Attached files
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EX-31.2 - EXHIBIT 31.2 - UFood Restaurant Group, Inc. | c17480exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - UFood Restaurant Group, Inc. | c17480exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - UFood Restaurant Group, Inc. | c17480exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - UFood Restaurant Group, Inc. | c17480exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 3, 2011
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to _________
Commission File Number: 333-136167
UFOOD RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) |
20-4463582 (I.R.S. Employer Identification No.) |
255 Washington Street, Suite 100
Newton, MA 02458
(Address of principal executive offices)
Newton, MA 02458
(Address of principal executive offices)
(617) 787-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data file required to be submitted and posted
pursuant to rule 405 of Regulation S-t during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
o Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
As of May 16, 2011, there were 40,581,557 shares of the Registrants common stock, par value
$0.001 per share, issued and outstanding.
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
3 | ||||||||
21 | ||||||||
30 | ||||||||
30 | ||||||||
PART II OTHER INFORMATION |
||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
34 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Index to Consolidated Financial Statements
4 - 5 | ||||
6 | ||||
7 | ||||
8 | ||||
9 - 20 | ||||
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Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
April 3, 2011 and January 2, 2011
April 3, 2011 and January 2, 2011
Assets
April 3, | January 2, | |||||||
2011 | 2011 | |||||||
(unaudited) | (audited) | |||||||
(restated) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,936,311 | $ | 2,797,452 | ||||
Restricted cash |
40,129 | 40,041 | ||||||
Accounts receivable, net |
10,329 | 8,334 | ||||||
Inventories |
122,642 | 118,324 | ||||||
Prepaid expenses and other current assets |
76,688 | 78,310 | ||||||
Total current assets |
2,186,099 | 3,042,461 | ||||||
Property and equipment: |
||||||||
Equipment |
1,060,933 | 1,006,238 | ||||||
Furniture and fixtures |
300,545 | 210,251 | ||||||
Leasehold improvements |
1,742,506 | 1,722,654 | ||||||
Website development costs |
64,575 | 27,050 | ||||||
Total property and equipment |
3,168,559 | 2,966,193 | ||||||
Accumulated depreciation and amortization |
1,948,799 | 1,863,148 | ||||||
Net fixed assets |
1,219,760 | 1,103,045 | ||||||
Other assets: |
||||||||
Deferred financing, net |
6,173 | 7,717 | ||||||
Goodwill |
75,363 | 75,363 | ||||||
Other |
114,161 | 84,382 | ||||||
Total other assets |
195,697 | 167,462 | ||||||
Total assets |
$ | 3,601,556 | $ | 4,312,968 | ||||
See accompanying notes.
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Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
April 3, 2011 and January 2, 2011
April 3, 2011 and January 2, 2011
Liabilities and Stockholders Equity
April 3, | January 2, | |||||||
2011 | 2011 | |||||||
(unaudited) | (audited) | |||||||
(restated) | ||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 450,000 | $ | 450,000 | ||||
Current portion of capital lease obligations |
20,557 | 27,496 | ||||||
Accounts payable |
401,608 | 279,102 | ||||||
Franchisee deposits |
87,500 | 80,000 | ||||||
Accrued dividends |
400,571 | 225,779 | ||||||
Accrued expenses and other current liabilities |
171,159 | 165,632 | ||||||
Total current liabilities |
1,531,395 | 1,228,009 | ||||||
Long-term liabilities: |
||||||||
Long-term debt |
67,679 | 62,120 | ||||||
Warrant liability |
1,133,264 | 1,451,669 | ||||||
Capital lease obligations |
14,522 | 17,844 | ||||||
Other noncurrent liabilities |
81,558 | 83,716 | ||||||
1,297,023 | 1,615,349 | |||||||
Total liabilities |
2,828,418 | 2,843,358 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value, 10,000,000 shares authorized, |
||||||||
Series A 56,925 shares issued and outstanding |
57 | 57 | ||||||
Series B 39,400 shares issued and outstanding |
39 | 39 | ||||||
Common stock, $0.001 par value, 300,000,000 shares authorized,
40,567,428 and 40,487,294 shares issued and outstanding at
April 3, 2011 and January 2, 2011 respectively |
40,567 | 40,487 | ||||||
Additional paid-in capital |
43,055,705 | 42,845,625 | ||||||
Accumulated deficit |
(42,323,230 | ) | (41,416,598 | ) | ||||
Total stockholders equity |
773,138 | 1,469,610 | ||||||
Total liabilities and stockholders equity |
$ | 3,601,556 | $ | 4,312,968 | ||||
See accompanying notes.
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Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations Unaudited
For the Fiscal Quarters Ended April 3, 2011 and March 28, 2010
For the Fiscal Quarters Ended April 3, 2011 and March 28, 2010
Fiscal Quarters Ended | ||||||||
April 3, | March 28, | |||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Store sales |
$ | 918,068 | $ | 1,068,970 | ||||
Franchise royalties and fees |
45,906 | 40,536 | ||||||
963,974 | 1,109,506 | |||||||
Costs and expenses: |
||||||||
Store operating expenses: |
||||||||
Cost of goods sold, food and paper products |
276,907 | 304,470 | ||||||
Cost of goods sold |
65,247 | 83,989 | ||||||
Labor |
301,628 | 306,443 | ||||||
Occupancy |
106,913 | 123,828 | ||||||
Other store operating expenses |
193,016 | 208,642 | ||||||
General and administrative expenses |
925,133 | 717,395 | ||||||
Advertising, marketing and promotion expenses |
51,341 | 27,020 | ||||||
Depreciation and amortization |
85,651 | 82,982 | ||||||
Total costs and expenses |
2,005,836 | 1,854,768 | ||||||
Operating loss |
(1,041,862 | ) | (745,262 | ) | ||||
Other income (expense): |
||||||||
Other income (expense) |
318,405 | (68,901 | ) | |||||
Interest income |
2,424 | 2,531 | ||||||
Interest expense |
(10,807 | ) | (384,212 | ) | ||||
Other income (expense), net |
310,022 | (450,582 | ) | |||||
Loss before income taxes |
; | (731,840 | ) | (1,195,844 | ) | |||
Income taxes |
| | ||||||
Net loss |
$ | (731,840 | ) | $ | (1,195,844 | ) | ||
Dividends on preferred stock |
(174,792 | ) | | |||||
Net loss attributable to common stockholders |
(906,632 | ) | (1,195,844 | ) | ||||
Weighted average number of shares outstanding-basic and diluted |
40,538,701 | 38,338,309 | ||||||
Basic and diluted loss per share |
$ | (0.02 | ) | $ | (0.03 | ) | ||
See accompanying notes.
