
85.0 |
% |
Franchise royalties and fees |
|
|
6.3 |
|
|
|
7.9 |
|
Other revenue |
|
|
2.3 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Store operating expenses (1): |
|
|
|
|
|
|
|
|
Food and paper cost |
|
|
33.3 |
% |
|
|
32.6 |
% |
Cost of goods sold |
|
|
7.3 |
|
|
|
7.4 |
|
Labor |
|
|
28.4 |
|
|
|
29.2 |
|
Occupancy |
|
|
8.8 |
|
|
|
12.0 |
|
Other store operating expenses |
|
|
18.0 |
|
|
|
16.8 |
|
General and administrative expenses |
|
|
83.5 |
|
|
|
67.8 |
|
Advertising, marketing and promotion expenses |
|
|
4.7 |
|
|
|
4.0 |
|
Depreciation and amortization |
|
|
6.6 |
|
|
|
7.5 |
|
Loss on disposal of assets, Impairment of
Goodwill and Long-lived assets |
|
|
0.5 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
179.5 |
|
|
|
163.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(79.5 |
) |
|
|
(63.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
0.1 |
|
|
|
0.4 |
|
Interest expense |
|
|
(78.8 |
) |
|
|
(17.5 |
) |
Other expense, net |
|
|
(7.5 |
) |
|
|
8.1 |
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(86.2 |
) |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(165.7 |
) |
|
|
(72.6 |
) |
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(165.7 |
%) |
|
|
(72.6 |
%) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Food and paper costs are shown as a percentage of food sales. The cost of nutritional
products, labor, occupancy and other store operating expenses are shown as a
percentage of total store sales. |
29
The following table sets forth certain data relating to the number of Company-owned,
franchise-operated and system-wide store locations:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
January 2, |
|
|
December 27, |
|
|
|
2011 |
|
|
2009 |
|
Company-owned locations: |
|
|
|
|
|
|
|
|
|
Locations at the beginning of the year |
|
|
4 |
|
|
|
4 |
|
Locations opened |
|
|
|
|
|
|
|
|
Locations closed |
|
|
|
|
|
|
|
|
Locations sold |
|
|
|
|
|
|
|
|
Locations transferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations at the end of the year |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise-operated locations: |
|
|
|
|
|
|
|
|
Locations at the beginning of the year |
|
|
4 |
|
|
|
6 |
|
Locations opened |
|
|
2 |
|
|
|
4 |
|
Locations closed |
|
|
(2 |
) |
|
|
(6 |
) |
Locations sold |
|
|
|
|
|
|
|
|
Locations transferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations at the end of the year |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System-wide locations |
|
|
|
|
|
|
|
|
Locations at the beginning of the year |
|
|
8 |
|
|
|
10 |
|
Locations opened |
|
|
2 |
|
|
|
4 |
|
Locations closed |
|
|
(2 |
) |
|
|
(6 |
) |
Locations sold |
|
|
|
|
|
|
|
|
Locations transferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations at the end of the year |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Fiscal year 2010 compared to 2009
Our fiscal year ends on the Sunday nearest to December 31 of each year. As a result, every five or
six years our fiscal year contains 53 calendar weeks. The fiscal year 2010 contained 53 weeks,
whereas the fiscal year 2009 contained 52 weeks. While certain expenses increased in direct
relationship to additional revenue from the 53rd week, other costs (for example, depreciation and
other fixed costs) are recorded on a calendar month basis. Therefore, the impact of the additional
week is not necessarily indicative of a typical relationship of expenses to revenues measured over
a longer period of comparison, such as a fiscal month or a fiscal quarter. We estimate that the
extra week of operations generated incremental revenue of approximately $67,117 and incremental
expenses of approximately $47,907 in fiscal year 2010.
30
General
For the twelve months ended January 2, 2011, our comparable store sales for Company-owned stores
decreased by 2.4%. All of the comparable store locations are located in the greater Boston area.
Comparable store sales are based on sales for stores that have been in operation for the entire
period of comparison. Franchisee-owned stores which we acquire are included in comparable store
sales once they have been open for the entire period of comparison. Comparable store sales exclude
closed locations.
Results of Operations
Revenues
Our total revenues for the year ended January 2, 2011 decreased by $507,897, or 9.3%, to $4,942,939
from $5,450,836 for the year ended December 27, 2009. The decrease in total revenues for the year
ended January 2, 2011, as compared to the prior year was primarily due to the recognition during
the year ended December 27, 2009 of franchise deposits as revenue for the cancellation of several
franchise agreements with no material obligations to be satisfied by the Company; and the decrease
of Company-owned stores revenue as well as a reduction of royalty revenue due to fewer franchised
stores operating.
Total store sales at Company-owned stores for the year ended January 2, 2011 decreased by $114,343,
or 2.5%, to $4,518,308 from $4,632,651, for the year ended December 27, 2009. As a percentage of
total revenues, sales at Company-owned stores increased to 91.4% of total revenues for the year
ended January 2, 2011 from 85.0% of total revenues for the year ended December 27, 2009. The
decrease in sales at Company-owned stores for the year ended January 2, 2011 was primarily due the
decrease in same store sales and the closing of a company-operated store during 2009.
During the year ended January 2, 2011, franchise royalties and fees decreased by $116,948, or 27.2%
to $312,589 from $429,537 for the year ended December 27, 2009 primarily due to a decrease in
franchise fees and royalties as a result of less franchised stores in the system. The Company
recognized $70,000 of revenue from initial franchise fees during the year ended January 2, 2011
compared with $157,500 for the year ended December 27, 2009.
The other revenue for the year ended January 2, 2011 decrease by $276,606, or 71.2% to $112,042
from $388,648 for the year ended December 27, 2009 primarily attributable to the cancellation of
several franchise agreements during 2009, resulting in the recognition of revenues for the
franchise deposits since the Company didnt have any material obligations going forward.
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 four area development agreements and three franchise agreements
covering 57 franchise units in the following states: Texas, Ohio, Massachusetts, Florida 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 57
units include four franchise locations currently open and operating, and requiring an additional 53
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.
31
During the year ended January 2, 2011, we terminated the area development agreements for San
Jose, California and Naples, Florida. Our standard franchise and area development agreements
require franchisees and area developers to develop a specified number of stores on or before
specific dates. If a franchisee or area developer fails to develop stores on schedule, we have the
right to terminate the agreement, retain up-front franchise fees and develop Company-owned
locations or develop locations through new area developers in that market. We may exercise one or
more alternative remedies to address defaults by area developers and franchisees of the terms of
their franchise agreements including the failure to open locations on time and non-compliance with
our operating and brand requirements and other covenants under the franchise agreement.
Costs and Expenses
Cost of food and paper products for the year ended January 2, 2011, decreased by $3,937, or 0.3%,
to $1,332,303 from $1,336,240 for the year ended December 27, 2009. The decrease in food and paper
cost was primarily due to the decrease in Company-owned stores revenue. As a percentage of store
sales, food and paper cost increased to 33.3% of store sales for the year ended January 2, 2011,
from 32.6% of store sales for the year ended December 27, 2009. The increase in food and paper cost
as a percentage of store sales was primarily due to the introduction of bundle items with
promotional pricing in order to attract new customers and to increase the frequency of store
visits. The cost of goods sold for the year ended January 2, 2011, decreased by $15,669, or 4.6%
to $328,550 from $344,219 for the year ended December 27, 2009. The decrease in cost of goods sold
was primarily due to the decrease of same store sales of nutritional products. As a percentage of
the retail-nutritional products sales, the cost of goods sold decreased to 64.2% of store retail
sales for the year ended January 2, 2011, from 65.1% of store retail sales for the year ended
December 27, 2009.
Labor expense for the year ended January 2, 2011, decreased by $69,350, or 5.1%, to $1,284,751 from
$1,354,101, for the year ended December 27, 2009. The decrease in labor expense was primarily
attributable to decrease of man hours and new store managers at entry salary levels. As a
percentage of store sales, labor expense decreased to 28.4% of store sales for the year ended
January 2, 2011, from 29.2% of store sales for the year ended December 27, 2009. The decrease in
labor expense as a percentage of store sales for the year ended January 2, 2011, was primarily due
to the reduction of man hours at the stores and new store managers with a an salary at an entry
level.
Occupancy costs for the year ended January 2, 2011, decreased by $156,979, or 28.3%, to $397,944
from $554,923 for the year ended December 27, 2009. The decrease in occupancy costs was primarily
attributable to the lease amendment of one of our locations adjusting 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. In addition, our Common Area
Maintenance charges were lower than the year ended December 27, 2009. As a percentage of store
sales, occupancy costs decreased to 8.8% of store sales for the year ended January 2, 2011, from
12.0% of store sales for the year ended December 27, 2009.
Other store operating expenses for the year ended January 2, 2011, increased by $36,178, or 4.6%,
to $814,333 from $778,155 for the year ended December 27, 2009. The increase in other store
operating expenses was primarily due to maintenance and repairs expenses as well as credit card
fees. As a percentage of store sales, other store operating expenses increased to 18.0% of store
sales during the year ended January 2, 2011, from 16.8% of store sales during the year ended
December 27, 2009.
32
General and administrative expenses for the year ended January 2, 2011, increased by $432,857, or
11.7%, to $4,129,282 from $3,696,425 for the year ended December 27, 2009. The increase in general
and administrative expenses for the year ended January 2, 2011, compared to the same period in the
prior year is primarily due to higher non-cash stock based compensation for officers, directors,
employees and vendors related to the investor relations and marketing, partially offset by,
reduction in personnel cash costs, consulting expenses, insurance, legal, and rent expenses. The
variance for each major category is as follows:
|
|
|
The personnel related costs increase was $399,894 and it is comprised of $172,050
reduction of payroll expenses due to the decline of corporate staff headcount, and offset
by $571,944 higher stock base compensation than the prior year 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 their non-qualified stock options grants vested at the
execution of the agreement and half over a three year period. The fair value of the stock
options granted during 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. |
|
|
|
General and administrative expenses for the year ended January 2, 2011 include $572,434
of investor and public relations expenses compared to $82,819 for the year ended December
27, 2009. The increase of $489,615 was primarily due to the grant of 10,000 Series B
preferred shares pursuant to a service agreement for investor and public relations executed
on June 29th, 2010 with a term of 12 months from the date of the execution. Pursuant to
Section 3 of the Agreement, the Company terminated the agreement on December 8, 2010 which
such cancelation reduced the number of preferred shares to be issued by one-half to 5,000
shares. |
|
|
|
The year-over-year decrease of legal expenses of $163,833 was primarily due to the legal
cost associated with the mechanics liens in connection with the build-out of premises,
which the original contractor failed to pay the subcontractors during the year ended
December 27, 2009. |
|
|
|
The decrease in insurance expenses of $82,678 was primarily due to the cancelation of
the key man insurance on our Chief Executive Officer, George Naddaff during the first
quarter of 2010. |
|
|
|
The rent expense reduction of $164,939 during the year ended January 2, 2011 was as a
result of moving the Corporate Offices to a smaller suite in the same building for about
the one-third of the cost of the previous lease. An adjustment of $110,912 to the straight
line rent accrual was booked. |
The general and administrative expenses as a percentage of total revenues, increased to 83.5% of
total revenues for the year ended January 2, 2011, from 67.8% of total revenues for the year ended
December 27, 2009.
Advertising, marketing and promotion expenses for the year ended January 2, 2011, increased by
$14,097 or 6.4%, to $233,457 from $219,360 for the year ended December 27, 2009. The increase in
advertising, marketing and promotion expenses was primarily due to the increase of the stock grant
market value to George Foreman Ventures partially offset by a reduction of media expenses for a TV
campaign conducted in 2009. As a percentage of total revenues, advertising, marketing and
promotion expenses increased to 4.7% of total revenues in 2010 from 4% of total revenues in 2009.
Depreciation and amortization expense for the year ended January 2, 2011, decreased by $81,641, or
20.0%, to $325,952 from $407,593 for the year ended December 27, 2009 due to the utilization of
some fully depreciated equipment in our company-owned stores. As a percentage of total revenues,
depreciation and amortization expense decreased to 6.6% of total revenues for the year ended
January 2, 2011, from 7.5% of total revenues for the year ended December 27, 2009.
Net interest expense/income for the year ended January 2, 2011, increased by $2,953,480, to
$3,887,787, from $934,307 for the year ended December 27, 2009. The increase in net interest
expense was primarily due to the conversion of the outstanding Debentures into SeriesA preferred
stock. As a result of the conversion, the outstanding balances for deferred financing costs and
the debt discount associated with the beneficial conversion feature of the debentures had to be
booked as interest expense. The beneficial conversion feature was being accreted using the
effective interest method over the term of the debenture.
33
The detail of the interest expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
January 2, |
|
|
December 27, |
|
|
|
2011 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature (98.2% of the remaining balance) |
|
$ |
2,774,619 |
|
|
$ |
310,201 |
|
Deferred Financing |
|
|
750,154 |
|
|
|
266,176 |
|
Interest expense (net) |
|
|
370,102 |
|
|
|
378,639 |
|
|
|
|
|
|
|
|
Net interest expense |
|
$ |
3,894,875 |
|
|
$ |
955,016 |
|
|
|
|
|
|
|
|
Other income (expense) for the year ended January 2, 2011 changed by $813,953 to an expense of
$371,820, from $442,133 of income for the year ended December 27, 2009. The variance of other
expenses was primarily due to the following;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Variance |
|
Change in fair value of 2008 Warrants- Income(expense) |
|
$ |
(1,447,919 |
)(1) |
|
$ |
349,498 |
|
|
$ |
(1,797,417 |
) |
Change in fair value of 2009 Warrants- Income(expense) |
|
|
(4,616,401 |
)(2) |
|
|
|
|
|
|
(4,616,401 |
) |
Extinguishment of debt |
|
|
5,692,500 |
(3) |
|
|
74,967 |
|
|
|
5,617,533 |
|
Other Income |
|
|
|
|
|
|
17,668 |
|
|
|
(17,668 |
) |
|
|
|
|
|
|
|
|
|
|
Total Other Income(expense) |
|
$ |
(371,820 |
) |
|
$ |
442,133 |
|
|
$ |
(813,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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-Contracts in entitys Own Equity. At January 2, 2011, the aggregate
fair value of the derivative was $1,451,669. The increase in the fair value of the
derivative was in the aggregate amount of $1,447,919 during the year ended January 2, 2011. |
|
(2) |
|
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. |
|
(3) |
|
In conjunction with the extinguishment of debt and in accordance to ASC 470-20-30, if
the intrinsic value of the beneficial conversion feature is greater than the proceeds
allocated to the convertible instrument, the amount of the discount assigned to the
beneficial conversion feature shall be limited to the amount of the proceeds allocated to
the convertible instrument. As such, the beneficial conversion feature of the preferred
shares is equal to $5,692,500. |
Our net loss for the year ended January 2, 2011, increased by 4,231,671, or 106.7%, to $8,189,022
from $3,957,351 for the year ended December 27, 2009. Our net loss increased primarily due to the
non-cash transactions in connection with the Debentures conversion into Preferred stock including
the full amortization of the beneficial conversion feature and the deferred financing costs, as
well as the change in the fair value of the warrants offset by the gain on the extinguishment of
debt. As a percentage of total revenues, our net loss increased to 165.7% of total revenues for
the year ended January 2, 2011, from 72.6% of total revenues for the year ended December 27, 2009.