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Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows Unaudited
For the Fiscal Quarters Ended April 3, 2011 and March 28, 2010
For the Fiscal Quarters Ended April 3, 2011 and March 28, 2010
Fiscal Quarters Ended | ||||||||
April 3, | March 28, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (731,840 | ) | $ | (1,195,844 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
85,651 | 82,982 | ||||||
Amortization of the beneficial conversion feature |
5,559 | 173,628 | ||||||
Deferred financing costs, net |
1,545 | 87,403 | ||||||
Stock-based compensation |
168,194 | 56,448 | ||||||
Change in fair value of warrant liability |
(318,405 | ) | 68,901 | |||||
Non-cash advertising, marketing and promotion expenses |
50,879 | 17,212 | ||||||
Non-cash interest payments |
| 103,390 | ||||||
Increase (decrease) in cash from changes in assets and liabilities: |
||||||||
Accounts receivable |
(1,995 | ) | 116,339 | |||||
Inventories |
(4,318 | ) | (8,119 | ) | ||||
Prepaid expenses and other current assets |
1,622 | 3,012 | ||||||
Other assets and noncurrent liabilities |
(29,780 | ) | 2,280 | |||||
Accounts payable |
122,506 | 76,190 | ||||||
Franchisee deposits |
7,500 | 35,000 | ||||||
Accrued expenses and other liabilities |
3,370 | 35,147 | ||||||
Net cash used in operating activities |
(639,512 | ) | (346,031 | ) | ||||
Cash flows from investing activities: |
||||||||
Acquisition of property and equipment |
(202,366 | ) | (13,204 | ) | ||||
Net cash used in investing activities |
(202,366 | ) | (13,204 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments for financing costs |
(8,914 | ) | | |||||
Payments on long-term debt |
| (153,312 | ) | |||||
Payments on capital lease obligations |
(10,261 | ) | (14,531 | ) | ||||
Increase in restricted cash |
(88 | ) | | |||||
Net cash used in financing activities |
(19,263 | ) | (167,843 | ) | ||||
Decrease in cash and cash equivalents |
(861,141 | ) | (527,078 | ) | ||||
Cash and cash equivalents beginning of year |
2,797,452 | 2,278,427 | ||||||
Cash and cash equivalents end of period |
$ | 1,936,311 | $ | 1,751,349 | ||||
See accompanying notes.
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UFOOD RESTAURANT GROUP, INC.
and SUBSIDIARY
and SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity
For the Fiscal Quarter ended April 3, 2011 (unaudited)
Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Value | Shares | Value | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, January 2, 2011, Restated |
96,325 | $ | 96 | 40,487,294 | $ | 40,487 | $ | 42,845,625 | $ | (41,416,598 | ) | $ | 1,469,610 | |||||||||||||||
Common stock issued for consulting, marketing & promotional services |
| 80,134 | 80 | 50,799 | | 50,879 | ||||||||||||||||||||||
Common stock-based compensation |
| | | | 168,194 | | 168,194 | |||||||||||||||||||||
Payments for financing costs |
| | | | (8,913 | ) | | (8,914 | ) | |||||||||||||||||||
Dividends on preferred stock |
| | | | | (174,792 | ) | (174,792 | ) | |||||||||||||||||||
Net loss for the Fiscal Quarter ended April 3, 2011 |
| | | | | (731,840 | ) | (731,840 | ) | |||||||||||||||||||
Balance, April 3, 2011 |
96,325 | $ | 96 | 40,567,428 | $ | 40,567 | $ | 43,055,705 | $ | (42,323,230 | ) | $ | 773,138 | |||||||||||||||
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Table of Contents
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Unaudited
1. | Nature of Operations and Basis of Presentation |
Nature of Operations |
UFood Restaurant Group, Inc. was incorporated in the State of Nevada on February 8, 2006 as Axxent Media Corp. Prior to December 18, 2007, Axxent Media Corp was a development stage company headquartered in Vancouver, Canada. As Axxent Media Corp., the Companys business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, the Company changed its name to UFood Franchise Company, Inc., and on September 25, 2007, changed its name to UFood Restaurant Group, Inc. (UFood or the Company). |
On December 18, 2007, (the Merger Date) pursuant to the terms of an Agreement and Plan of Merger and Reorganization, a wholly-owned subsidiary of the Company merged with and into KnowFat Franchise Company, Inc. (KnowFat). Following the merger (the Merger), UFood continued KnowFats business operations as a franchisor and operator of fast-casual food service restaurants that capitalize on consumer demands for great tasting food with healthy attributes. As of April 3, 2011, the Companys operations consisted of four company-operated restaurants and four franchise-operated locations. 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 net losses 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 April 3, 2011, the Company had approximately $1,936,000 of unrestricted cash. Based on current trends, management believes that additional franchises will be sold within the next seven months, and that the additional capital raised will be sufficient to support activities through 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. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. |
Basis of Presentation |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the Securities and Exchange Commission. They include the activity and balances of UFood and its subsidiaries but do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The interim consolidated financial statements are unaudited; however, they include all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly UFoods financial position at April 3, 2011, and the results of its operations and cash flows for the fiscal quarters ended April 3, 2011 and March 28, 2010. The results of operations for the fiscal quarters ended April 3, 2011 are not necessarily indicative of the results to be expected for future quarters or the full year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the fiscal year ended January 2, 2011 included in the Companys Annual Report as amended by Form 10-K/A filed on May 18, 2011. |
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2. | Summary of Significant Accounting Policies |
Fiscal Quarters |
In 2011, our fiscal quarters end on April 3rd, July 3rd, October 2nd of 2011, and January 1st, 2012. In 2010, our fiscal quarters ended on March 28th, June 27th, September 26th and January 2nd, 2011. |
Principles of Consolidation |
The consolidated financial statements include the assets, liabilities and results of operations of UFood Restaurant Group, Inc. and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. |
Use of Estimates |
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. |
Reclassifications |
Certain reclassifications have been made to conform previously reported data to the current presentation. |
Deferred Financing Costs |
Deferred financing costs represent costs paid to third parties in order to obtain long-term financing and have been included in other assets. Deferred financing costs are amortized over the life of the related debt. Amortization expense related to these costs was $1,545 and $87,403 for the quarters ended April 3, 2011 and March 28, 2010, respectively, and is included in interest expense. |
Valuation of Goodwill |
We account for goodwill and other intangible assets under ASC No. 805, Business Combinations, and ASC No. 350-20 to 30, Goodwill and Other Intangible Assets. ASC No. 805 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. Under ASC No. 350-20 to 30, purchased goodwill and intangible assets with indefinite lives are not amortized, but instead tested for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill attributable to our franchise operations segment is evaluated by comparing the Companys fair market value, determined based upon quoted market prices of the Companys equity securities, to the carrying amount of goodwill. Goodwill attributable to our store operations segment is evaluated on a restaurant-by-restaurant basis by comparing the restaurants estimated fair value to the carrying value of the restaurants underlying net assets inclusive of goodwill. Fair value is determined based upon the restaurants estimated future cash flows. Future cash flows are estimated based upon a restaurants historical operating performance and managements estimates of future revenues and expenses over the period of time that the Company expects to operate the restaurant, which generally coincides with the initial term of the restaurants lease but which may take into account the restaurants first lease renewal period up to 5 years. The estimate of a restaurants future cash flows may also include an estimate of the restaurants terminal value, determined by applying a capitalization rate to the restaurants estimated cash flows during the last year of the forecast period. The capitalization rate used by the Company was determined based upon the restaurants location, cash flows and growth prospects. Goodwill is tested for impairment annually on the first day of the fourth quarter. The carrying amount of goodwill may be impaired in the future if our actual operating results and cash flows fall short of our expectations. |
Impairment of Long-Lived Assets |
In accordance with ASC No. 360 Property, Plant and Equipment, when impairment indicators exist, the Company evaluates its long-lived assets for potential impairment. Potential impairment is assessed when there is evidence that events or changes in circumstances have occurred that indicate the carrying amount of an asset may not be recovered. When events or changes in circumstances have occurred that indicate a long-lived asset may be impaired, the Company uses estimates of future cash flows on a restaurant-by-restaurant basis to test the recoverability of its long-lived assets. Future cash flows are estimated based upon the restaurants historical operating performance and managements projections of future revenues and expenses and may take into account the restaurants estimated terminal value. Long-lived assets may be impaired in the future if our actual operating results and cash flows fall short of our expectations. |
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Revenue Recognition |
The Company records revenue for Company-owned store sales upon the delivery of the related food and other products to the customer. The Company 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. 952-605-25 and 952-340-25, Franchisors. Franchisee deposits represent advances on initial franchise fees prior to the opening of the franchisee location. We recognize initial franchise fee revenue when all material services we are required to perform and all material conditions we are required to satisfy have been substantially completed, which is generally the opening of the franchised location. The Company defers direct costs related to franchise sales until the related revenue is recognized; however, the deferred costs shall not exceed anticipated revenue less estimated additional related costs. Such costs include training, facilities design, menu planning and marketing. Franchise royalty revenues are recognized in the same period the relevant franchisee sales occur. |
Rent Expense |
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term as defined in ASC No. 840, 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 period. 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 period. |
Fair Value of Financial Instruments |
The carrying amounts of the Companys financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and other accrued expenses and debt obligations approximate their fair values due to the short-term maturity of these instruments. |
Stock-Based Compensation |
The Company maintains two stock-based incentive plans. The Company grants options to purchase common stock at an option price equal to the market value of the stock at the date of grant. Options generally vest over a three year period beginning on the date of grant and have a ten year contractual term. |
The Company applies the fair value recognition provisions of ASC No. 718, Compensation-Stock Compensation, which requires all stock-based compensation, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. The Company uses the Black-Scholes option pricing model which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their vested stock options before exercising them and the estimated volatility of the Companys common stock price over the expected term. |
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Stock-based compensation expense recognized during the fiscal quarter ended April 3, 2011 totaled $168,194 for stock options. Stock-based compensation expense recognized during the fiscal quarter ended March 28, 2010 totaled $56,448 for stock options. Stock-based compensation expense was included in general and administrative expenses in the accompanying consolidated statements of operations. |
3. | Long Term Debt and Warrants |
2008 Investor Warrants
On December 18 and 21, 2007, January 22, 2008, February 6, 2008, and March 30, 2008, the Company sold 5,720,000, 440,000, 863,000, 1,927,000, and 1,991,000 units (Units), respectively, of its securities at a price of $1.00 per Unit, in connection with five separate closings (the Closings) of its private placement of securities (the Offering). Each Unit consists of one share of common stock of the Company, par value $.001 per share (Common Stock), and a warrant to purchase one-half of one share of Common Stock (the 2008 Investor Warrants). A total of 5,470,500 2008 Investor Warrants were issued in conjunction with the closings. |
The 2008 Investor Warrants provide for the purchase of shares of Common Stock for five years at an original exercise price of $1.25 per share. The 2008 Investor Warrants, at the option of the holder, may be exercised by cash payment of the exercise price or by cashless exercise to the extent that a registration statement covering the shares of Common Stock underlying the 2008 Investor Warrants is not in effect following the one year anniversary of issuance. A cashless exercise means that in lieu of paying the aggregate purchase price for the shares being purchased upon exercise of the 2008 Investor Warrants in cash, the holder will forfeit a number of shares underlying the 2008 Investor Warrants with a fair market value equal to such aggregate exercise price. The Company will not receive additional proceeds to the extent that 2008 Investor Warrants are exercised by cashless exercise. As a result of the Companys recent private placement, the exercise price of the 2008 Investor Warrants was reduced to $0.59 pursuant to the terms of such warrants. |
The exercise price and number of shares of Common Stock issuable on exercise of the 2008 Investor Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. The 2008 Investor Warrants are also subject to a weighted average price protection for the term of the 2008 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 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 (expenses) in the consolidated statements of operations. The change in the fair value of the derivative instrument affects the Change in fair value of warrant liability line in the Cash flows from operating activities section of the consolidated statements of cash flows. |
At the date of issuance of the 2008 Investor Warrants and 2008 Placement Agent Warrants, based upon evaluation under applicable ASC No. 815 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 fiscal 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 was 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 fiscal 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 fiscal quarter ended March 29, 2009. |
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At April 3, 2011, the aggregate fair value of the derivative was $1,133,264. The decrease in the fair value of the derivative was in the aggregate amount of $318,405 during the fiscal quarter ended April 3, 2011. The decrease in the fair value of the derivative was recorded in the consolidated statement of operations as other income. As a result of the most recent financing during 2010 and pursuant to the terms of the 2008 Investor Warrants, the exercise price was changed to $0.54 from $0.59. |
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 April 3, 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 |
Other Liabilities | $ | 1,133,264 | |||||
Total derivatives |
$ | 1,133,264 |
The effect of the derivative instrument on the Consolidated Statements of Operations
for the Quarter Ended April 3, 2011 follows:
Amount of Gain (Loss) | ||||||||
Recognized in Income on | ||||||||
Location of Gain (Loss) | Derivative | |||||||
Recognized in Income on | Fiscal Quarter Ended April 3, | |||||||
Derivative | 2011 | |||||||
Derivatives not designated as
hedging instruments under ASC
No. 815: |
||||||||
Derivative warrant liability |
Other Income (Expense) | $ | 318,405 | |||||
Total |
$ | 318,405 |
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 January 2, 2011, and as of April 3, 2011, using the following assumptions: |
At Issuance | January 2, 2011 | April 3, 2011 | ||||||||||
Expected term (years) |
5 7 Years | 2 4 Years | 2 4 Years | |||||||||
Expected volatility |
32.34 | % | 156.3 | % | 144.03 | % | ||||||
Risk-free interest rate |
2.46 | % | 0.61 | % | 0.80 | % | ||||||
Expected annual dividend |
0.00 | % | 0.00 | % | 0.00 | % |
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The table below sets forth a summary of changes in the fair value of the Companys level 3 derivative at December 29, 2008, and through the fiscal quarter ended April 3, 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 at December 27, 2009 |
(349,498 | ) | ||
Increase in fair value at January 2, 2011 |
1,447,919 | |||
Decrease in fair value during quarter ended April 3, 2011 |
(318,405 | ) | ||
Balance as of April 3, 2011 |
$ | 1,133,264 |
2009 Warrants
On March 19, 2009, the Company sold 8% Senior Secured Convertible Debentures (the Debentures) to investors in the principal amount of $3,315,000 and issued warrants (the 2009 Warrants and, collectively with the Debentures, the Securities) to purchase 12,750,000 shares of our Common Stock to such investors in connection with the first closing of our private placement of securities (the 2009 Offering). On April 20, 2009, the Company sold an additional $2,559,000 of Debentures in connection with the final closing of its private offering to accredited investors. The addition of both closings is $5,874,000 of Debentures. The Debentures bore interest at a rate of 8% and are due three years from the date they are issued. The Debentures were convertible into shares of Common Stock at $0.13 per share. 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. Interest on the Debentures a rate of 8% per annum was payable on a quarterly basis. Subject to certain conditions, the Company had the right to pay interest on the Debentures in either cash or shares of Common Stock, or in a combination of cash and Common Stock. After the one year anniversary of the first closing of the 2009 Offering, the Company has the right to redeem the Debentures at a 20% premium, subject to certain conditions. Subject to certain conditions, the Company has the right to force conversion of the Debentures into shares of Common Stock. The Company has filed a registration statement with the Securities and Exchange Commission covering all shares of Common Stock issuable upon conversion of the Debentures and/or exercise of the 2009 Warrants. |