34
Liquidity and Capital Resources
Historically we have funded our operations, working capital requirements, acquisitions and capital
expenditures with proceeds from the issuance of debt and equity securities. 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, as well as access to the debt and/or equity capital markets. We have incurred
significant operating losses since our inception and we expect to incur operating losses for the
foreseeable future.
Our current business plan assumes no Company-owned stores will be constructed during 2011. As set
forth in the following table, we will need to secure approximately $2.5 million of additional
capital through the sale of debt securities or equity securities or both to fund our current
business plan through the next 24 months. The amounts shown below may change as we execute our
business plan.
The estimated capital required to fund our current plan is expected to come from the sale of debt
securities, equity securities or both. Currently, we do not have a bank line of credit or other
source of additional debt financing. There can be no assurance that we will be able to secure the
additional capital that our business plan requires. See Risk Factorsit is highly likely that we
will need to raise additional capital to meet our business requirements in the future, and such
capital raising may be costly or difficult to obtain and could dilute current stockholders
ownership interests.
At and for the Fiscal Year Ended January 2, 2011
Cash and cash equivalents and restricted cash at January 2, 2011 were $2,837,493 compared to
$2,338,852 at December 27, 2009. Cash is primarily used to fund our (i) capital expenditures for
Company-owned stores, (ii) working capital requirements and (iii) net operating losses. At January
2, 2011, restricted cash included $40,041 in a letter of credit as guarantee of the deposit for the
lease of our corporate offices.
We used $2,045,702 of cash to fund our operating activities in the year ended January 2, 2011
compared with $3,189,391 of cash used to fund our operating activities in twelve months ended
December 27, 2009. The decrease in cash used to fund our operating activities was primarily due to
the reduction in working capital requirements as well as less cash used to fund operating losses
compared to the same period last year.
During the twelve months ended January 2, 2011, we spent $95,311 primarily for the acquisition of
additional equipment in our stores, compared with $116,910 spent during the twelve months ended
December 27, 2009.
Financing Activities
During the year ended January 2, 2011, financing activities provided $2,660,038 of cash including
the issuance of 34,400 Series B 8% Preferred Shares to accredited investors in the principal
amount of $3,440,000, at $100 per share with a par value $0.001. 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 14,956,522. However,
the number of shares 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 Offering provided $2,953,737 of net cash. In addition, we used
$407,882 of cash to repay outstanding indebtedness. Restricted cash decreased by $20,384 during the
twelve months ended January 2, 2011.
35
We evaluated the Series B Preferred Stock issued and have recorded the intrinsic value of the
embedded beneficial conversion feature of $1,793,428 as additional paid in capital. The embedded
beneficial conversion feature was treated as a deemed dividend and, as such, has been expensed to
retained earnings.
Furthermore, we have calculated the relative fair value of the warrants in connection with the
Offering on their date of grant, which was determined to be $1,074,563 and was recorded as
additional paid-in capital. The fair value of the warrants was computed using the Black-Scholes
option pricing model. The fair value of the warrants was calculated on the dates of issuance,
using the following assumptions
|
|
|
|
|
|
|
|
|
|
|
October 4, 2010 |
|
|
October 29, 2010 |
|
|
|
|
|
|
|
|
|
|
Expected term (years) |
|
|
5 Years |
|
|
|
5 Years |
|
Expected volatility |
|
|
118.45 |
% |
|
|
118.45 |
% |
Risk-free interest rate |
|
|
1.26 |
% |
|
|
1.17 |
% |
Expected annual dividend |
|
0.00 |
% |
|
0.00 |
% |
Debentures and Debentures Exchange
On March 19 and April 20, 2009, the Company sold 8% Senior Secured Convertible Debentures (the
Debentures) to accredited investors in the principal amount of $5,874,000. Those Debentures were
convertible into 45,184,615 shares of common stock of the Company at the rate of $0.13 per share.
The Debentures bore interest at a rate of 8% per annum, payable quarterly and are due three years
from the date they are issued. In addition, each investor will received 5-year detachable warrants
to purchase a number of shares of Common Stock equal to 50% of the shares underlying the Investors
Debenture. The potential common shares from the assumed conversion of the debentures and exercise
of warrants related to this transaction were excluded from the calculation of diluted net loss per
share for the year ended January 2, 2011 because their inclusion would have been anti-dilutive.
The Company paid Garden State Securities, Inc., the placement agent retained in connection with the
2009 Offering (the 2009 Placement Agent) a commission of $587,400 plus a non-accountable expense
allowance of $176,220 and received warrants to purchase 9,036,923 shares of Common Stock. 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 a 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. Of the $3,130,200
in debt discount, $571,200 has an effective interest rate of 15.18%, and $2,559,000 has an
effective interest rate of 82.97%.
On October 1, 2010, the Company consummated the extinguishment of approximately ninety-eight
percent (98%) of the 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 face value of each preferred share is $100 with an aggregate value of the transaction of
$5,692,500. 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 the common stock into
which the Series A Preferred Stock is currently convertible is 43,788,462. However, 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.
36
Approximately $2,200,042 of the debt discount relating to the beneficial conversion option and the
2009 Warrants issued to the Debenture holders was 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.
The business reasons to execute the exchange of the debenture for preferred stock were:
|
|
|
Eliminating the debt provides us with more operational flexibility in terms of
allocating financial resources. |
|
|
|
We believe adding to our equity and reducing debt provides us with a stronger financial
position and will allow us to more readily attract new capital to execute the operating
plan and provide the time needed to reach profitability. |
|
|
|
Reducing debt in return for equity provides some assurance to potential franchisees of a
longer term commitment from investors for us to reach profitability. |
Commitments, Contractual Obligations and Off Balance Sheet Arrangements
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.
37
The following table sets forth information as of January 2, 2011, 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 |
|
$ |
512,120 |
|
|
$ |
512,120 |
(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital leases |
|
|
45,340 |
|
|
|
27,496 |
|
|
|
17,844 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
2,041,000 |
|
|
|
466,000 |
|
|
|
943,000 |
|
|
|
596,000 |
|
|
|
36,000 |
|
Scheduled interest payments(2) |
|
|
17,300 |
|
|
|
15,100 |
|
|
|
2,200 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt due in less than 1 year includes $450,000 that becomes
due upon the sale of our Landmark Center restaurant and store. We
currently have no plans to sell our Landmark Center unit. |
Impact of Inflation
Our profitability depends in part on our ability to anticipate and react to increases in our
operating costs, including food, labor, occupancy (including utilities and energy), insurance and
supplies costs. In the past, we have been able to recover some of our higher operating costs
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 net income
have not been materially adverse. However, the recent volatility in certain commodity markets, such
as those for energy, grains and dairy products, which have experienced significant increases in
prices, may have an adverse effect on us and may be generally causing franchisees in our industry
to delay construction of new restaurants and/or causing potential new franchisees to reconsider
entering into franchise agreements. The extent of the impact may depend on our ability to increase
our menu prices and the timing thereof.
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.
|
|
|
Item 7A. |
|
Quantitive and Qualitive Disclosures About Market Risk |
N/A
38
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
|
|
|
|
|
Index to Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
41 42 |
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
46 66 |
|
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of UFood Restaurant Group, Inc:
We have audited the accompanying consolidated balance sheets of UFood Restaurant Group, Inc and
Subsidiary (the Company) as of January 2, 2011 and December 27, 2009, and the related consolidated
statements of operations, changes in stockholders equity and cash flows for the fiscal years then
ended. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States of America). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. An audit includes consideration of
internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion of the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of UFood Restaurant Group, Inc and Subsidiary as of
January 2, 2011 and December 27, 2009, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note No. 15, the consolidated financial statements as of and for the year ended
January 2, 2011 have been restated.
/s/ CCR LLP
Westborough, Massachusetts
March 18, 2011, except for Note No. 15 which is May 18, 2011
40
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
January 2, 2011 and December 27, 2009
Assets
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
Restated |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,797,452 |
|
|
$ |
2,278,427 |
|
Restricted cash |
|
|
40,041 |
|
|
|
60,425 |
|
Accounts receivable, net |
|
|
8,334 |
|
|
|
180,134 |
|
Inventories |
|
|
118,324 |
|
|
|
123,648 |
|
Prepaid expenses and other current assets |
|
|
78,310 |
|
|
|
68,605 |
|
|
|
|
|
|
|
|
|
|
|
3,042,461 |
|
|
|
2,711,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Equipment |
|
|
1,006,238 |
|
|
|
937,857 |
|
Furniture and fixtures |
|
|
210,251 |
|
|
|
202,205 |
|
Leasehold improvements |
|
|
1,722,654 |
|
|
|
1,744,594 |
|
Website development costs |
|
|
27,050 |
|
|
|
37,050 |
|
|
|
|
|
|
|
|
|
|
|
2,966,193 |
|
|
|
2,921,706 |
|
Accumulated depreciation and amortization |
|
|
1,863,148 |
|
|
|
1,560,402 |
|
|
|
|
|
|
|
|
|
|
|
1,103,045 |
|
|
|
1,361,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Deferred financing costs, net |
|
|
7,717 |
|
|
|
757,873 |
|
Goodwill |
|
|
75,363 |
|
|
|
75,363 |
|
Other |
|
|
84,382 |
|
|
|
86,560 |
|
|
|
|
|
|
|
|
|
|
|
167,462 |
|
|
|
919,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,312,968 |
|
|
$ |
4,992,339 |
|
|
|
|
|
|
|
|
See accompanying notes.
41
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
January 2, 2011 and December 27, 2009
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
Restated |
|
|
2009 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
450,000 |
|
|
$ |
857,882 |
|
Current portion of capital lease obligations |
|
|
27,496 |
|
|
|
58,820 |
|
Accounts payable |
|
|
279,102 |
|
|
|
285,150 |
|
Franchisee deposits |
|
|
80,000 |
|
|
|
157,500 |
|
Accrued dividends |
|
|
225,779 |
|
|
|
|
|
Accrued expenses and other current liabilities |
|
|
165,632 |
|
|
|
157,870 |
|
|
|
|
|
|
|
|
|
|
|
1,228,009 |
|
|
|
1,517,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
62,120 |
|
|
|
3,044,001 |
|
Warrant liability |
|
|
1,451,669 |
|
|
|
3,750 |
|
Capital lease obligations |
|
|
17,844 |
|
|
|
39,071 |
|
Other noncurrent liabilities |
|
|
83,716 |
|
|
|
276,920 |
|
|
|
|
|
|
|
|
|
|
|
1,615,349 |
|
|
|
3,363,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,843,358 |
|
|
|
4,880,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, |
|
|
|
|
|
|
|
|
Series A 56,925 shares issued and
outstanding |
|
|
57 |
|
|
|
|
|
Series B 39,400 shares issued and outstanding |
|
|
39 |
|
|
|
|
|
Common stock, $0.001 par value, 300,000,000 shares
authorized, 40,487,294 and 37,934,907 shares issued and
outstanding, respectively |
|
|
40,487 |
|
|
|
37,935 |
|
Additional paid-in capital |
|
|
42,845,625 |
|
|
|
25,589,311 |
|
Accumulated deficit |
|
|
(41,416,598 |
) |
|
|
(25,515,871 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,469,610 |
|
|
|
111,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,312,968 |
|
|
$ |
4,992,339 |
|
|
|
|
|
|
|
|
See accompanying notes.
42
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the Fiscal Years Ended January 2, 2011 and December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Store sales |
|
$ |
4,518,308 |
|
|
$ |
4,632,651 |
|
Franchise royalties and fees |
|
|
312,589 |
|
|
|
429,537 |
|
Other revenue |
|
|
112,042 |
|
|
|
388,648 |
|
|
|
|
|
|
|
|
|
|
|
4,942,939 |
|
|
|
5,450,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Store operating expenses: |
|
|
|
|
|
|
|
|
Food and paper costs |
|
|
1,332,303 |
|
|
|
1,336,240 |
|
Cost of Goods sold |
|
|
328,550 |
|
|
|
344,219 |
|
Labor |
|
|
1,284,751 |
|
|
|
1,354,101 |
|
Occupancy |
|
|
397,944 |
|
|
|
554,923 |
|
Other store operating expenses |
|
|
814,333 |
|
|
|
778,155 |
|
General and administrative expenses |
|
|
4,129,282 |
|
|
|
3,696,425 |
|
Advertising, marketing and promotion expenses |
|
|
233,457 |
|
|
|
219,360 |
|
Depreciation and amortization |
|
|
325,952 |
|
|
|
407,593 |
|
Impairment of goodwill |
|
|
|
|
|
|
136,000 |
|
Loss on disposal of assets |
|
|
25,782 |
|
|
|
88,997 |
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
8,872,354 |
|
|
|
8,916,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(3,929,415 |
) |
|
|
(3,465,177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
7,088 |
|
|
|
20,709 |
|
Interest expense |
|
|
(3,894,875 |
) |
|
|
(955,016 |
) |
Other (expense) income |
|
|
(371,820 |
) |
|
|
442,133 |
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(4,259,607 |
) |
|
|
(492,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(8,189,022 |
) |
|
|
(3,957,351 |
) |
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,189,022 |
) |
|
$ |
(3,957,351 |
) |
Dividends on preferred stock |
|
|
(225,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(8,414,801 |
) |
|
$ |
(3,957,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share |
|
$ |
(0.21 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
basic and diluted |
|
|
39,184,919 |
|
|
|
35,320,547 |
|
See accompanying notes.
43
UFOOD RESTAURANT GROUP, INC.
and SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity
For the Twelve Months ended January 2, 2011 and December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional Paid-in |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
Balances, December 28, 2008 as filed |
|
|
|
|
|
|
|
|
|
|
34,818,490 |
|
|
|
34,818 |
|
|
|
24,998,924 |
|
|
|
(24,717,544 |
) |
|
|
316,198 |
|
Cumulative effect of reclassification of warrants to warrants liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,512,272 |
) |
|
|
3,159,024 |
|
|
|
(353,248 |
) |
Common stock issued for marketing and promotional services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,920 |
|
|
|
|
|
|
|
150,920 |
|
Common stock issued for interest payment |
|
|
|
|
|
|
|
|
|
|
2,982,671 |
|
|
|
2,983 |
|
|
|
312,995 |
|
|
|
|
|
|
|
315,978 |
|
Exercise of stock options into common stock |
|
|
|
|
|
|
|
|
|
|
7,618 |
|
|
|
8 |
|
|
|
45 |
|
|
|
|
|
|
|
53 |
|
Common stock issued for franchise sales commission |
|
|
|
|
|
|
|
|
|
|
82,895 |
|
|
|
83 |
|
|
|
14,917 |
|
|
|
|
|
|
|
15,000 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483,625 |
|
|
|
|
|
|
|
483,625 |
|
Issuance of warrants and beneficial conversion feature in connection |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,130,200 |
|
|
|
|
|
|
|
3,130,200 |
|
Forfeitures of common stock |
|
|
|
|
|
|
|
|
|
|
(33,690 |
) |
|
|
(34 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
Exercised debentures into common stock |
|
|
|
|
|
|
|
|
|
|
76,923 |
|
|
|
77 |
|
|
|
9,923 |
|
|
|
|
|
|
|
10,000 |
|
Net loss for year ended December 27, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,957,351 |
) |
|
|
(3,957,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 27, 2009 |
|
|
|
|
|
|
|
|
|
|
37,934,907 |
|
|
$ |
37,935 |
|
|
$ |
25,589,311 |
|
|
$ |
(25,515,871 |
) |
|
$ |
111,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock series A issued |
|
|
56,925 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
5,692,443 |
|
|
|
|
|
|
|
5,692,500 |
|
Preferred stock series B issued |
|
|
34,400 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
2,953,703 |
|
|
|
|
|
|
|
2,953,737 |
|
Preferred stock series B issued for promotional services |
|
|
5,000 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
499,995 |
|
|
|
|
|
|
|
500,000 |
|
Common stock issued for consulting, marketing, & promotional services |
|
|
|
|
|
|
|
|
|
|
380,000 |
|
|
|
380 |
|
|
|
216,218 |
|
|
|
|
|
|
|
216,598 |
|
Common stock issued for interest payment |
|
|
|
|
|
|
|
|
|
|
1,297,236 |
|
|
|
1,297 |
|
|
|
311,587 |
|
|
|
|
|
|
|
312,884 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,055,569 |
|
|
|
|
|
|
|
1,055,569 |
|
Forfeitures of common stock |
|
|
|
|
|
|
|
|
|
|
(1,773 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
Exercised debentures & warrants into common stock |
|
|
|
|
|
|
|
|
|
|
876,924 |
|
|
|
877 |
|
|
|
116,969 |
|
|
|
|
|
|
|
117,846 |
|
Change in the warrants fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,616,401 |
|
|
|
|
|
|
|
4,616,401 |
|
Beneficial conversion feature- deemed dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,793,428 |
|
|
|
(1,793,428 |
) |
|
|
|
|
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225,779 |
) |
|
|
(225,779 |
) |
Extinguishment of Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,692,500 |
) |
|
|
(5,692,500 |
) |
Net loss for the year ended January 2, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,189,022 |
) |
|
|
(8,189,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 2, 2011 (Restated) |
|
|
96,325 |
|
|
$ |
96 |
|
|
|
40,487,294 |
|
|
$ |
40,487 |
|
|
$ |
42,845,625 |
|
|
$ |
(41,416,598 |
) |
|
$ |
1,469,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Fiscal Years Ended January 2, 2011 and December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,189,022 |
) |
|
$ |
(3,957,351 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
325,952 |
|
|
|
407,593 |
|
Adjustment to straight-line rent |
|
|
(149,912 |
) |
|
|
|
|
Amortization of beneficial conversion feature |
|
|
2,673,952 |
|
|
|
310,201 |
|
Amortization of deferred financing costs |
|
|
750,155 |
|
|
|
266,176 |
|
Provision for doubtful accounts |
|
|
(10,254 |
) |
|
|
161,424 |
|
Impairment of goodwill |
|
|
|
|
|
|
136,000 |
|
Loss on disposal of assets |
|
|
25,782 |
|
|
|
88,997 |
|
Change in value of warrant liability |
|
|
1,447,919 |
|
|
|
(349,498 |
) |
Stock-based compensation |
|
|
1,055,569 |
|
|
|
483,625 |
|
Non-cash promotion expenses |
|
|
716,598 |
|
|
|
158,302 |
|
Non-cash interest payments |
|
|
312,884 |
|
|
|
315,976 |
|
Gain on extinguishment of debt |
|
|
(5,692,500 |
) |
|
|
(74,967 |
) |
Change in fair value of warrants (debenture exchange) |
|
|
4,616,401 |
|
|
|
|
|
Increase (decrease) in cash from changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
182,054 |
|
|
|
(189,185 |
) |
Inventories |
|
|
5,323 |
|
|
|
18,159 |
|
Prepaid expenses and other current assets |
|
|
295 |
|
|
|
11,052 |
|
Other assets and noncurrent liabilities |
|
|
2,179 |
|
|
|
2,640 |
|
Accounts payable |
|
|
(6,048 |
) |
|
|
(248,269 |
) |
Franchisee deposits |
|
|
(77,500 |
) |
|
|
(542,500 |
) |
Accrued expenses and other current liabilities |
|
|
(35,530 |
) |
|
|
(187,766 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,045,702 |
) |
|
|
(3,189,391 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of assets |
|
|
|
|
|
|
5,600 |
|
Acquisition of property and equipment |
|
|
(95,311 |
) |
|
|
(116,910 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(95,311 |
) |
|
|
(111,310 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of options |
|
|
|
|
|
|
53 |
|
Proceeds from issuance of common stock |
|
|
53,846 |
|
|
|
|
|
Proceeds from issuance of preferred stock, net of issuance costs |
|
|
3,054,405 |
|
|
|
|
|
Proceeds from issuance of convertible debt |
|
|
|
|
|
|
5,874,000 |
|
Payments for financing costs |
|
|
|
|
|
|
(1,001,220 |
) |
Payments on long-term debt |
|
|
(407,882 |
) |
|
|
(375,511 |
) |
Payments on capital lease obligations |
|
|
(60,715 |
) |
|
|
(62,810 |
) |
Decrease in restricted cash |
|
|
20,384 |
|
|
|
357,065 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,660,038 |
|
|
|
4,791,577 |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
519,025 |
|
|
|
1,490,876 |
|
Cash and cash equivalents beginning of year |
|
|
2,278,427 |
|
|
|
787,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
2,797,452 |
|
|
$ |
2,278,427 |
|
|
|
|
|
|
|
|
See accompanying notes.
45
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Nature of Operations and Basis of Presentation
UFood Restaurant Group, Inc. 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, and on September 25, 2007, changed its name to
UFood Restaurant Group, Inc. (UFood or the Company).
On December 18, 2007, (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 January 2, 2011, the
Companys operations consisted of four Company-owned restaurants and four franchise-owned
locations. One of the franchise-owned locations was operated by the Company pursuant to a
management series agreement. 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.
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 January 2, 2011, the Company had approximately $2,797,000 of unrestricted cash. 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. The Company is currently in the process of raising
additional equity capital.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of UFood Restaurant Group, Inc. and its
subsidiary consist of the accounts of UFood Restaurant Group, Inc. and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
Our fiscal year ends on the Sunday nearest to December 31 of each year. As a result, every five or
six years our fiscal year contains 53 calendar weeks. Fiscal 2010 contained 53 weeks, whereas fiscal
2009 contained 52 weeks. While certain expenses increased in direct relationship to additional
revenue from the 53rd week, other costs (for example, depreciation and other fixed costs) are
recorded on a calendar month basis. Therefore, the impact of the additional week is not necessarily
indicative of a typical relationship of expenses to revenues measured over a longer period of
comparison, such as a fiscal month or a fiscal quarter. The Companys fiscal year ended
on January 2, 2011 and December 27, 2009, with 53 and 52 weeks respectively.
46
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Cash Equivalents
Cash equivalents represent highly liquid instruments with original maturities of three months or
less when purchased. Cash equivalents consist of money market accounts at January 2, 2011 and
December 27, 2009. At January 2, 2011 restricted cash was comprised of $40,041 used to
collateralize a standby letter of credit.
Inventories
Inventories, which primarily consist of food products, paper goods and supplies and vitamins and
supplements for resale, are stated at the lower of cost or market, with cost determined by the
average cost method.
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 were $750,155 and $266,176
for the years ended January 2, 2011 and December 27, 2009, respectively, and is included in
interest expense. The significant increase in the deferred financing costs amortization was due to
the extinguishment of debt related to the conversion of the Debentures into Series A preferred
stock.
Property and Equipment
Property, equipment and leaseholds are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of their estimated useful lives or the
related reasonably assured lease term. The estimated useful lives used for financial statement
purposes are:
|
|
|
Leasehold improvements
|
|
5 years, or over life of lease, whichever is shorter |
Equipment
|
|
5 years |
Furniture and fixtures
|
|
5 years |
Website development costs
|
|
3 years |
Upon retirement or sale, the cost of assets disposed and their related accumulated depreciation are
removed from the accounts. Any resulting gain or loss is credited or charged to operations.
Maintenance and repairs are charged to expense when incurred, while betterments are capitalized.
The total amounts expensed for maintenance and repairs were $90,700 and $71,038 for the fiscal
years ended January 2, 2011 and December 27, 2009, respectively.
47
Goodwill and Other Intangible Assets
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. The Goodwill attributable to our franchise operations segment was impaired due
to the decision to not renew the lease agreement for a property originally leased as a training
facility. The carrying amount of the goodwill attributable to franchise operations exceeded its
implied fair value and the Company recognized a non-cash impairment charge of $136,000, during the
year ended December 27, 2009. 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.
As of the first day of the fourth quarter of the year ended January 2, 2011 according to our
policy we have tested the carrying value of the Goodwill attributable to our store operations and
no impairment was necessary. 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.
Income Taxes
The Company completes the provision for income taxes in accordance with the accounting standard for
income taxes in the Companys consolidated financial statements and accompanying notes. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Any effect on deferred tax assets and
liabilities from a change in tax rates is recognized in income in the period that includes the
enactment date.
In accordance with the authoritative guidance on income taxes issued by the FASB, the Company
establishes additional provisions for income taxes when, despite the belief that tax positions are
fully supportable, there remain certain positions that do not meet the minimum probability
threshold, which is a tax position that is more likely than not to be sustained upon examination by
the applicable taxing authority. In the normal course of business, the Company and its subsidiaries
are examined by various Federal, State and foreign tax authorities. The Company regularly assesses
the potential outcomes of these examinations and any future examinations for the current or prior
years in determining the adequacy of its provision for income taxes. The Company continually
assesses the likelihood and amount of potential adjustments and adjusts the income tax provision,
the current tax liability and deferred taxes in the period in which the facts that give rise to a
revision become known. The Company classifies estimated interest and penalties related to the
underpayment of income taxes as a component of income taxes in the consolidated statements of
operations.
48
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 records a liability in the period in which a gift card
is issued and proceeds are received. As gift cards are redeemed, this liability is reduced and
revenue is recognized.
The Company follows the accounting guidance of ASC No. 952, 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.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense amounted to $60,644 in 2010
and $76,998 in 2009.
Pre-Opening Costs
All pre-opening costs directly associated with the opening of new Company-owned restaurant
locations, which consist primarily of labor and food costs incurred during in-store training and
preparation for opening, but exclude manager training costs which are included in other operating
expenses, are expensed when incurred.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term
as defined in ASC No. 840, 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, 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.
49
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include accounts receivable,
accounts payable and other accrued expenses 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 recognized during the fiscal year ended January 2, 2011 totaled
approximately $1,055,569 for stock options. Stock-based compensation expense recognized during the
fiscal year ended December 27, 2009 totaled approximately $483,625 for stock options. Stock-based
compensation expense was included in general and administrative expenses in the accompanying
consolidated statements of operations.
Reclassifications
Certain accounts previously reported in the 2009 consolidated financial statements have been
reclassified to facilitate comparability with the current year presentation. The reclassifications
had no effect on the 2009 net loss previously reported.
3. Disposal of Assets
During 2011, the Company recorded a loss on disposal of assets of $25,782 due to the write off of
leasehold improvements and equipment as a result of the move of our corporate Offices to another
suite within same building.
During 2009, the Company recorded a loss on disposal of assets of $88,997 due to the write off of
obsolete equipment and furniture and fixtures as a result of the closure of the Bedford, MA
location.
4. Goodwill
During the year ended December 27, 2009, the goodwill attributable to our franchise operations
segment was impaired due to the decision to not renew the lease agreement for a property originally
leased as a training facility. The carrying amount of the goodwill attributable to franchise
operations exceeded its implied fair value and the Company recognized a non-cash impairment charge
of $136,000.