The Company paid Garden State Securities, Inc., the placement agent retained in connection with the 2009 Offering (the 2009 Placement Agent), (i) a commission of 10% of the aggregate subscription amount of the Securities sold in the 2009 Offering, plus (ii) $50,000 for its legal fees and expenses, plus (iii) a non-accountable expense allowance equal to 3% of the aggregate subscription amount of the Securities sold in the 2009 Offering. In addition, the 2009 Placement Agent (or its assigns) received warrants (the 2009 Placement Agent Warrants) to purchase a number of shares of Common Stock equal to twenty percent (20%) of the maximum number of shares of Common Stock underlying the Debentures and 2009 Warrants sold in the 2009 Offering. As a result of the foregoing, the 2009 Placement Agent was paid a commission of $587,400 plus a non-accountable expense allowance of $176,220 and received warrants to purchase 5,100,000 shares of Common Stock for March 2009 first closing, and 3,936,923 for April 2009 second and final closing in connection with the 2009 Offering. The terms of these warrants were similar to those of the 2009 Warrants. |
In conjunction with the Debentures and the 2009 Warrants, the Company recorded 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. Since the inception of the Debentures through the first fiscal quarter of 2011 ended on April 3, 2011 the Company has recorded interest expense of $3,090,379 in connection with the debt discount on the warrants and the beneficial conversion feature. Of the $3,130,200 in debt discount, $571,200 had an effective interest rate of 15.18%, and $2,559,000 had an effective interest rate of 82.97%. The Company has undergone additional financing in order to fund future working capital requirements. |
Since the issuance of the debentures through September 30, 2010, debentures holders converted their debentures into common stock in the amount of $74,000. On October 1, 2010, the Company consummated the cancellation of ninety-eight 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. |
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Effective immediately with respect to one-half of the shares of Series A Preferred Stock issued in connection with the Debenture Exchange, and effective January 1, 2011 with respect to the remaining shares of Series A Preferred Stock issued in connection with the Debenture Exchange, each holder of Series A Preferred Stock may convert his, her or its shares of Series A Preferred Stock into shares of Common Stock at a conversion price equal to $0.13 (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. |
In order to induce the conversion and extinguishment of debt, the exercise price of the Common Stock Purchase Warrants issued to 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. |
4. | Stock-Based Compensation |
The Company has two share-based, shareholder approved employee compensation plans, the KnowFat 2004 Stock Option Plan (the 2004 Plan) and the UFood 2007 Equity Incentive Plan (the 2007 Plan, and together with the 2004 Plan, the Equity Plans), which are described below. |
The Company estimates the fair value of stock options using a Black Scholes option pricing model. 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. |
There were no grants made during the fiscal quarters ended April 3, 2011 and March 28, 2010. |
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. |
The 2007 Plan |
There were no awards under the 2007 Plan prior to December 18, 2007. Awards of ISOs, non-qualified stock options, stock appreciation rights, restricted stock units, restricted stock or performance units may be made under the 2007 Plan of up to a maximum of 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. On April 1st, 2010 the Companys Board of Directors approved the grant of 2,070,000 options to purchase shares of the Companys common stock to Officers and employees, fully vested at grant. At April 3, 2011, there were 5,711,849 stock options outstanding under the 2007 Plan. At April 3, 2011, options to purchase 5,711,849 shares of Common Stock were exercisable at a weighted average exercise price of $0.19. |
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Activity under the 2007 Plan for the fiscal quarter ended April 3, 2011 is presented below: |
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Outstanding at January 2, 2011 |
5,884,990 | $ | 0.19 | 7.9 | $ | 200,500 | ||||||||||
Granted |
| | | |||||||||||||
Exercised |
| | | |||||||||||||
Forfeited |
173,141 | | | |||||||||||||
Outstanding at April 3, 2011 |
5,711,849 | $ | 0.19 | 7.6 | $ | 78,000 | ||||||||||
Exercisable at April 3, 2011 |
5,711,849 | $ | 0.19 | 7.6 | $ | 78,000 | ||||||||||
At April 3, 2011 there were 3,288,151 options available for grant under the 2007 Plan. The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Companys closing stock price of $0.20 as of April 3, 2011 which would have been received by the options holders had all option holders exercise their options as of that date. |
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 recorded an expense of $500,000 of stock-based compensation expense. |
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 April 3, 2011 there was $634,827 of total unrecognized compensation cost related to non-vested options granted outside of any Plan. This cost will be recognized over approximately 27 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 January 2, 2011 through April 3, 2011 is presented below: |
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term | Value | |||||||||||||
Outstanding at January 2, 2011 |
8,728,673 | $ | 0.19 | 9.2 | $ | 245,993 | ||||||||||
Granted |
| | | |||||||||||||
Forfeited |
174,000 | | | |||||||||||||
Canceled |
| |||||||||||||||
Outstanding at April 3, 2011 |
8,554,673 | $ | 0.19 | 9.0 | $ | 73,827 | ||||||||||
Exercisable at April 3, 2011 |
5,711,849 | $ | 0.19 | 9.0 | $ | 48,074 | ||||||||||
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5. | Capital Stock |
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. | ||
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. |
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The exercise price and number of shares of Common Stock issuable on exercise of the Investor Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. The Investor Warrants are also subject to a weighted average price protection for the term of the Investor Warrants. The Placement Agent Warrants are substantially identical to the terms of the Investor Warrants except that the Placement Agent Warrants have cashless exercise rights to the extent that a registration statement covering the shares of Common Stock underlying the Placement Agent Warrants is not in effect six months following the date of issuance. |
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 | % |
Debentures conversion into Series A Preferred Stock |
On October 1, 2010, the Company extinguished 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. |
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. |
Approximately $2,200,869 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 1.17%, 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 |
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6. | Income Taxes |
The Company applies the provisions of ASC No. 740-10-25, Accounting for Uncertainty in Income Taxes which requires that the impact of tax positions taken by the Company be recognized in the financial statements if they are more likely than not of being sustained based upon the technical merits of the position. The Company has a valuation allowance against the full amount of its net deferred taxes. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. |
No provision for current income taxes has been recorded for the fiscal quarters ended April 3, 2011 and March 28, 2010 due to the Companys cumulative net losses. Significant components of deferred tax assets are net operating loss carryforwards, start-up costs and organizational costs capitalized for tax purposes, and deferred revenue. Significant component of deferred tax liabilities is depreciation of property and equipment. |
Management has evaluated the evidence bearing upon the realization of its deferred tax assets and has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets. As a result, the Company has recorded a full valuation allowance against its deferred tax assets. If the Company should generate sustained future taxable income against which these tax attributes might be applied, some portion or all of the valuation allowance would be reversed. |
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 |
7. | Commitments and Contingencies |
We are subject to legal proceedings and claims which arise in the normal course of business. Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all significant cases pending against us, including the matters described below, and we intend to defend vigorously each such case. 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. 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. |
8. | Supplemental Disclosures of Cash Flow Information: |
2011 | 2010 | |||||||
Cash paid during the period for interest |
$ | 3,703 | $ | 19,794 | ||||
Accrued dividends on preferred stock |
174,792 | | ||||||
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9. | Earnings per share |
The amounts used for basic and diluted per share calculations are as follows: |
For the fiscal quarters ended | ||||||||
April 3, 2011 |
March 28, 2010 |
|||||||
Net loss allocable to common stockholders |
$ | (906,632 | ) | $ | (1,195,844 | ) | ||
Weighted average number of shares outstanding basic and diluted |
40,538,701 | 38,338,309 | ||||||
Basic and diluted per common share |
$ | (0.02 | ) | $ | (0.03 | ) | ||
The 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 65,250,052 and 49,779,658 potential common shares from the assumed exercise of warrants and options were excluded from the calculation of diluted net loss per share for the fiscal quarters ended April 3, 2011 and March 28, 2010, because their inclusion would have been anti-dilutive |
10. | Segment Data |
The Company operates two business segments; Store Operations and Franchise Operations. The Store Operations segment comprises the operating activities of restaurants owned or operated by the Company. The Franchise Operations segment is comprised of the operating activities of the franchise business unit which licenses qualified operators to conduct business under the Knowfat and UFood Grill tradenames and also costs to monitor the operations of these business units. Under the terms of the franchise agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Knowfat and UFood Grill tradenames. |
The accounting policies of the segments are the same. Interest expense has been allocated based on operating results and total assets employed in each segment. |
Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals of the reportable segments revenues and net loss agree with the comparable amounts contained in the Companys consolidated financial statements. |
Segment information for the Companys two business segments follows: |
Fiscal quarters Ended | ||||||||
April 3, 2011 |
March 28, 2010 |
|||||||
Revenues: |
||||||||
Store operations |
$ | 918,068 | $ | 1,068,970 | ||||
Franchise operations |
45,906 | 40,536 | ||||||
Total revenue |
$ | 963,974 | $ | 1,109,506 | ||||
Segment loss: |
||||||||
Store operations |
$ | (84,968 | ) | $ | (10,441 | ) | ||
Franchise operations |
(273,816 | ) | (171,233 | ) | ||||
Total segment loss |
$ | (358,784 | ) | $ | (181,674 | ) | ||
Advertising, marketing and promotion |
$ | 62,420 | $ | 27,020 | ||||
Depreciation and amortization |
85,651 | 82,982 | ||||||
Unallocated general and administrative expenses |
535,007 | 440,955 | ||||||
Interest (income) expense |
8,383 | 381,681 | ||||||
Other (income)expense |
(318,405 | ) | 68,901 | |||||
Net loss |
$ | (731,840 | ) | $ | (1,195,844 | ) | ||
11. | Subsequent Events |
The Company announced on May 10, 2011 that it has signed a Master License agreement for the development of 8 UFood Grill locations in Puerto Rico. |
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operation |
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our financial statements and related notes included elsewhere in this
report. This discussion contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors discussed in Risk Factors in our Annual
Report amended on Form 10-K/A filed with the Securities and Exchange Commission on May 18, 2011 and
elsewhere in this report.
The information contained in this Report on Form 10-Q and in other public statements by the Company
and Company Officers include or may contain forward-looking statements. All statements other than
statements of historical facts contained in this Report on Form 10-Q, including statements
regarding our future financial position, business strategy and plans and objectives of management
for future operations, are forward-looking statements. The words anticipate, believe,
estimate, will, may, future, plan, intend, and expect and similar expressions
generally identify forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in the forward-looking statements are reasonable, we cannot be sure that
they will be achieved. Actual results may differ materially from the forward-looking statements
contained herein due to a number of factors.
Overview
Our operations currently consist of eight restaurants in the Boston area and Dallas Forth Worth, TX
and Cleveland, OH; comprising four Company-owned restaurants and four franchise-owned locations. We
have entered into a total of five area development agreements and four franchise agreements
covering 65 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 and
another Area Development Agreement is for Puerto Rico. The 65 units include four franchise
locations currently open and operating, and require an additional 61 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 opened.
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) 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 system-wide sales are useful in assessing customer acceptance of our
brand and facilitating an understanding of financial performance as our franchisees pay royalties
and contribute to marketing funds based on a percentage of their sales.
We derive revenues from three sources: (i) store sales which include sales of hot and cold prepared
food in a fast casual dining environment as well as sales of health and nutrition related products;
(ii) franchise royalties and fees represent amounts earned under franchise and area development
agreements; and (iii) other revenues derived primarily from the sale of marketing materials to
franchisees. Store operating expenses include the cost of goods, food and paper products sold in
Company-owned stores as well as labor and other operating costs incurred to operate Company-owned
stores. General and administrative expenses, advertising, marketing and promotion expenses and
depreciation expense relate to all three revenue sources.
Critical Accounting Policies & Estimates
The discussion and analysis of our financial condition and results of operations is based upon our
consolidated financial statements for the fiscal quarters ended April 3, 2011 and March 28, 2010
which have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of the consolidated financial statements requires us to make estimates,
judgments and assumptions, which we believe to be reasonable, based on the information available.
These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and
expenses. Variances in the estimates or assumptions used could yield materially different
accounting results. On an ongoing basis, we evaluate the continued appropriateness of our
accounting policies and resulting estimates to make adjustments we consider appropriate under the
facts and circumstances.
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We have chosen accounting policies we believe are appropriate to report accurately and fairly our
operating results and financial position, and we apply those accounting policies in a consistent
manner.
Principles of Consolidation
The consolidated financial statements include the assets, liabilities and results of operations of
UFood Restaurant Group, Inc. and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual amounts could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform previously reported data to the current
presentation.
Deferred Financing Costs
Deferred financing costs represent costs paid to third parties in order to obtain long-term
financing and have been included in other assets. Deferred financing costs are amortized over the
life of the related debt. Amortization expense related to these costs was $1,545 and $87,403 for
the quarters ended April 3, 2011 and March 28, 2010, respectively, and is included in interest
expense.
Valuation of Goodwill
We account for goodwill and other intangible assets under ASC No. 805, Business Combinations, and
ASC No. 350-20 to 30, Goodwill and Other Intangible Assets. ASC No. 805 requires that the purchase
method of accounting be used for all business combinations initiated after June 30, 2001, and that
certain intangible assets acquired in a business combination be recognized as assets apart from
goodwill. Under ASC No. 350-20 to 30, purchased goodwill and intangible assets with indefinite
lives are not amortized, but instead tested for impairment at least annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable. Goodwill attributable
to our franchise operations segment is evaluated by comparing the Companys fair market value,
determined based upon quoted market prices of the Companys equity securities, to the carrying
amount of goodwill. Goodwill attributable to our store operations segment is evaluated on a
restaurant-by-restaurant basis by comparing the restaurants estimated fair value to the carrying
value of the restaurants underlying net assets inclusive of goodwill. Fair value is determined
based upon the restaurants estimated future cash flows. Future cash flows are estimated based upon
a restaurants historical operating performance and managements estimates of future revenues and
expenses over the period of time that the Company expects to operate the restaurant, which
generally coincides with the initial term of the restaurants lease but which may take into account
the restaurants first lease renewal period up to 5 years. The estimate of a restaurants future
cash flows may also include an estimate of the restaurants terminal value, determined by applying
a capitalization rate to the restaurants estimated cash flows during the last year of the forecast
period. The capitalization rate used by the Company was determined based upon the restaurants
location, cash flows and growth prospects. Goodwill is tested for impairment annually on the first
day of the fourth quarter. The carrying amount of goodwill may be impaired in the future if our
actual operating results and cash flows fall short of our expectations.