50
As of the first day of the fourth quarter of the year ended January 2, 2011 according to our policy
we have tested the carrying value of the goodwill attributable to our store operations and no
impairment was necessary. The carrying amount of goodwill may be impaired in the future if our
actual operating results and cash flows fall short of our expectations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise |
|
|
|
|
|
|
Store Operations |
|
|
Operations |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 28, 2008 |
|
|
75,363 |
|
|
|
136,000 |
|
|
|
211,363 |
|
Goodwill written off in
connection with impairment
test |
|
|
|
|
|
|
(136,000 |
) |
|
|
(136,000 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 27, 2009 |
|
|
75,363 |
|
|
|
|
|
|
|
75,363 |
|
Goodwill written off in
connection with impairment
test |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 2, 2011 |
|
|
75,363 |
|
|
|
|
|
|
|
75,363 |
|
|
|
|
|
|
|
|
|
|
|
5. Long-Term Debt
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. As a result of the Companys recent
private placement, the exercise price of the 2008 Investor Warrants was reduced to $0.54 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 recent private placement, 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-Contracts 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.
51
At the date of issuance of the 2008 Investor Warrants and 2008 Placement Agent Warrants, based upon
evaluation under applicable ASC No. 815 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 January 2, 2011, the aggregate fair value of the derivative was $1,451,669. The increase in the
fair value of the derivative was in the aggregate amount of $1,447,919 during the year ended
January 2, 2011. The increase in the fair value of the derivative 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.
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 January 2, 2011 |
|
|
|
Liability Derivatives |
|
|
|
Balance Sheet |
|
|
|
|
|
|
Location |
|
|
Fair Value |
|
Derivatives designated as hedging
instruments under ASC No. 815: |
|
|
|
|
|
|
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments under ASC No.
815: |
|
|
|
|
|
|
|
|
Derivative warrant liability |
|
Long-term liabilities |
|
$ |
1,451,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
1,451,669 |
|
|
|
|
|
|
|
|
The effect of the derivative instrument on the consolidated statements of operations for the year
ended January 2, 2011 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
|
|
|
|
|
|
Recognized in Income on |
|
|
|
|
|
|
|
Derivative |
|
|
|
Location of Gain (Loss) |
|
|
|
|
|
|
Recognized in Income on |
|
|
Twelve Months Ended |
|
|
|
Derivative |
|
|
January 2, 2011 |
|
Derivatives not designated as
hedging instruments under ASC No.
815: |
|
|
|
|
|
|
|
|
Derivative warrant liability |
|
Other Income (Expense) |
|
$ |
(1,447,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(1,447,919 |
) |
|
|
|
|
|
|
|
52
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, 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 27,
2009, and as of January 2, 2011, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Issuance |
|
|
December 27, 2009 |
|
|
January 2, 2011 |
|
Expected term (years) |
|
5 7 Years |
|
|
5 7 Years |
|
|
2 4 Years |
|
Expected volatility |
|
|
32.34 |
% |
|
|
37.20 |
% |
|
|
156.3 |
% |
Risk-free interest rate |
|
|
2.46 |
% |
|
|
1.56 |
% |
|
|
0.61 |
% |
Expected annual dividend |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The table below sets forth a summary of changes in the fair value of the Companys level 3
derivative at December 29, 2008, through for the twelve months ended January 2, 2011:
|
|
|
|
|
Balance as of December 29, 2008 |
|
$ |
|
|
Fair value of warrant liability at issuance |
|
|
3,512,272 |
|
Decrease in fair value at December 29, 2008 |
|
|
(3,159,024 |
) |
Decrease in fair value during the twelve months ended December 27,
2009 |
|
|
(349,498 |
) |
Increase in fair value during the twelve months ended January 2, 2011 |
|
|
1,447,919 |
|
Balance as of January 2, 2011 |
|
$ |
1,451,669 |
|
2009 Warrants
On March 19 and April 20, 2009, the Company sold 8% Senior Secured Convertible Debentures (the
Debentures) to accredited investors in the principal amount of $5,874,000. Those Debentures were
convertible into 45,184,615 shares of common stock of the Company at the rate of $0.13 per share.
The Debentures bore interest at a rate of 8% per annum, payable quarterly and are due three years
from the date they are issued. In addition, each investor received 5-year detachable warrants to
purchase a number of shares of Common Stock equal to 50% of the shares underlying the Investors
Debenture. The potential common shares from the assumed conversion of the debentures and exercise
of warrants related to this transaction were excluded from the calculation of diluted net loss per
share for the year ended January 2, 2011 because their inclusion would have been anti-dilutive.
The Company paid Garden State Securities, Inc., the placement agent retained in connection with the
2009 Offering (the 2009 Placement Agent), a commission of $587,400 plus a non-accountable expense
allowance of $176,220 and warrants to purchase 9,036,923 shares of Common Stock. 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 a 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. Of the $3,130,200
in debt discount, $571,200 has an effective interest rate of 15.18%, and $2,559,000 has an
effective interest rate of 82.97%.
On October 1, 2010, the Company consummated the cancellation of ninety-six percent (98%) of its
outstanding 8% Senior Secured Convertible Debentures (the Debentures) in exchange (the
Debenture Exchange) for shares of the Company Series A 8% Convertible Preferred Stock
(the Series A Preferred Stock). An aggregate principal amount of $5,692,500 of
outstanding Debentures was cancelled in exchange for 56,925 shares of Series A Preferred Stock. The
face value of each preferred share is $100 with an aggregate value of the transaction of
$5,692,500. 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.
53
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 (Series A Conversion Price). The
number of shares of the common stock into which the Series A Preferred Stock is currently
convertible is 43,788,462. However, 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. The terms of the Series A Preferred Stock are more fully set forth
in the Certificate of Designation attached hereto as Exhibit 3.2 and incorporated herein by
reference.
Upon consummation of the Debenture Exchange, the exercise price of the Common Stock Purchase
Warrants purchased by the investors in connection with their Debentures was reduced from $0.14 to
$0.09 per share of Common Stock, and the termination date of the Common Stock Purchase Warrants was
extended to the six year anniversary of the initial exercise dates of the warrants. In addition,
the Common Stock Purchase Warrants were modified so that such warrants are not exercisable until
the one year anniversary of the closing of the Debenture Exchange. 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.
Long-term debt consists of the following at January 2, 2011 and December 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Senior Secured Convertible Debentures $5,874,000
at 8% interest 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 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. On October 1, 2010, an aggregate
principal amount of $5,692,500 of outstanding
Debentures was extinguished in exchange for
56,925 shares of Series A Preferred Stock. |
|
|
62,120 |
|
|
|
3,044,001 |
|
|
|
|
|
|
|
|
|
|
Landmark Center acquisition promissory note with
no stated interest rate. Due upon the occurrence
of a sales event, as defined in the agreement.
The note agreement includes a restrictive
covenant requiring the Companys wholly-owned
subsidiary, KnowFat of Landmark Center, Inc., to
maintain net equity of not less than $450,000. |
|
|
450,000 |
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
Term note payable to bank in monthly principal
installments of $29,167 commencing January 2007
through December 2010. Interest is payable
monthly at the banks prime rate (3.25% at May
31, 2010). The note has been fully paid. |
|
|
|
|
|
|
342,072 |
|
|
|
|
|
|
|
|
|
|
Unsecured, non-interest bearing note payable.
This note payable is due on demand. Interest
imputed on the note using a discount rate of 5%
totaled $59,597, which is being amortized over
the term of the note. The note has been fully
paid. |
|
|
|
|
|
|
56,033 |
|
54
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
Indebtedness incurred in connection with the
acquisition of the two franchisee locations. No
stated interest rate; this note payable is due on
demand. The note has been fully paid. |
|
|
|
|
|
|
2,137 |
|
|
|
|
|
|
|
|
|
|
Note payable to the Watertown landlord in
connection with the acquisition of the training
center in 2004. The note is payable in monthly
installments of $2,566 including interest at 5%
through April 2010. This note has been fully
paid. |
|
|
|
|
|
|
7,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512,120 |
|
|
|
3,901,883 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
450,000 |
|
|
|
857,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
62,120 |
|
|
$ |
3,044,001 |
|
|
|
|
|
|
|
|
Maturities of long-term debt at January 2, 2011 are as follows:
|
|
|
|
|
2011 |
|
|
450,000 |
|
2012 |
|
|
62,120 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
512,120 |
|
|
|
|
|
6. Capital Lease Obligations
The Company leases certain equipment under capital leases. The equipment has been recorded at the
present value of the total lease payments using discount rates ranging from 13.9% to 17.95%.
Future minimum lease payments under these leases are as follows:
|
|
|
|
|
2011 |
|
$ |
31,986 |
|
2012 |
|
|
14,014 |
|
Thereafter |
|
|
5,861 |
|
|
|
|
|
|
|
|
51,861 |
|
Less imputed interest |
|
|
6,521 |
|
|
|
|
|
|
|
|
45,340 |
|
Less current portion |
|
|
27,496 |
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
17,844 |
|
|
|
|
|
The recorded cost and accumulated amortization of the equipment acquired are $126,655 and $61,581,
respectively as of January 2, 2011.
55
7. Capital Stock
On December 18, 2007, the Company, through a wholly-owned subsidiary, merged with and into KnowFat
Franchise Company, Inc.
Share Transactions Prior to the Merger
During 2007, prior to the Merger, KnowFat issued 1,412,903 shares of common stock comprised of
41,746 shares issued to consultants and vendors and 1,371,157 shares issued to George Foreman
Ventures LLC (GFV) pursuant to the terms of a Services Agreement which became effective June 12,
2007. The 41,746 shares issued to consultants and vendors were valued at $31,237, or $0.75 per
share.
Under the terms of the Services Agreement with GFV, KnowFat also agreed to (i) issue GFV an
additional 152,351 shares of common stock promptly following the sale of the 600th
franchise, provided the sale of such franchise occurs by December 31, 2009 and (ii) pay GFV a
royalty equal to 0.2% of aggregate net sales, in exchange for the performance of certain services
by George Foreman and a limited license to use Mr. Foremans name and likeness in connection with
the promotion of restaurants operated by KnowFat and its franchisees. At January 2, 2011, 1,294,982
shares of common stock issued to GFV were vested. The remaining 76, 175 shares of common stock
issued will vest on June 11, 2011.
In the event there is a change of control after December 18, 2007, as defined in the Services
Agreement, GFV has the right to return 50% of the shares of common stock received in exchange for a
prospective increase in the royalty rate to 0.5%.
The fair value of the 152,352 shares vested on June 12, 2010 was $45,705 of which $39,611 is
included in advertising, marketing and promotion expenses for the year ended January 2, 2011.
2010 Private Placement
Series B Preferred Stock
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. The Series
B Preferred Stock is convertible into 14,956,522 shares of Common Stock at the original
conversion price. However, the number of shares 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. Effective January 1, 2011, the Company may, at its election,
require the conversion of the Series B Preferred Stock to shares of Common Stock at the Series B
Conversion Price if the closing price of the Common Stock for 10 consecutive trading days equals or
exceeds 300% of the Series B Conversion Price and the average daily volume of the shares of Common
Stock for the same period exceeds 250,000 shares.
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 (the Common Stock), per share of
Preferred Stock purchased (the Investor Warrants). The Company issued warrants to
purchase an aggregate of 3,440,000 shares of Common Stock to investors who participated in the
Offering.
56
The Company paid Garden State Securities, Inc., the exclusive placement agent retained in
connection with the Offering (the Placement Agent), a commission of 10% of the funds
raised from the investors in connection with each closing of the Offering. In addition, the
Placement Agent received warrants (the Placement Agent Warrants) to purchase a number of
shares of Common Stock equal to 15% of the shares of Common Stock underlying the shares of Series
B Preferred Stock sold to investors in connection with the each closing of the Offering. As a
result of the foregoing, the Placement Agent was paid a commission of $344,000 and received
warrants to purchase 2,243,478 shares of Common Stock in connection with the both closings of 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.
We evaluated the Series B Preferred Stock issued and have recorded the intrinsic value of the
embedded beneficial conversion feature of $1,793,428 as additional paid in capital. The embedded
beneficial conversion feature was treated as a deemed dividend and, as such, has been expensed to
retained earnings.
Warrants
As stated above, the Company issued to each investor who participated in the Offering, a warrant to
purchase 100 shares of common stock of the Company, par value $0.001 per share (the Common
Stock), per share of Preferred Stock purchased (the Investor Warrants). The Company
issued warrants to purchase an aggregate of 3,440,000 shares of Common Stock to the participating
investors. Also, the Company issued to the placement agent warrants to purchase an aggregate of
2,243,478 shares of common stock in connection with the most private placement.
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. 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
Furthermore, we have calculated the relative fair value of the warrants on their date of grant,
which was determined to be $1,074,563 and was recorded as additional paid-in capital. The fair
value of the warrants was computed using the Black-Scholes option pricing model. The fair value of
the warrants was calculated on the dates of issuance, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
October 4, 2010 |
|
|
October 29, 2010 |
|
Expected term (years) |
|
5 Years |
|
|
5 Years |
|
Expected volatility |
|
|
118.45 |
% |
|
|
118.45 |
% |
Risk-free interest rate |
|
|
1.26 |
% |
|
|
1.17 |
% |
Expected annual dividend |
|
|
0.00 |
% |
|
|
0.00 |
% |
57
At January 2, 2011, warrants to purchase 50,950,773 shares of UFood Common Stock were issued and
outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Description |
|
Warrants |
|
|
Exercise Price |
|
New Warrants |
|
|
607,226 |
|
|
$ |
1.00 |
|
Vendor Warrants |
|
|
2,916,666 |
|
|
$ |
1.25 |
|
2008 Placement Agent Warrants |
|
|
2,988,200 |
|
|
$ |
0.49 |
(2) |
2008 Investor Warrants |
|
|
7,510,588 |
|
|
$ |
0.59 |
(2) |
2009 Investor Warrants |
|
|
22,207,692 |
|
|
$ |
0.09 |
(1) |
2009 Placement Agent Warrants |
|
|
9,036,923 |
|
|
$ |
0.14 |
|
2010 Investor Warrants |
|
|
3,440,000 |
|
|
$ |
0.29 |
|
2010 Placement Agent Warrants |
|
|
2,243,478 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
Total |
|
|
50,950,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In conjunction with the extinguishment of debt, the Company modified the exercise price
of the 2009 Investor 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. |
|
(2) |
|
As a result of the Offering in 2010 and pursuant to the terms of the 2008 Investor
warrants the exercise price was reduced from $0.59 to $0.54 and the 2008 Placement agent
warrants from $0.49 to $0.45 per share. |
8. Stock-Based Compensation
At January 2, 2011, the Company has two share-based, shareholder approved employee compensation
plans, the 2004 Stock Option Plan (2004 Plan) and the 2007 Equity Incentive Plan (2007 Plan, and
together with the 2004 Plan, the Equity Plans), which are described below. During 2010 and 2009,
the Company recognized $1,055,569 and $483,625 of compensation expense for awards under the Equity
Plans. In April 1, 2010 the Board of Directors approved the grant of 2,070,000 stock options
granted to employees and officers with an exercise price of $0.16 and fully vested as of the grant
date.