Impairment of Long-Lived Assets
In accordance with ASC No. 360 Property, Plant and Equipment, when impairment indicators exist, the
Company evaluates its long-lived assets for potential impairment. Potential impairment is assessed
when there is evidence that events or changes in circumstances have occurred that indicate the
carrying amount of an asset may not be recovered. When events or changes in circumstances have
occurred that indicate a long-lived asset may be impaired, the Company uses estimates of future
cash flows on a restaurant-by-restaurant basis to test the recoverability of its long-lived assets.
Future cash flows are estimated based upon the restaurants historical operating performance and
managements projections of future revenues and expenses and may take into account the restaurants
estimated terminal value. Long-lived assets may be impaired in the future if our actual operating
results and cash flows fall short of our expectations.
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Revenue Recognition
The Company records revenue for Company-owned store sales upon the delivery of the related food and
other products to the customer. The Company 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. 952-605-25 and 952-340-25, Franchisors.
Franchisee deposits represent advances on initial franchise fees prior to the opening of the
franchisee location. We recognize initial franchise fee revenue when all material services we are
required to perform and all material conditions we are required to satisfy have been substantially
completed, which is generally the opening of the franchised location. The Company defers direct
costs related to franchise sales until the related revenue is recognized; however, the deferred
costs shall not exceed anticipated revenue less estimated additional related costs. Such costs
include training, facilities design, menu planning and marketing. Franchise royalty revenues are
recognized in the same period the relevant franchisee sales occur.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term
as defined in ASC No. 840, 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 period. 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 period.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and other accrued expenses and debt obligations
approximate their fair values due to the short-term maturity of these instruments.
Stock-Based Compensation
The Company maintains two stock-based incentive plans. The Company grants options to purchase
common stock at an option price equal to the market value of the stock at the date of grant.
Options generally vest over a three year period beginning on the date of grant and have a ten year
contractual term.
The Company applies the fair value recognition provisions of ASC No. 718, Compensation-Stock
Compensation, which requires all stock-based compensation, including grants of employee stock
options, to be recognized in the statement of operations based on their fair values. The Company
uses the Black-Scholes option pricing model which requires extensive use of accounting judgment and
financial estimates, including estimates of the expected term participants will retain their vested
stock options before exercising them and the estimated volatility of the Companys common stock
price over the expected term.
Stock-based compensation expense recognized during the fiscal quarter ended April 3, 2011 totaled
$168,194 for stock options. Stock-based compensation expense recognized during the fiscal quarter
ended March 28, 2010 totaled $56,448 for stock options. Stock-based compensation expense was
included in general and administrative expenses in the accompanying consolidated statements of
operations.
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Executive Summary of Results
The following table sets forth the percentage relationship to total revenues, except where
otherwise indicated, of certain items included in our consolidated statements of operations for the
periods indicated. Percentages may not add due to rounding:
Fiscal quarters Ended | ||||||||
April 3, | March 28, | |||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Store sales |
95.2 | % | 96.3 | % | ||||
Franchise royalties and fees |
4.8 | 3.7 | ||||||
100.0 | % | 100.0 | % | |||||
Costs and expenses: |
||||||||
Store operating expenses (1): |
||||||||
Cost of food and paper products (2) |
33.9 | % | 32.7 | % | ||||
Cost of goods sold |
7.1 | 7.9 | ||||||
Labor |
32.9 | 28.7 | ||||||
Occupancy |
11.6 | 11.6 | ||||||
Other store operating expenses |
21.0 | 19.5 | ||||||
General and administrative expenses |
96.0 | 64.7 | ||||||
Advertising, marketing and promotion expenses |
5.3 | 2.4 | ||||||
Depreciation and amortization |
8.9 | 7.5 | ||||||
Total costs and expenses |
208.1 | 167.2 | ||||||
Operating loss |
(108.1 | ) | (67.2 | ) | ||||
Other income (expense): |
||||||||
Other income (expense) |
33.0 | (6.2 | ) | |||||
Interest income |
0.3 | 0.2 | ||||||
Interest expense |
(1.1 | ) | (34.6 | ) | ||||
Other income (expense), net |
32.2 | (40.6 | ) | |||||
Loss before income taxes |
(75.9 | ) | (107.8 | ) | ||||
Income taxes |
| | ||||||
Net loss |
(75.9 | )% | (107.8) | % | ||||
(1) | As a percentage of store sales. | |
(2) | As a percentage of only restaurant sales. |
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The following table sets forth certain data relating to the number of Company-owned,
franchise-operated and system-wide store locations:
Fiscal quarters Ended | ||||||||
April 3, | March 28, | |||||||
2011 | 2010 | |||||||
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 period |
4 | 4 | ||||||
Franchise-owned locations: |
||||||||
Locations at the beginning of the year |
4 | 4 | ||||||
Locations opened |
| 1 | ||||||
Locations closed |
| (1 | ) | |||||
Locations sold |
| | ||||||
Locations transferred (1) |
| | ||||||
Locations at the end of the period |
4 | 4 | ||||||
System-wide locations |
||||||||
Locations at the beginning of the year |
8 | 8 | ||||||
Locations opened |
| 1 | ||||||
Locations closed |
| (1 | ) | |||||
Locations sold |
| | ||||||
Locations transferred |
| | ||||||
Locations at the end of the period |
8 | 8 | ||||||
Fiscal quarter Ended April 3, 2011 Compared to Fiscal quarter Ended March 28, 2010
General
For the Fiscal quarter ended April 3, 2011, our comparable store sales for Company owned stores
decreased by 14.1%. The decrease in comparable store sales for Company owned stores was primarily
attributable to a significant reduction of customer count mostly generated by decline in airline
passengers at the Logan Airport Terminal B location. Also, the severe winter weather forced the
Company to close the Boston stores for a total of two days. Comparable store sales are based on sales
for stores that have been in operation for the entire period of comparison. Comparable store sales
exclude closed locations.
Results of Operations
Revenues
Total revenues for the Fiscal quarter ended April 3, 2011 decreased by $145,533, or 13.1%, to
$963,974 from $1,109,506 from the Fiscal quarter ended March 28, 2010. The decrease in total
revenues for the Fiscal quarter ended April 3, 2011, as compared to the prior year was primarily
due to the decrease in company-owned store sales slightly offset by higher franchise royalties and
fees.
Sales at Company-operated stores for the Fiscal quarter ended April 3, 2011 decreased by $150,902,
or 14.1%, to $918,068 from $1,068,970 for the Fiscal quarter ended March 28, 2010. As a percentage
of total revenues, sales at Company-operated stores decreased to 95.2% of total revenues for the
Fiscal quarter ended April 3, 2011 from 96.3% of total revenues for the Fiscal quarter ended March
28, 2010. The decrease in sales at Company-operated stores for the Fiscal quarter ended April 3,
2011 was primarily due to a significant sales decline at our Logan Airport Terminal B location due
to a reduction in customers caused by the decrease of airline passengers. The decrease in customer
count was significantly impacted by the severe winter weather which forced the Company to close the
Boston stores for a total of two days during the first quarter of 2011.
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During the Fiscal quarter ended April 3, 2011, franchise royalties and fees increased $5,369, or
13.2% to $45,905 from $40,536 for the Fiscal quarter ended March 28, 2010 due to higher revenue
stores in operation this period versus the same period last year. During the Fiscal quarter ended
April 3, 2011, the Company did not recognize any franchise fees.
Costs and Expenses
Cost of food and paper products for the Fiscal quarter ended April 3, 2011 decreased by $27,563, or
9.1%, to $276,907 from $304,470 for the Fiscal quarter ended March 28, 2010. As a percentage of
store sales, food and paper products increased to 33.9% of store sales for the Fiscal quarter ended
April 3, 2011 compared to 32.7% of store sales for the Fiscal quarter ended March 28, 2010. The
increase in food and paper products was primarily attributable to the increase in prices of
wholesale products as a result of higher gasoline and protein prices.
Labor expense for the Fiscal quarter ended April 3, 2011 decreased by $4,815, or 1.6%, to $301,628
from $306,443 for the Fiscal quarter ended March 28, 2010. As a percentage of store sales, labor
expense increased to 32.9% of store sales for the Fiscal quarter ended April 3, 2011 up from 28.7%
of store sales for the Fiscal quarter ended March 28, 2010. The increase in labor expense as a
percentage of store sales for the Fiscal quarter ended April 3, 2011 was primarily due to the
decrease in store sales volume.
Occupancy costs for the Fiscal quarter ended April 3, 2011 decreased by $16,915, or 13.7%, to
$106,913 from $123,828 for the Fiscal quarter ended March 28, 2010. The decrease in occupancy costs
was primarily attributable to the amendment of the lease of one our locations to reduce the monthly
rent beginning in September 2010. As a percentage of store sales, occupancy costs for the Fiscal
quarter ended April 3, 2011 was flat at 11.6% compared to the same period last year.
Other store operating expenses for the Fiscal quarter ended April 3, 2011 decreased by $15,626, or
7.5%, to $193,016 from $208,642 for the Fiscal quarter ended March 28, 2010. The decrease in other
store operating expenses was primarily due to an electricity extra charge for prior periods from
one of our landlords during the Fiscal quarter ended March 28, 2010. As a percentage of store
sales, other store operating expenses increased to 21.0% of store sales for the Fiscal quarter
ended April 3, 2011 from 19.5% of store sales during the Fiscal quarter ended March 28, 2010.
General and administrative expenses for the Fiscal quarter ended April 3, 2011 increased by
$207,738 or 28.9%, to $925,133 from $717,395 for the Fiscal quarter ended March 28, 2010. The
increase in general and administrative expenses for the Fiscal quarter ended April 3, 2011 compared
to the same period in the prior year is primarily due to the following:
| The personnel cost increase was $129,128 primarily due to $111,746 in higher stock based compensation and $17,382 in payroll expenses due to higher payroll taxes. |
| Consulting expenses increased by $67,121, of which $33,666 was stock based compensation and $33,455 was payment to consultants for marketing, store design and nutritional information. |
| Investor relations expenses were higher by $37,785 due to the engagement of a Public Relations firm. |
| The increases in general and administrative expenses were partially offset by the decrease in legal expenses of $22,951 and a reduction in rent expenses in the amount of $28,392 due to the relocation of our corporate office to a smaller suite within the same office building. |
As a result of the foregoing, general and administrative expenses increased to 96.0% of total
revenues during the Fiscal quarter ended April 3, 2011 up from 64.7% of total revenues for the
Fiscal quarter ended March 28, 2010.
Advertising, marketing and promotion expenses for the Fiscal quarter ended April 3, 2011 increased
by $24,321, or 90.0%, to $51,341 from $27,020 for the Fiscal quarter ended March 28, 2010. The
increase in advertising, marketing and promotion expenses was primarily due to the development of
new in-store messaging and zone merchandising. As a percentage of total revenues, advertising,
marketing and promotion expenses increased to 5.3% of total revenues for the Fiscal quarter ended
April 3, 2011 up from 2.4% for the Fiscal quarter ended March 28, 2010.
Depreciation and amortization expense for the Fiscal quarter ended April 3, 2011 increased by
$2,669, or 3.2%, to $85,651 from $82,982 for the Fiscal quarter ended March 28, 2010. Depreciation
and amortization expense slightly increased due to the acquisition of new equipment and the new
development of our website. As a percentage of total revenues, depreciation and amortization
expense increased to 8.9% of total revenues for the Fiscal quarter ended April 3, 2011 up from 7.5%
of total revenues for the Fiscal quarter ended March 28, 2010.
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Net other expense changed from $450,582 of expense for the Fiscal quarter ended March 28, 2010 to
$310,022 of income for the Fiscal quarter ended April 3, 2011. The detail of the other expense is
as follows:
Fiscal quarter | Fiscal quarter | |||||||||||
ended | ended | |||||||||||
April 3, | March 28, | |||||||||||
2011 | 2010 | Variance | ||||||||||
Other income (expense) |
$ | 318,405 | $ | (68,901 | )(1) | $ | 387,306 | |||||
Interest income |
2,424 | 2,531 | (107 | ) | ||||||||
Interest expense |
(10,807 | ) | (384,212 | )(2) | 373,405 | |||||||
Total other income(expense) |
310,022 | (450,582 | ) | 760,604 |
(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 April 3, 2011, the aggregate fair value of the derivative was $1,133,264. The decrease in the fair value of the derivative was in the aggregate amount of $318,405 during the Fiscal quarter ended April 3, 2011. | |
(2) | On October 1, 2010, the Company extinguished 98% of the outstanding Debentures; consequently the payment of interest has diminished significantly. Furthermore, in connection 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 was being accreted using the effective interest method over the three year term of the debentures. As a result of the extinguishment of the debentures the total unamortized amount at the time of the extinguishment was fully amortized. |
Our net loss for the Fiscal quarter ended April 3, 2011 decreased by $464,004, to $731,840, from
$1,195,844 for the Fiscal quarter ended March 28, 2010. Our net loss decreased primarily due to the
fluctuation of the fair value of the 2008 Warrants and elimination of the debt discount accreted as
interest due to the extinguishment of debt, partially offset by the increase of General and
Administrative expenses and decline in sales. As a percentage of total revenues, our net loss
decreased to 75.9% of total revenues for the Fiscal quarter ended April 3, 2011 from 107.8% of
total revenues for the Fiscal quarter ended March 28, 2010.
Liquidity and Capital Resources
Cash and cash equivalents and restricted cash at April 3, 2011 were $1,976,440 compared to
$2,837,493 at January 2, 2011. Cash is primarily used to fund our (i) capital expenditures for
company-owned stores, (ii) acquisitions of franchise-operated stores, (iii) working capital
requirements and (iv) net operating losses.