The Company estimates the fair value of the 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 grant was estimated on the date of grant using the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Expected term (years) |
|
|
5 |
|
|
|
6 |
|
Expected volatility |
|
|
45 |
% |
|
|
36.53 |
% |
Risk-free interest rate |
|
|
2.59 |
% |
|
|
0.89 |
% |
Expected annual dividend |
|
None |
|
|
None |
|
58
The expected term is based on the weighted average midpoint between vesting and the contractual
term. Expected volatility is based on the historical volatility of published common stock prices
over the last six years of comparable publicly held companies. 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 for the years ended January 2,
2011 and December 27, 2009. 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 32,757 shares of common stock
in the aggregate, to employees, officers, directors, consultants and agents of the Company. The
Company believes that such awards align the interests of its employees with those of its
shareholders. In general, stock option awards under the 2004 Plan are granted with an exercise
price equal to the fair value of the Companys stock at the date of grant, vest over a three-year
period and expire ten years from the date of grant. As a result of the Merger, no awards will be
made under the 2004 Plan after December 18, 2007; a summary of option activity under the 2004 Plan
during 2010 and 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at December 28, 2008 |
|
|
304,702 |
|
|
$ |
0.61 |
|
|
|
7.8 |
|
|
$ |
|
|
Canceled |
|
|
(181,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(82,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 27, 2009 |
|
|
32,757 |
|
|
$ |
0.01 |
|
|
|
5.0 |
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2011 |
|
|
32,757 |
|
|
$ |
0.01 |
|
|
|
4.0 |
|
|
$ |
6,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 2, 2011 |
|
|
32,757 |
|
|
$ |
0.01 |
|
|
|
4.0 |
|
|
$ |
6,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 2, 2011, all of the options outstanding under the 2004 Plan were vested. There was no
unrecognized compensation expense related to options outstanding under the 2004 Plan at January 2,
2011.
The 2007 Plan
The 2007 Plan was approved in contemplation of the Merger. There were no awards under the 2007 Plan
prior to December 18, 2007, the Closing Date of the Merger. 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 9,000,000 shares of Common Stock to
employees, directors, consultants and agents of the Company. The Company believes awards under the
2007 Plan align the interests of its employees with those of its shareholders. At January 2, 2011,
5,884,990 stock options were outstanding under the 2007 Plan.
59
Activity under the 2007 Plan from December 28, 2008, through January 2, 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at December 28, 2008 |
|
|
2,845,920 |
|
|
$ |
1.22 |
|
|
|
8.8 |
|
|
|
-0- |
|
Granted |
|
|
3,979,990 |
|
|
$ |
0.20 |
|
|
|
8.2 |
|
|
|
|
|
Canceled |
|
|
(2,360,920 |
) |
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(545,000 |
) |
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 27, 2009 |
|
|
3,919,990 |
|
|
$ |
0.20 |
|
|
|
8.2 |
|
|
|
-0- |
|
Granted |
|
|
2,070,000 |
|
|
$ |
0.16 |
|
|
|
9.3 |
|
|
|
|
|
Canceled |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(105,000 |
) |
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2011 |
|
|
5,884,990 |
|
|
$ |
0.19 |
|
|
|
7.9 |
|
|
$ |
200,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable at January 2, 2011 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 |
|
|
|
7.2 |
|
|
|
3,800,439 |
|
|
$ |
0.20 |
|
2,070,000 |
|
$ |
0.16 |
|
|
|
9.3 |
|
|
|
2,070,000 |
|
|
$ |
0.16 |
|
The aggregate intrinsic value in the table above represents the total intrinsic value, based on the
Companys closing stock price of $0.22 as of December 31, 2010 which would have been received by
the options holders had all option holders exercise their options as of that date. At January 2,
2011 there was $8,785 of total unrecognized compensation cost related to non-vested options granted
under the 2007 Plan. This cost will be recognized over the next two months.
On July 1st, 2010, the majority of shares represented at the Companys annual meeting
approved a 3,000,000 increase in the number of shares of Common Stock reserved for issuance under
the 2007 Plan to 9,000,000 shares.
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. The face value of the preferred shares is $100 per share and the
conversion price to common stock is $0.23. Pursuant to Section 3 of the Agreement, the Company
terminated the agreement on December 8, 2010 which such cancelation reduced the number of preferred
shares to be issued by one-half to 5,000 shares. As a result of this grant, General and
Administrative expenses include $500,000 of stock-based compensation expense.
60
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 January 2, 2011 there was $850,281 of total
unrecognized compensation cost related to non-vested options granted outside of any Plan. This cost
will be recognized over approximately 30 months.
On November 17, 2010 the Companys Board of Directors awarded to Jeffrey Bonasia, a marketing
consultant, Non-qualified stock options to purchase 250,000 shares of the Companys common stock
with an exercise price of $0.27. The vesting schedule is over a five month period pursuant to his
consulting agreement with the Company. The Company will recognize an expense in the total amount of
$55,631 over the vesting period.
Activity of Non-Qualified Stock Options outside of any plan from December 27, 2009 through January
1, 2011 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 |
|
|
|
7.2 |
|
|
$ |
-0- |
|
Granted |
|
|
8,553,673 |
|
|
|
0.19 |
|
|
|
9.5 |
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2011 |
|
|
8,728,673 |
|
|
$ |
0.19 |
|
|
|
9.2 |
|
|
$ |
245,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Income Taxes
On January 1, 2007, the Company adopted the provisions of ASC 740, 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. The implementation of
ASC 740 had no impact on the Companys financial statements due to the valuation allowances that
have historically been provided against all deferred tax assets.
No provision for current income taxes has been recorded for 2010 and 2009 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 components of deferred tax liabilities are depreciation of property and
equipment. The net deferred tax assets are fully reserved by a valuation allowance due to the
uncertainty of realizing the tax benefit of the deferred tax assets.
61
Net deferred tax assets (liabilities) at January 2, 2011 and December 27, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred Taxes |
|
Federal |
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
Net Fixed Assets |
|
|
555,000 |
|
|
|
543,000 |
|
Net Intangible Assets |
|
|
228,000 |
|
|
|
255,000 |
|
Deferred Revenues |
|
|
28,000 |
|
|
|
54,000 |
|
Bad Debt Reserve |
|
|
2,000 |
|
|
|
29,000 |
|
Deferred Rent |
|
|
28,000 |
|
|
|
94,000 |
|
Option Expenses on NQs |
|
|
516,000 |
|
|
|
279,000 |
|
Net Operating Loss Carryforwards |
|
|
9,604,000 |
|
|
|
7,939,000 |
|
Other |
|
|
9,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
Total |
|
|
10,970,000 |
|
|
|
9,201,000 |
|
|
|
|
|
|
|
|
|
|
Deferred Taxes |
|
State |
|
|
State |
|
|
|
|
|
|
|
|
|
|
Net Fixed Assets |
|
|
86,000 |
|
|
|
100,000 |
|
Net Intangible Assets |
|
|
36,000 |
|
|
|
47,000 |
|
Deferred Revenues |
|
|
4,000 |
|
|
|
10,000 |
|
Bad Debt Reserve |
|
|
|
|
|
|
5,000 |
|
Deferred Rent |
|
|
4,000 |
|
|
|
17,000 |
|
Option Expenses on NQs |
|
|
80,000 |
|
|
|
51,000 |
|
Net Operating Loss Carryforwards |
|
|
1,462,000 |
|
|
|
1,437,000 |
|
Other |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
Total |
|
|
1,673,000 |
|
|
|
1,668,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Taxes |
|
|
12,643,000 |
|
|
|
10,869,000 |
|
Valuation Allowance |
|
|
(12,643,000 |
) |
|
|
(10,869,000 |
) |
|
|
|
|
|
|
|
Total Deferred Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax benefit (expense) are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Federal |
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
$ |
1,665,000 |
|
|
$ |
1,183,000 |
|
Other |
|
|
104,000 |
|
|
|
(175,000 |
) |
|
|
|
|
|
|
|
|
|
|
1,769,000 |
|
|
|
1,008,000 |
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
|
252,000 |
|
|
|
207,000 |
|
Change in state tax rate |
|
|
(264,000 |
) |
|
|
|
|
Other |
|
|
17,000 |
|
|
|
(31,000 |
) |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
176,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit before adjustment to valuation allowance |
|
|
1,774,000 |
|
|
|
1,184,000 |
|
Adjustment to valuation allowance |
|
|
(1,774,000 |
) |
|
|
(1,184,000 |
) |
|
|
|
|
|
|
|
Net tax benefit |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Companys effective income tax rate differs from the federal statutory income tax rate as
follows for the fiscal years ended January 2, 2011 and December 27, 2009.
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Federal tax provision rate |
|
|
34 |
% |
|
|
34 |
% |
State tax provision, net of federal provision |
|
|
5.3 |
% |
|
|
6 |
% |
Change in valuation allowance |
|
|
(39.3 |
%) |
|
|
(40 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
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
federal and state deferred tax assets. As a result, management has recorded a full valuation
allowance. 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.
The Companys income tax returns have not been audited by the Internal Revenue Service (IRS) or any
state taxing authority. The years 2007 through 2010 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. As of the date ASC 740 was
adopted, we did not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized during the years ended January 2, 2011 and
December 27, 2009
Federal and state net operating loss carryforwards expire in 2030. Ownership changes, as defined in
Section 382 of the Internal Revenue Code, may have limited the amount of net operating loss
carryforwards that may be utilized annually to offset future taxable income. Subsequent ownership
changes could further affect the limitation in future years.
10. Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk include
cash and cash equivalents, which occasionally exceed current federal deposit insurance limits.
Substantially all of the cash and cash equivalents are maintained in a certain large commercial
bank. Senior management continually reviews the financial stability of this institution.
11. Commitments and Contingencies
Leases
The Company rents store and office locations under non-cancelable operating leases and tenant at
will arrangements. The agreements expire on various dates through December 2016, and some include
options to extend. The leases require the Company to pay its share of the operating expenses of the
leased properties, including taxes, utilities and insurance.
Future minimum payments at January 2, 2011 under non-cancelable leases are as follows:
|
|
|
|
|
2011 |
|
$ |
466,000 |
|
2012 |
|
|
470,000 |
|
2013 |
|
|
473,000 |
|
2014 |
|
|
440,000 |
|
2015 |
|
|
157,000 |
|
Thereafter |
|
|
36,000 |
|
|
|
|
|
|
|
$ |
2,042,000 |
|
|
|
|
|
63
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. As a
result of these grants the company will recognized an expense of $878,711 over the next thirty
months; this amount is already included in the total amount to be expensed in our Foot note No. 8
for stock based compensation.
Legal matters
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
and we intend to defend vigorously each such case. Based on information currently available, we
believe the amount, or range, of reasonably possible losses in connection with the actions against
us in excess of established reserves, in the aggregate, not to be material to our consolidated
financial condition or cash flows. 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.
12. Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
70,880 |
|
|
$ |
78,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends on preferred stock |
|
$ |
225,779 |
|
|
$ |
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired with capital lease |
|
$ |
8,163 |
|
|
$ |
12,357 |
|
|
|
|
|
|
|
|
13. Loss per share
The amounts used for basic and diluted per share calculations are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Net loss |
|
$ |
(8,189,022 |
) |
|
$ |
(3,957,351 |
) |
Dividends on preferred stock |
|
|
225,779 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
Net loss allocable to common stockholders |
|
$ |
(8,414,801 |
) |
|
$ |
(3,957,351 |
) |
|
|
|
|
|
|
|
Weighted average number of shares
outstanding basic and diluted |
|
|
39,184,919 |
|
|
|
35,320,547 |
|
|
|
|
|
|
|
|
Basic and diluted loss per common share |
|
$ |
(0.21 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
64
Our diluted earnings (loss) per share is the same as our basic loss per share since the effect of
the assumed exercise of options and warrants to purchase common stock is anti-dilutive. A total of
65,597,193 and 49,065,349 potential common shares from the assumed exercise of options and warrants
were excluded from the calculation of diluted net loss per share for the years ended January 2,
2011 and December 27, 2009, respectively, because their inclusion would have been anti-dilutive.
14. 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 the UFood Grill tradename.
The accounting policies of the segments are the same as those described in Note 2. 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, net loss
and assets agree with the comparable amounts contained in the Companys audited financial
statements.
Segment information for the Companys two business segments follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Store operations |
|
$ |
4,518,308 |
|
|
$ |
4,632,651 |
|
Franchise operations |
|
|
424,631 |
|
|
|
818,225 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
4,942,939 |
|
|
$ |
5,450,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
Store operations |
|
$ |
142,762 |
|
|
$ |
(13,056 |
) |
Franchise operations |
|
|
(923,471 |
) |
|
|
(842,440 |
) |
|
|
|
|
|
|
|
Total segment loss |
|
$ |
(780,709 |
) |
|
$ |
(855,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, marketing and promotion |
|
$ |
233,457 |
|
|
$ |
219,360 |
|
Depreciation and amortization |
|
|
325,952 |
|
|
|
407,593 |
|
Unallocated general and administrative expenses |
|
|
2,589,296 |
|
|
|
1,982,728 |
|
Interest (income) expense |
|
|
3,887,769 |
|
|
|
934,307 |
|
Other (income) expenses, net |
|
|
371,820 |
|
|
|
(442,133 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,189,022 |
) |
|
$ |
(3,957,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
Store operations |
|
$ |
302,288 |
|
|
$ |
364,757 |
|
Franchise operations |
|
|
23,664 |
|
|
|
42,836 |
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
325,952 |
|
|
$ |
407,593 |
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Capital expenditures: |
|
|
|
|
|
|
|
|
Store operations |
|
$ |
77,805 |
|
|
$ |
108,102 |
|
Franchise operations |
|
|
17,506 |
|
|
|
8,808 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
95,311 |
|
|
$ |
116,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets: |
|
|
|
|
|
|
|
|
Store operations |
|
$ |
1,468,858 |
|
|
$ |
1,682,070 |
|
Franchise operations |
|
|
2,844,110 |
|
|
|
3,310,269 |
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
4,312,968 |
|
|
$ |
4,992,339 |
|
|
|
|
|
|
|
|
15. Restatement
The consolidated financial statements as of and for the year ended January 2, 2011 have been restated to
correctly reflect the embedded beneficial conversion feature in connection with our most recent
financing of Series B Preferred Stock. The amount of embedded beneficial conversion feature
previously reported was $100,667 and the restated amount is $1,793,428 affecting Retained Earnings
with an offset to Additional Paid in Capital.
16. Subsequent Events
On February 10, 2011, we signed a franchisee agreement with Hawkeye/Badger LLC for a location
within the Omni Club in Fort Myers, Florida.
The Army and Air forces Exchange Services (AAFES) has awarded UFood Grill a contract to build and
operate two UFood Grill units at Aberdeen Proving Ground in Maryland. The restaurants are
projected to open in 2011.
|
|
|
Item 9. |
|
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
|
|
|
Item 9A |
|
Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures.
We have established disclosure controls and procedures to ensure that material information relating
to the Company, including its consolidated subsidiaries is made known to the officers who certify
our financial reports and to other members of management and the Board of Directors. Based on their
evaluations as of January 2, 2011, our Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) were not effective, due to our material weakness in internal
control over financial reporting described below, in ensuring that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC rules and forms and
that such information is accumulated and communicated to our management, including our CEO and CFO,
as appropriate to allow timely decisions regarding required disclosures.
66
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for our Company. Internal control over financial reporting is defined as a
process designed by, or under the supervision of, a Companys principal executive and principal
financial officers and effected by the Companys board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company; |
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made in accordance with
authorizations of management and directors of the Company; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management, under the supervision of and with the participation of the Chief Executive Officer
and Chief Financial Officer, assessed the effectiveness of our internal control over financial
reporting as of January 2, 2011. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal
Control An Integrated Framework (September 1992). Because of the material weakness existed and
continues to exist due to our inability to perform sufficient testing of internal controls over
financial reporting, management concluded that, as of January 2, 2011, our internal controls over
financial reporting were not effective.
Remediation Plans
Management, in coordination with the input, oversight and support of our Audit Committee, has
contracted with a Consultant to assist us in our controls re-design and testing and remediation
efforts. As a result of the testing of Internal Controls over Financial Reporting, the Company may
determine additional material weaknesses. While we expect these remedial actions to be implemented
as soon as possible, these actions were not in place to help us certify that any material
weaknesses have been fully remediated as of the end of calendar year 2010. We will continue to
develop our remediation plans and implement additional measures into calendar year 2011.
Management will actively address operational and internal control remediation efforts. Management
will report quarterly to our Audit Committee on the status of the remediation efforts.
If the remedial measures described above are insufficient to address any of the identified material
weaknesses or are not implemented effectively, or additional deficiencies arise in the future,
material misstatements in our interim or annual financial statements may occur in the future. We
are currently working to improve and simplify our internal processes and implement enhanced
controls, as discussed above, to address the material weaknesses in our internal control over
financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures.
67
This annual report does not include an attestation report of our registered independent public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our registered independent public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only managements report in this annual report.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the
most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
|
Item 9B |
|
Other Information |
none
68
PART III
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
Our executive officers and directors are as follows:
|
|
|
|
|
|
|
Name |
|
|
Age |
|
|
Position |
|
|
|
|
|
|
|
George Naddaff
|
|
|
81 |
|
|
Chief Executive Officer and Chairman of the
Board of Directors |
|
|
|
|
|
|
|
Charles Cocotas
|
|
|
75 |
|
|
President and Chief Operating Officer, Director |
|
|
|
|
|
|
|
Irma Norton
|
|
|
43 |
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
Robert C. Grayson
|
|
|
65 |
|
|
Director |
|
|
|
|
|
|
|
Mark Giresi
|
|
|
52 |
|
|
Director |
|
|
|
|
|
|
|
Richard Golden
|
|
|
57 |
|
|
Director |
|
|
|
|
|
|
|
Keith Mueller
|
|
|
51 |
|
|
Director |
Background of Officers and Directors
George Naddaff has been our Chairman and Chief Executive Officer since December 18, 2007. Prior to
the merger, Mr. Naddaff was the Chief Executive Officer of KnowFat Franchise Company (KnowFat), a
predecessor to the Company, since February 2004, its CEO since September 2007 and its Chairman of
the Board since March 2004. From February 1986 to February 2004, he was Chief Executive Officer of
Business Expansion Capital, Inc., an investment firm located in Newton, Massachusetts. From 1997 to
2001, he held various management positions (including acting Chief Executive Officer) at Ranch*1,
Inc., a franchisor of quick service restaurants with its headquarters in New York, New York. Mr.
Naddaff is one of the founders of KnowFat Franchise Co., Inc. with more than 40 years of experience
in the franchise industry. In addition to Boston Chicken, Mr. Naddaff has been significantly
involved with several other successful concepts including the founding of Mulberry Child Care
Centers, which had over 90 company-owned childcare centers when it was sold to Kindercare,
Americas largest chain. George also founded Living and Learning Schools, which operated more than
50 upscale childcare facilities and was sold to Kindercare in 1980. In addition, he founded VR
Business Brokers, the nations largest business brokerage franchise with over 350 offices, which
was acquired in 1986 by Christies, LLP, London. In 1984, as a director and investor in Sylvan
Learning Centers, Mr. Naddaff helped launch their franchising effort which today has over 1100
units. Mr. Naddaff is a serial entrepreneur and franchise leader, which are excellent attributes to
be the Chairman of Board and CEO of our Company.
Charles A. Cocotas has been our President and Chief Operating Officer and a director since December
18, 2007. Mr. Cocotas joined KnowFat as a consultant in May 2007. In September 2007 he was
appointed as UFoods President and Chief Operating Officer. From 1999 to 2007, Mr. Cocotas was
principal of the
Charles A. Cocotas Restaurant Consulting firm in Massachusetts. Mr. Cocotas has served as Executive
Vice-President with International Dairy Queen. Inc, Chief Operating Officer of Churchs Fried
Chicken, was the original President/Chief Operating Officer of Boston Chicken, Inc., President/CEO
of TCBY, Inc., and Chairman of the Board/CEO of Best Friends Pet Care, Inc. He is an experienced
executive with more than 35 years experience in the restaurant industry, which included the launch
of start-up ventures as well as turn-arounds with established corporations operating both Company
and franchise restaurants. Mr. Cocotas leadership experience, particularly as a food operator for
over three decades, and extensive functional skill set give him an appreciation for business
practices that are vital to the success of a developing company such as ours.
69
Irma Norton joined KnowFat as its Controller in November 2004 and became our Chief Financial
Officer in April 2009. Most recently (from September 2002 through October 2004), Ms. Norton was the
controller for Handmade Bow Company, a privately held consumer products company. Prior to that
position, from March 1990 through October 1995, Norton was the CFO for the Dunkin Donuts master
franchisee in Mexico. Ms. Norton holds a B.A. degree in Accounting from University of Guadalajara
in Mexico and is a graduate of the distinguished Executive Management Program of ITAM in Mexico
City.
Robert C. Grayson has been a director of KnowFat since 2004 and a director of UFood since 2007.
Since 1992 Mr. Grayson has been President and Chief Executive Officer of RC Grayson and Associates,
a retail-oriented consulting firm in New York City. Mr. Grayson served initially as an outside
consultant to Tommy Hilfiger Corp., a wholesaler and retailer of mens sportswear and boyswear, and
later accepted titles of Chairman of Tommy Hilfiger Retail, Inc. and Vice Chairman of Tommy
Hilfiger Corp. From 1970 to 1992, Mr. Grayson served in various capacities for Limited Inc.,
including President and CEO of Lerner New York from 1985 to 1992, and President and CEO of Limited
Stores from 1982 to 1985. He also serves as a director of Kenneth Cole Productions, St. John Knits,
Lillian August Inc., and Stax Incorporated. Mr. Graysons leadership roles in the retail industry,
consumer marketing, research and development, retail technology have made him an integral member of
our Board.
Mark Giresi has been a director of KnowFat since December 6, 2007, and a director of UFood
since 2007. From February 2000 until May 2008, Mr. Giresi worked for Limited Brands where, as
Executive Vice President, he was responsible for the retail operation of Victorias Secret, Bath &
Body Works, Express and The Limited, as well as real estate, store design and construction and loss
prevention functions. Most recently, he led the strategic growth of Victorias Secret and Bath &
Body Works outside of the United States. Prior to Limited Brands, Mr. Giresi spent almost 16 years
at Burger King Corporation, where he held several executive positions including Senior Vice
President of U.S. Franchise Operations and Development and Worldwide General Counsel. Mr. Giresi
holds a Bachelor of Sciences degree in accounting from Villanova University and a Juris Doctorate
degree from Seton Hall Law School. He also serves as a director of NXT Nutritional Holdings, Inc.
His extensive experience in retail, food and franchising industries has been a tremendous
contribution to our board.
Richard Golden is currently a private investor in a number of emerging companies and takes an
active role in overseeing the investments. From 2007 to mid-2010, he was a Managing Director of
Alumni Capital Network, a private equity firm specializing in buying and building small to
mid-sized businesses. He managed the fund-raising for the firms $68 million fund and served on the
Board of the company. Previously, he spent 28 years with Accenture in various executive management
roles as well as managed large-scaled business improvement projects for Global 1000 companies,
concentrating on airlines, manufacturers and retailers. His management positions included Country
Managing Director Sweden and Finland; Managing Director of the Retail Industry in Europe and
Africa; Chief Operating Officer for the Products Market Unit; and Corporate Chief of Staff where he
helped manage the transition of
Accenture from a global partnership to an international corporation. Mr. Goldens contribution to
our Company is his vast experience in leadership roles and fund-raising activities that have made
him a critical member of our Board.
Keith Mueller currently serves as Advisor to BookKeeping Express, the only national franchise
providing book keeping services to small and medium-sized businesses, and Cate Street Capital, the
owner and developer of a New Hampshire based bio-mass power plant that is intended to provide 65
megawatts of clean energy starting in 2010. He also held a number of management roles during his 27
years at Accenture and focused on large clients in the utility Industry. Some of experiences
include leading the utilities practice in North America that had over $800 million in revenues and
1,000 people and building an outsourcing practice from start-up to over $500 million in revenue in
four years with over 4,000 individuals. Mr. Muellers brings to our board a deep understanding of
business strategy and during his tenure as a member he has gained additional expertise in the
restaurant industry.
70
There are no family relationships among our executive officers and directors. None of our
executive officers or directors has, during the past five years:
|
(a) |
|
had any petition under the federal bankruptcy laws or any state insolvency law
filed by or against, or a receiver, fiscal agent or similar officer appointed by a
court for the business or property of, such person, or any partnership in which he
was a general partner at or within two years before the time of such filing, or any
corporation or business association of which he was an executive officer at or
within two years before the time of such filing; |
|
|
(b) |
|
been convicted in a criminal proceeding or subject to a pending criminal proceeding; |
|
|
(c) |
|
been subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or any federal or
state authority, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities, futures,
commodities or banking activities; or |
|
|
(d) |
|
been found by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Future Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended or
vacated. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys officers, directors and
persons who own more than ten percent of the issued and outstanding shares of Common Stock to file
reports of beneficial ownership and changes in beneficial ownership with the SEC and to furnish
copies of all Section 16(a) forms to the Company. Form 3 filings are known to be late for each of
the following directors, officers and beneficial owners of more than 10 percent of any class of
equity securities of the Company: George A. Naddaff, Charles A. Cocotas, Irma Norton, Robert C.
Grayson, Mark A. Giresi, Richard Golden and Keith Mueller.
Nominations to the Board of Directors
Stockholders may recommend individuals to the Nominating and Corporate Governance Committee of the
Board of Directors for consideration as potential director candidates by submitting their names,
together with appropriate biographical information and background materials, to the Nominating and
Corporate Governance Committee, c/o Corporate Secretary, UFood Restaurant Group, Inc., 255
Washington Street, Suite 150, Newton, MA 02458.
Code of Ethics
We have a Code of Ethics that governs all of our employees, including our CEO, CFO, principal
accounting officer or persons performing similar functions. We will provide a copy of our Code of
Ethics free of charge to any person upon written request to us at the following address: 255
Washington Street, Suite 150, Newton, MA 02458 Attn: Chief Financial Officer.
Board of Directors
The Board of Directors currently consists of six members. Directors serve until their successors
are duly elected or appointed. On February 12, 2008, the Board of Directors designated a
Compensation Committee, Audit Committee and Nominating and Corporate Governance Committee of the
Board. Mark Giresi, Robert Grayson and Keith Mueller are members of the Compensation Committee,
Mark Giresi and Richard Golden are members of the Audit Committee, and Robert Grayson is a member
of the Nominating and Corporate Governance Committee of the Board.