At April 3, 2011, we had working capital of $654,704 compared to $1,814,452 at January 2, 2011. The
decrease in working capital was primarily due to the use of cash to fund our operating loss and the
acquisition of fixed assets.
Net cash used in operating activities increased
from $346,031 during the fiscal quarter ended March 28, 2010 to $639,512 during the fiscal
quarter ended April 3, 2011, primarily due to a reduction of $596,541 in non cash items and an increase
in working capital requirements of $101,384 and an reduction in other liabilities of $59,560 partially
offset by a reduction in the net loss of $464,004.
During the Fiscal quarter ended April 3, 2011, we spent $202,366 for the acquisition of equipment
compared with $13,204 spent for the acquisition of equipment during the Fiscal quarter ended March
28, 2010.
During the Fiscal quarter ended April 3, 2011, financing activities used $19,263 of cash, primarily
due to payments on long term debt. During the Fiscal quarter ended March 28, 2010, the financing
activities used $167,843 of cash, primarily due to payments on long-term debt.
Historically we have funded our operations, working capital requirements, acquisitions and capital
expenditures with cash flow generated by operations and proceeds from the issuance of debt and
equity securities. We believe that cash flow from operations and proceeds from the issuance of debt
and equity securities will be sufficient to fund our operations and capital expenditures for the
next twelve months.
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Debenture Conversion
On October 1, 2010, the Company extinguished 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.
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.
Approximately $2,200,869 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 1.17%, 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.
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. |
Private Placement
On October 4 and October 29, 2010, the Company issued and sold 27,950 shares and 6,450 shares,
respectively, of Series B 8% Convertible Preferred Stock, par value $0.001 per share (the Series B
Preferred Stock), at $100.00 per share for a total of $3,440,000. Effective January 1, 2011, each
holder of the Series B Preferred Stock may convert his, her or its shares of Series B Preferred
Stock into shares of Common Stock at a conversion price equal to $0.23. Each investor who
participated in the Offering also received a warrant to purchase 100 shares of common stock of the
Company, par value $0.001 per share, per share of Preferred Stock purchased. Currently, the Series
B is convertible into 14,956,522 shares of common stock. However, the number of shares of Common
Stock into which the Series B Preferred Stock is convertible is subject to adjustment to prevent
dilution in the event of a stock split or stock dividend. The Series B Conversion Price is also
subject to a weighted average price protection. Effective January 1, 2011, the Company may, at
its election, require the conversion of the Series B Preferred Stock to share 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. 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.
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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.
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.
The Investor Warrants provide for the purchase of shares of Common Stock for five years at an
exercise price of $0.29 per whole share. The Investor Warrants, at the option of the holder, may be
exercised by cash payment of the exercise price or by cashless exercise to the extent that a
registration statement covering the shares of Common Stock underlying the Investor Warrants is not
in effect following the one year anniversary of issuance. A cashless exercise means that in lieu
of paying the aggregate purchase price for the shares being purchased upon exercise of the Investor
Warrants in cash, the holder will forfeit a number of shares underlying the Investor Warrants with
a fair market value equal to such aggregate exercise price. The Company will not receive
additional proceeds to the extent that Investor Warrants are exercised by cashless exercise.
The exercise price and number of shares of Common Stock issuable on exercise of the Investor
Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or
our recapitalization, reorganization, merger or consolidation. The Investor Warrants are also
subject to a weighted average price protection for the term of the Investor Warrants. The Placement
Agent Warrants are substantially identical to the terms of the Investor Warrants except that the
Placement Agent Warrants have cashless exercise rights to the extent that a registration statement
covering the shares of Common Stock underlying the Placement Agent Warrants is not in effect six
months following the date of issuance.
We evaluated the Series B Preferred Stock issued and have recorded the intrinsic value of the
embedded beneficial conversion feature of $1,793,428 as additional paid in capital. The embedded
beneficial conversion feature was treated as a deemed dividend and, as such, has been recorded to
retained earnings.
Furthermore, we have calculated the relative fair value of the warrants on their date of grant,
which was determined to be $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
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.
Contractual Obligations and Other Commitments
In addition to our capital expenditures requirements, we have certain other contractual and
committed cash obligations. Our contractual cash obligations primarily consist of non-cancelable
operating leases for our stores and administrative offices. Lease terms for our stores and
administrative offices are generally for seven to ten years with renewal options at most locations
and generally require us to pay a proportionate share of real estate taxes, insurance, common area,
and other operating costs. Some store leases provide for contingent rental (i.e. percentage rent)
payments based on sales in excess of specified amount. Certain of our lease agreements provide for
scheduled rent increases during the lease terms or for rental payments commencing at a date other
than the date of initial occupancy.
The following table sets forth information as of April 3, 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 |
$ | 517,679 | $ | 450,000 | (1) | $ | 67,679 | $ | | $ | | |||||||||
Capital leases |
35,099 | 20,577 | 14,522 | | ||||||||||||||||
Operating leases |
1,925,000 | 350,000 | 943,000 | 596,000 | 36,000 |
(1) | Long-term debt due in less than 1 year includes $450,000 that becomes due upon the sale of the Companys Landmark Center restaurant and store. The Company currently has no plans to sell its Landmark Center unit. |
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Our future capital requirements and the adequacy of available funds will depend on many
factors, including the pace of expansion, real estate markets, site locations, and the nature of
the arrangements negotiated with landlords. We have incurred significant operating losses since
inception and expect to incur a significant operating loss in 2011.
Seasonality
Although our business is not highly seasonal, it can be adversely affected by weather conditions.
Impact of Inflation
In the past, we have been able to recover inflationary cost and commodity price increases through
increased menu prices. There have been, and there may be in the future, delays in implementing such
menu price increases, and competitive pressures may limit our ability to recover such cost
increases in their entirety. Historically, the effects of inflation on our net income have not been
materially adverse.
Many of our employees are paid hourly rates related to federal and state minimum wage laws.
Although we have and will continue to attempt to pass along any increased labor costs through food
price increases, there can be no assurance that all such increased labor costs can be reflected in
our prices or that increased prices will be absorbed by consumers without diminishing to some
degree consumer spending at our stores. However, we have not experienced to date a significant
reduction in store profit margins as a result of changes in such laws, and management does not
anticipate any related future significant reductions in gross profit margins.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Item 4. | 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 April 3, 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.
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. |
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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 April 3, 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 April 3, 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. 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.
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 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.
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PART II OTHER INFORMATION
Item 1. | 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. 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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Removed and Reserved |
None.
Item 5. | Other Information |
None.
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Item 6
Exhibit | ||||
No. | Description | |||
31.1 | Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002* |
|||
31.2 | Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002* |
|||
32.1 | Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002* |
|||
32.2 | Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002* |
* | Filed herewith |
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SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
UFOOD RESTAURANT GROUP, INC. |
||||
Date: May 18, 2011 | By: | /s/ George Naddaff | ||
George Naddaff | ||||
Chairman and Chief Executive Officer (principal executive officer) |
||||
Date: May 18, 2011 | By: | /s/ Irma Norton | ||
Irma Norton | ||||
Chief Financial Officer (principal financial officer) |
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