Audit Committee Financial Expert
Our Board of Directors has determined that there is no financial expert serving on our Audit
Committee. Since we are not a listed issuer as that term is defined in Rule 10A-3 under the
Exchange Act, we are not required to have a financial expert serving on our Audit Committee.
71
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Item 11. |
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Executive Compensation |
EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth, for the last two fiscal years, the compensation earned by our Chief
Executive Officer and the other executive officers who received annual compensation in excess of
$100,000. Each of the named executive officers (the Named Executive Officers) is entitled to
certain payments in connection with resignation, retirement or other termination, as described more
fully under the heading Agreements with Executive Officers and Consultants.
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Non-Equity |
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Nonqualified |
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Name and |
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Incentive |
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Deferred |
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All Other |
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Principal |
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Stock |
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Option |
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Plan |
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Compensation |
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Annual |
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|
Position(s) |
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Awards |
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|
Awards |
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|
Compensation |
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Earnings |
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Compensation |
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Total |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
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(e) |
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(f)(1) |
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(g) |
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(h) |
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|
(i)(2) |
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(j) |
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George Naddaff, |
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2010 |
|
|
$ |
301,620 |
|
|
$ |
-0- |
|
|
$ |
0 |
|
|
$ |
691,961 |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
30,000 |
|
|
$ |
1,023,581 |
|
Chairman and CEO |
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|
2009 |
|
|
$ |
301,485 |
|
|
$ |
-0- |
|
|
$ |
7,500 |
|
|
$ |
212,000 |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
7,500 |
|
|
$ |
528,485 |
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Charles A. Cocotas |
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2010 |
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|
$ |
201,620 |
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|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
271,788 |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
473,408 |
|
President and COO |
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|
2009 |
|
|
$ |
201,485 |
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|
$ |
-0- |
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|
$ |
-0- |
|
|
$ |
43,200 |
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|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
244,685 |
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Irma Norton |
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2010 |
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|
$ |
136,215 |
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|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
56,278 |
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|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
192,493 |
|
CFO |
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2009 |
|
|
$ |
133,409 |
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|
$ |
10,000 |
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|
$ |
-0- |
|
|
$ |
4,465 |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
147,874 |
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Thomas Mackey |
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2010 |
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|
$ |
150,000 |
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|
|
-0- |
|
|
$ |
-0- |
|
|
$ |
52,870 |
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|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
10,950 |
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|
$ |
213,820 |
|
SVP of Operations |
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2009 |
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$ |
150,000 |
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|
|
-0- |
|
|
$ |
-0- |
|
|
$ |
7,170 |
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|
$ |
-0- |
|
|
$ |
-0- |
|
|
$ |
10,950 |
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|
$ |
168,120 |
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(1) |
|
These amounts represent the aggregate grant date fair value of
awards for fiscal years 2010, and 2009. The fair value of the
stock option award(s) was determined using a Black Scholes option
pricing model and the assumptions for expected option term,
volatility of our Common Stock, risk-free interest rate and
expected annual dividend yield disclosed in Note 8, Stock-Based
Compensation, of the Notes to our 2010 Consolidated Financial
Statements included in the Companys annual report. |
|
(2) |
|
Mr. Naddaff was paid in 2010 the amount of $30,000 for
commissions with respect to franchises sold pursuant to his
employment agreement. Mr. Mackey received an auto-allowance for
the use of his personal car while doing business. |
The salary of Mr. Naddaff is currently $300,000, and the salary of Mr. Cocotas is currently
$220,000.
Agreements with Executive Officers
The Company entered into an employment contract with Mr. Naddaff on October 15, 2007 that provides:
(i) the term of his employment agreement is for three years; (ii) the base salary for Mr. Naddaff
is $300,000, plus benefits; (iii) Mr. Naddaff was granted options to purchase 1,500,000 of our
shares under the Equity Incentive Plan; and (iv) if a Mr. Naddaffs employment is terminated by the
Company without cause, or by Mr. Naddaff as a result of a constructive termination by the Company,
or as a result of Mr. Naddaffs death or disability, then the Company is obligated to pay severance
(consisting of salary and benefits as in effect at the time of termination) to Mr. Naddaff (or Mr.
Naddaffs legal representatives) for a period equal to the lesser of 12 months or the
then-remaining balance of the employment term. The options referenced above have an exercise price
of $1.00 per share, have a term of ten years and vest over a three-year period as follows: Mr.
Naddaffs options to purchase (i) 500,000 shares vested upon the grant of the options and (ii)
1,000,000 shares vest in equal monthly amounts of approximately 27,778 shares over a three year
period through December 17, 2010. In addition to the foregoing, upon our consummation of the sale
of any franchise restaurant, we will pay
72
Mr. Naddaff a fee of $10,000. To the extent any franchise
transaction is a part of an Area Development Agreement, the fee will be payable to Mr. Naddaff upon
consummation of the franchise sale as follows: (i) $5,000 in cash and (ii) the remaining portion in
a number of shares of our common stock having an aggregate value of $5,000 on the date such fee is
due. Mr. Naddaffs employment agreement provides for severance (consisting of base salary and
benefits continuation) for a period of up to 12 months upon termination of the executive without
cause. On May 1, 2008, the Board of Directors granted to Mr. Naddaff options to purchase 1,000,000
shares of the Companys Common Stock, exercisable at $1.23, which options were fully vested. These
options were not granted pursuant to a compensation plan, but instead represent non-qualified stock
options. All options granted to Mr. Naddaff were canceled on May 13 2009 and he received a new
grant with the same amount of options to purchase shares of the Companys common stock under the
2007 Stock Option Plan, at an exercise price of $0.20 with the same vesting schedule as the
canceled options. On June 30, 2010, the Company amended its employment agreement with George
Naddaff 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. One half of options vested on the date of
grant and the other half vest over a period of three years.
On February 12, 2008, the Board of Directors approved an employment agreement with Mr. Cocotas. The
agreement provides: (i) for an initial term of two years; (ii) for a base salary of $200,000 per
year, plus
benefits; (iii) that Mr. Cocotas is entitled to receive options to purchase 200,000 shares of the
Companys Common Stock, exercisable at $1.00 per share of Common Stock, which options shall vest in
equal amounts on the first day of each month for twenty-four months following the date of the
employment agreement; and (iv) that if Mr. Cocotas employment is terminated by him for good reason
(as defined in the agreement) or by the Company because of his permanent disability (as defined in
the agreement), the Company is obligated to pay severance, consisting of base salary, for a six
month period. On May 1, 2008, the Board of Directors granted to Mr. Cocotas options to purchase
300,000 shares of the Companys Common Stock, exercisable at $1.23, which options shall vest
monthly over the remaining period of his employment agreement. These options were not granted
pursuant to a compensation plan, but instead represent non-qualified stock options. All options
granted to Mr. Cocotas were canceled on May 13 2009 and he received a new grant with the same
amount of options to purchase shares of the Companys Common stock under the 2007 Stock Option
Plan, at an exercise price of $0.20 with the same vesting schedule of the canceled options. On June
30, 2010, the employment agreement for Mr. Cocotas 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 vested 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.
Summary Compensation Table
Outstanding Equity Awards at Fiscal Year End
January 2, 2011
The following table sets forth certain information, as of January 2, 2011, concerning securities
authorized for issuance under Equity Incentive Plan.
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Equity |
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Incentive |
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Plan |
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Awards: |
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No. of |
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No. of |
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Number of |
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|
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|
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|
|
|
|
Securities |
|
|
Securities |
|
|
Securities |
|
|
|
|
|
|
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Underlying |
|
|
Underlying |
|
|
Underlying |
|
|
|
|
|
|
|
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Unexercised |
|
|
Unexercised |
|
|
Unexercised |
|
|
Option |
|
|
Option |
|
|
|
Options (#) |
|
|
Options (#) |
|
|
Unearned |
|
|
Exercise |
|
|
Expiration |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
Options |
|
|
Price |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Naddaff |
|
|
5,100,694 |
|
|
|
1,399,306 |
(1) |
|
|
-0- |
|
|
$ |
0.19 |
|
|
April 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles A. Cocotas |
|
|
1,892,238 |
|
|
|
519,110 |
|
|
|
-0- |
|
|
|
0.19 |
|
|
April 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irma Norton |
|
|
302,580 |
|
|
|
168,750 |
|
|
|
-0- |
|
|
|
0.19 |
|
|
February 11, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Mackey |
|
|
290,000 |
|
|
|
168,750 |
|
|
|
-0- |
|
|
|
0.19 |
|
|
February 11, 2018 |
|
|
|
(1) |
|
The vesting schedule for the unexercised shares is
outlined in the section entitled Agreements with
Executive Officers and Consultants above. |
73
2004 Stock Option Plan
UFood Grill did not grant any options or other stock awards under the 2004 Stock Option Plan to any
named executive officer in 2010 or 2009.
2007 Equity Incentive Plan
The 2007 Plan was approved in contemplation of the Merger. There were no awards under the 2007
Plan prior to December 18, 2007, the Closing Date of the Merger. 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 9,000,000 shares of Common Stock to
employees, directors, consultants and agents of the Company. The Company believes awards under the
2007 Plan align the interests of its employees with those of its shareholders. At January 2, 2011,
5,884,990 stock options were outstanding under the 2007 Plan.
Activity under the 2007 Plan from December 28, 2008, through January 2, 2011 is presented below:
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Weighted |
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|
|
|
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|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
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|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at December 28, 2008 |
|
|
2,845,920 |
|
|
$ |
1.22 |
|
|
|
8.8 |
|
|
|
-0- |
|
Granted |
|
|
3,979,990 |
|
|
$ |
0.20 |
|
|
|
8.2 |
|
|
|
|
|
Canceled |
|
|
(2,360,920 |
) |
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(545,000 |
) |
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 27, 2009 |
|
|
3,919,990 |
|
|
$ |
0.20 |
|
|
|
8.2 |
|
|
|
-0- |
|
Granted |
|
|
2,070,000 |
|
|
$ |
0.16 |
|
|
|
9.3 |
|
|
|
|
|
Canceled |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(105,000 |
) |
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2011 |
|
|
5,884,990 |
|
|
$ |
0.19 |
|
|
|
7.9 |
|
|
$ |
200,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable at January 2, 2011 were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Number of |
|
Exercise |
|
|
Contractual |
|
|
Number of |
|
|
|
|
Options |
|
Price |
|
|
Term |
|
|
Options |
|
|
Exercise Price |
|
3,814,990 |
|
$ |
0.20 |
|
|
|
7.2 |
|
|
|
3,800,439 |
|
|
$ |
0.20 |
|
2,070,000 |
|
$ |
0.16 |
|
|
|
9.3 |
|
|
|
2,070,000 |
|
|
$ |
0.16 |
|
74
Administration
The Compensation Committee of the Board, or the Board in the absence of such a committee, will
administer the 2007 Plan. Subject to the terms of the 2007 Plan, the Compensation Committee has
complete authority and discretion to determine the terms of awards under the 2007 Plan.
Grants
The 2007 Plan authorizes the grant to participants of nonqualified stock options, incentive stock
options, restricted stock awards, restricted stock units, performance grants intended to comply
with Section 162(m) of the Internal Revenue Code, as amended, and stock appreciation rights, as
described below:
|
|
|
Options granted under the 2007 Plan entitle the grantee, upon
exercise, to purchase a specified number of shares from us at a
specified exercise price per share. The exercise price for shares of
common stock covered by an option cannot be less than the fair market
value of the common stock on the date of grant unless agreed to
otherwise at the time of the grant. |
|
|
|
|
Restricted stock awards and restricted stock units may be awarded on
terms and conditions established by the compensation committee, which
may include performance conditions for restricted stock awards and the
lapse of restrictions on the achievement of one or more performance
goals for restricted stock units. |
|
|
|
|
The compensation committee may make performance grants, each of which
will contain performance goals for the award, including the
performance criteria, the target and maximum amounts payable and other
terms and conditions. |
|
|
|
|
The 2007 Plan authorizes the granting of stock awards. The
compensation committee will establish the number of shares of common
stock to be awarded and the terms applicable to each award, including
performance restrictions. |
|
|
|
|
Stock appreciation rights (SARs) entitle the participant to receive a
distribution in an amount not to exceed the number of shares of common
stock subject to the portion of the SAR exercised multiplied by the
difference between the market price of a share of common stock on the
date of exercise of the SAR and the market price of a share of common
stock on the date of grant of the SAR. |
Duration, Amendment and Termination
The Board has the power to amend, suspend or terminate the 2007 Plan without stockholder approval
or ratification at any time or from time to time. No change may be made that increases the total
number of shares of common stock reserved for issuance pursuant to incentive awards or reduces the
minimum exercise price for options or exchange of options for other incentive awards, unless such
change is authorized by our stockholders within one year. Unless sooner terminated, the 2007 Plan
would terminate ten years after it is adopted.
Other Equity Awards
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
to 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 January 2, 2011 there was $850,281 of total
unrecognized compensation cost related to non-vested options granted outside of any Plan. This cost
will be recognized over approximately 30 months.
75
Director Compensation
On February 12, 2008, our Board of Directors approved the following compensation for non-employee
directors:
(a) Each non-employee director shall be granted non-qualified options to purchase 100,000
shares of common stock at an exercise price equal to the closing stock price on February 11,
2008. Such
grant shall represent a tri-annual retainer for the 2008, 2009 and 2010 fiscal years. The
options granted shall vest weekly over 36 months and shall expire February 11, 2018.
(b) Each non-employee director who serves as chairman of the Audit, Compensation or
Nominating and Corporate Governance committee shall receive an annual grant of non-qualified
options to purchase 3,000 shares of common stock. All other members of each committee shall
receive an annual grant of non-qualified options to purchase 2,500 shares of common stock.
On June 30th, 2010, each Director was issued non-qualified stock options to purchase
500,000 shares of the Companys common stock with an exercise price of $0.19. The vesting schedule
is monthly over one year. As a result of this grant, the Company will record an expense of
$394,400 over the vesting period. Our directors are reimbursed for reasonable and necessary
out-of-pocket expenses incurred in connection with their service to us, including travel expenses.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
Stock Awards |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Robert Grayson |
|
$ |
9,377 |
|
|
$ |
98,606 |
|
Mark Giresi |
|
$ |
9,377 |
|
|
$ |
98,606 |
|
Keith Mueller |
|
$ |
-0- |
|
|
$ |
98,606 |
|
Richard Golden |
|
$ |
-0- |
|
|
$ |
98,606 |
|
KnowFat did not award stock options or other compensation to its directors in 2007. Our directors
are reimbursed for reasonable and necessary out-of-pocket expenses incurred in connection with
their service to us, including travel expenses.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Securities Authorized for Issuance under Equity Compensation Plans
The Company has two share-based, shareholder-approved equity compensation plans, the 2004 Stock
Option Plan (the 2004 Plan) and the 2007 Equity Incentive Plan (the 2007 Plan). Descriptions of
these plans, and certain information regarding options issued thereunder, are presented in Note 8,
Stock-Based Compensation, of our 2010 Consolidated Financial Statements below.
As of the end of fiscal year 2010, we had the following securities authorized for issuance under
our equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
Number of |
|
|
|
|
|
|
remaining available for |
|
|
|
securities to be |
|
|
|
|
|
|
future issuance under |
|
|
|
issued upon |
|
|
Weighted-average |
|
|
equity compensation |
|
|
|
exercise of |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
outstanding |
|
|
outstanding options, |
|
|
securities reflected in |
|
Plan Category |
|
options |
|
|
warrants and rights |
|
|
column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by security holders |
|
|
5,917,747 |
(2) |
|
$ |
0.19 |
|
|
|
3,115,010 |
(3) |
Equity compensation plans not approved by security holders |
|
|
8,728,673 |
(1) |
|
$ |
0.19 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,646,420 |
|
|
$ |
0.19 |
|
|
|
3,115,010 |
|
|
|
|
(1) |
|
On June 30th, 2010 the Board of Directors approved the
grant of options to purchase 7,683,673 shares of common stock
shown in the table. These options were not granted pursuant to a
compensation plan, but instead represent non-qualified stock
options granted to Directors, Officers, and employees. The
options granted have various vesting schedules at an exercise
price of $0.19 per share. |
76
|
|
|
(2) |
|
On April 1, 2010, the Board of Directors approved the grant of
2,070,000 options to acquire shares of the Companys common stock
under the Companys 2007 Equity Incentive Plan to officers and
employees, fully vested at an exercise price of $0.16 per share. |
|
(3) |
|
On July 1st, 2010, the shareholders approved the
addition of 3,000,000 stock options available under our 2007
Stock Option Plan for a total of 9,000,000 stock options in that
Plan. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the beneficial ownership of our
common stock as of April 7, 2011, by (i) each person who, to our knowledge, owns more than 5% of
the Common Stock; (ii) each of our directors and executive officers; and (iii) all of our executive
officers and directors as a group. Unless otherwise indicated in the footnotes to the following
tables, each person named in the table has sole voting and investment power and that persons
address is c/o UFood Restaurant Group, Inc., 255 Washington Street, Suite 150, Newton,
Massachusetts 02458. Shares of Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days of April 7, 2011 are deemed outstanding for computing the share
ownership and percentage of the person holding such options and warrants, but are not deemed
outstanding for computing the percentage of any other person.
|
|
|
|
|
|
|
|
|
|
|
Amount and |
|
|
|
|
|
|
Nature of |
|
|
Percent |
|
|
|
Beneficial |
|
|
of |
|
Name and Address of Beneficial Owner |
|
Ownership |
|
|
Class+ |
|
|
|
|
|
|
|
|
|
|
George A. Naddaff(1) |
|
|
7,238,968 |
|
|
|
15.14 |
% |
Charles A. Cocotas(2) |
|
|
1,992,710 |
|
|
|
4.68 |
% |
Irma Norton(7) |
|
|
315,080 |
|
|
|
* |
|
Robert C. Grayson(3) |
|
|
705,483 |
|
|
|
1.71 |
% |
Mark Giresi(4) |
|
|
605,000 |
|
|
|
1.47 |
% |
Keith Mueller(5) |
|
|
3,594,771 |
|
|
|
8.1 |
% |
Richard Golden(6) |
|
|
2,975,816 |
|
|
|
6.8 |
% |
|
|
|
|
|
|
|
Directors and Executive Officers as a group(1)-(6) |
|
|
17,427,829 |
|
|
|
30.0 |
% |
|
|
|
|
|
|
|
|
|
Kevin Kimberlin(8) |
|
|
4,483,712 |
|
|
|
9.95 |
% |
535 Madison Avenue |
|
|
|
|
|
|
|
|
New York, NY 10022 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Less than one percent |
|
+ |
|
Based on 40,581,557 shares of common stock issued and outstanding as of April 7, 2011. |
|
(1) |
|
Includes 1,682,907 shares of Common Stock beneficially owned by Mr.
Naddaff. Also includes 184,533 shares of Common Stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days of April 7, 2011 and 5,371,528 shares of Common Stock issuable
upon exercise of options currently exercisable or exercisable within
60 days of April 7, 2011. Does not include 1,128,472 shares of Common
Stock issuable upon exercise of options granted to Mr. Naddaff which
will not be exercisable within 60 days of April 7, 2011. |
77
|
|
|
(2) |
|
Consists of 1,992,710 shares of Common Stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of April
7, 2011. Does not include 418,638 shares of Common Stock issuable upon
exercise of options granted to Mr. Cocotas which will not be
exercisable within 60 days of April 7, 2011. |
|
(3) |
|
Includes 74,815 shares of Common Stock beneficially owned by Mr.
Grayson. Also includes 25,668 shares of Common Stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days of April 7, 2011 and 605,000 shares of Common Stock issuable upon
exercise of options currently exercisable or exercisable within 60
days of April 7, 2011. |
|
(4) |
|
Includes 605,000 shares of Common Stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of April
7, 2011. |
|
(5) |
|
Includes 210,156 shares of Common Stock beneficially
owned by Mr. Mueller. Also, includes 1,923,077 shares
of Common Stock issuable upon conversion of Preferred
Stock and 961,538 shares of Common Stock issuable upon
exercise of warrants beneficially owned by Mr.
Mueller. Includes 500,000 shares of Common Stock
issuable upon exercise of options currently
exercisable or exercisable within 60 days of April 7,
2011. |
|
(6) |
|
Includes 168,124 shares of Common Stock beneficially
owned by Mr. Golden. Also, includes 1,538,462 shares
of Common Stock issuable upon conversion of Preferred
Stock and 769,231 shares of Common Stock issuable upon
exercise of warrants beneficially owned by Mr. Golden.
Includes 500,000 shares of Common Stock issuable upon
exercise of options currently exercisable or
exercisable within 60 days of April 7, 2011. |
|
(7) |
|
Includes 315,080 shares of Common Stock issuable upon
exercise of options currently exercisable or
exercisable within 60 days of April 7, 2011. Does not
include an additional 156,250 shares of Common Stock
issuable upon exercise of options granted to Mrs.
Norton which will not be exercisable within 60 days of
April 7, 2011. |
|
(8) |
|
Includes 102,125 shares of Common Stock beneficially
owned by Spencer Trask Breakthrough Partners, LLC
(STBP) and 3,240,000 shares of Common Stock
beneficially owned by Spencer Trask Investment
Partners, LLC (STIP). Mr. Kimberlin is the
non-member manager of both STBP and STIP. Also
includes (i) 51,063 shares of Common Stock issuable
upon exercise of a warrant held by STBP, (ii) 372,500
shares of Common Stock issuable upon exercise of a
warrant held by Concord Equities Group, Inc., (iii)
358,584 shares of Common Stock issuable upon exercise
of a warrant held by Spencer Trask & Co., a
corporation of which Mr. Kimberlin is the sole
stockholder, and (iv) 359,440 shares of Common Stock
issuable upon exercise of a warrant held by Washington
Associates, LLC. The information set forth in this
footnote 8 was obtained from a Form 4 filed by Mr.
Kimberlin with the SEC on July 16, 2008. |
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
Directors and Officers of UFood
In May 2006, KnowFat entered into an agreement with George Naddaff, Chairman and CEO, by which Mr.
Naddaff received a warrant to purchase up to 184,533 shares of KnowFat common stock in exchange for
Mr. Naddaffs personal guaranty of KnowFats credit obligations to the Bank.
78
UFoods directors have received stock option grants and reimbursement of certain expenses. See
Director Compensation above. Two of our directors are also executive officers.
Transactions with the Placement Agent and Its Related Parties
The Company paid Garden State Securities, Inc. (Garden State), the placement agent retained in
connection with its 2009 private placement of securities (the 2009 Offering) (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,
Garden State (or its assigns) received 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 warrants sold in the 2009 Offering. As a result of the foregoing, Garden State 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 the March 2009 first closing, and
3,936,923 for the April 2009 second and final closing in connection with the 2009 Offering. The
terms of these warrants were similar to those issued to investors in the 2009 Offering.
The Company paid Garden State, the placement agent retained in connection with its 2010 Private
Placement (i) an aggregate cash fee $344,000; (ii) warrants to purchase an aggregate of 2,243,478
shares of common stock at an exercise price equal to $0.29, and exercisable for a period of 5
years; and (iv) $37,500 for its fees and expenses.
Board Independence
Although we are not currently subject to the listing standards of any exchange or to the SEC
rules pertaining to director independence, we believe that Messrs. Grayson and Giresi are
independent directors as that term is defined by applicable listing standards of the Nasdaq stock
market and SEC rules, including the rules relating to the independence standards of an audit
committee and the non-employee definition of Rule 16b-3 promulgated under the Exchange Act.
|
|
|
Item 14. |
|
Principal Accounting Fees and Services |
The following table sets forth the fees we paid to CCR, LLP, independent registered public
accounting firm, during our fiscal years ended January 2, 2011 and December 30, 2007 for: (i)
services rendered for the audit of our annual financial statements and the review of our quarterly
financial statements; (ii) services rendered that are reasonably related to the performance of the
audit or review of our financial statements and that are not reported as audit fees; (iii) services
rendered in connection with tax compliance, tax advice and tax planning; and (iv) all other
services rendered.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
January 2, 2011 |
|
|
December 27, 2009 |
|
Audit fees (1) |
|
$ |
55,000 |
|
|
$ |
60,000 |
|
Audit-related fees |
|
|
33,000 |
|
|
|
33,000 |
|
Tax fees (2) |
|
|
17,100 |
|
|
|
17,100 |
|
All other fees (3) |
|
|
7,205 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
Total fees |
|
$ |
112,305 |
|
|
$ |
110,100 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees for the year ended January 2, 2011 represent payments made by KnowFat to CCR
for professional services in connection with the audit of its annual financial statements.
The payments were approved by the Audit Committee. |
79
|
|
|
(2) |
|
Tax fees for the year ended January 2, 2011 represent payments made by KnowFat to CCR
for their preparation of Knowfats federal and state income tax returns. The payments were
approved by the Audit Committee. |
|
(3) |
|
All other fees for the year ended January 2, 2011 are comprised of (i) $2,073 paid to
CCR for professional services in connection with their assistance on the review of the S-8
document, (ii) $3,852 for audit of the 401K Plan, and (iii) $1,280 for review of comment
letter with the SEC. These amounts were approved by the Audit Committee. |
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy for pre-approval of audit and permitted non-audit services
by the Companys independent registered public accountants. The Audit Committee will consider
annually and, if appropriate, approve the provision of audit services by its external auditor and
consider and, if appropriate, pre-approve the provision of certain defined audit and non-audit
services. The Audit Committee also will consider on a case-by-case basis and, if appropriate,
approve specific engagements that are not otherwise pre-approved.
Any proposed engagement that does not fit within the definition of a pre-approved service may be
presented to the Audit Committee for consideration at its next regular meeting or, if earlier
consideration is required, to the Audit Committee or one or more of its members. The member or
members to whom such authority is delegated shall report any specific approval of services at its
next regular meeting. The Audit Committee will regularly review summary reports detailing all
services being provided to the Company by its external auditor.
The Audit Committee approved the audit-related fees, tax fees and all other fees set forth
above for the year ended January 2, 2011.
80
PART IV
|
|
|
Item 15. |
|
Exhibits, Financial Statement Schedules. |
|
(a) |
|
The following documents are filed as part of this report: |
|
(1) |
|
Consolidated financial statements (included in Part II, Item 8): |
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
|
|
Consolidated Balance Sheets as of January 2, 2011 and December 27, 2009 |
|
|
|
|
Consolidated Statements of Operations for the Fiscal Years Ended
January 2, 2011 and December 27, 2009 |
|
|
|
|
Consolidated Statements of Stockholders Equity (Deficit) for the
Fiscal Years Ended January 2, 2011 and December 27, 2009 |
|
|
|
|
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 2, 2011 and December 27, 2009 |
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
|
(2) |
|
Consolidated financial statement schedules |
None
|
(3) |
|
Exhibits included herein: |
See Exhibit Index below for exhibits filed as part of this
Annual Report on Form 10-K/A.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
UFOOD RESTAURANT GROUP, INC.
|
|
Date: May 18, 2011 |
By: |
/s/ George Naddaff |
|
|
|
Chairman and Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
/s/ George Naddaff
|
|
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|
May 18, 2011 |
|
|
|
|
|
/s/ Charles A. Cocotas
|
|
President and Chief
Operating Officer,
Director
|
|
May 18, 2011 |
|
|
|
|
|
/s/ Irma Norton
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
May 18, 2011 |
|
|
|
|
|
/s/ Mark Giresi
|
|
Director
|
|
May 18, 2011 |
|
|
|
|
|
/s/ Robert Grayson
|
|
Director
|
|
May 18, 2011 |
|
|
|
|
|
Keith Mueller
|
|
Director
|
|
May 18, 2011 |
|
|
|
|
|
/s/ Rick Golden
|
|
Director
|
|
May 18, 2011 |
82
|
|
|
|
|
|
21 |
|
|
Subsidiaries of the Registrant* |
|
|
|
|
|
|
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* |
83