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EXCEL - IDEA: XBRL DOCUMENT - UFood Restaurant Group, Inc. | Financial_Report.xls |
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EX-32.2 - EX-32.2 - UFood Restaurant Group, Inc. | c24622exv32w2.htm |
EX-31.2 - EX-31.2 - UFood Restaurant Group, Inc. | c24622exv31w2.htm |
EX-31.1 - EX-31.1 - UFood Restaurant Group, Inc. | c24622exv31w1.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 October 2, 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 | 20-4463582 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
255 Washington Street, Suite 150
Newton, MA 02458
(Address of principal executive offices)
Newton, MA 02458
(Address of principal executive offices)
(617) 787-6000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of November 15, 2011, there were 48,269,598 shares of the Registrants common stock, par value
$0.001 per share, issued and outstanding.
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
Index to Consolidated Financial Statements
4 5 | ||||
6 | ||||
7 | ||||
8 | ||||
9 22 | ||||
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
October 2, 2011 and January 2, 2011
October 2, 2011 and January 2, 2011
Assets
October 2, 2011 | January 2, 2011 | |||||||
(audited | ||||||||
(unaudited) | restated) | |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 793,665 | $ | 2,797,452 | ||||
Restricted cash |
40,129 | 40,041 | ||||||
Accounts receivable, net |
27,908 | 8,334 | ||||||
Inventories |
114,221 | 118,324 | ||||||
Prepaid expenses and other current assets |
100,722 | 78,310 | ||||||
1,076,645 | 3,042,461 | |||||||
Property and equipment: |
||||||||
Equipment |
1,100,031 | 1,006,238 | ||||||
Furniture and fixtures |
303,570 | 210,251 | ||||||
Leasehold improvements |
1,745,542 | 1,722,654 | ||||||
Website development costs |
69,485 | 27,050 | ||||||
Total property and equipment |
3,218,628 | 2,966,193 | ||||||
Accumulated depreciation and amortization |
2,135,429 | 1,863,148 | ||||||
Net fixed assets |
1,083,199 | 1,103,045 | ||||||
Other assets: |
||||||||
Investment in APG JV, LLC |
510 | | ||||||
Deferred financing costs, net |
3,083 | 7,717 | ||||||
Goodwill |
75,363 | 75,363 | ||||||
Other |
82,128 | 84,382 | ||||||
161,084 | 167,462 | |||||||
Total assets |
$ | 2,320,928 | $ | 4,312,968 | ||||
See accompanying notes.
- 4 -
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
October 2, 2011 and January 2, 2011
October 2, 2011 and January 2, 2011
Liabilities and Stockholders Equity (Deficit)
October 2, | January 2, | |||||||
2011 | 2011 | |||||||
(audited | ||||||||
(unaudited) | restated) | |||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 450,000 | $ | 450,000 | ||||
Current portion of capital lease obligations |
13,117 | 27,496 | ||||||
Accounts payable |
368,330 | 279,102 | ||||||
Franchisee deposits |
122,500 | 80,000 | ||||||
Accrued dividends |
690,456 | 225,779 | ||||||
Accrued expenses and other current liabilities |
169,577 | 165,632 | ||||||
Total current liabilities |
1,813,980 | 1,228,009 | ||||||
Long-term liabilities: |
||||||||
Long-term debt |
82,323 | 62,120 | ||||||
Warrant liability |
388,798 | 1,451,669 | ||||||
Capital lease obligations, net of current portion |
7,923 | 17,844 | ||||||
Other noncurrent liabilities |
75,956 | 83,716 | ||||||
555,000 | 1,615,349 | |||||||
Total liabilities |
2,368,980 | 2,843,358 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity (deficit): |
||||||||
Preferred stock, $0.001 par value, 10,000,000 shares authorized, |
||||||||
Series A 51,925 and 56,925 shares issued and outstanding
at October 2, 2011 and
January 2, 2011 respectively |
52 | 57 | ||||||
Series B 33,785 and 39,400 shares issued and outstanding
at October 2, 2011 and
January 2, 2011 respectively |
34 | 39 | ||||||
Common stock, $0.001 par value, 300,000,000 shares authorized,
47,640,810 and 40,487,294 shares issued and outstanding at
October 2, 2011 and January 2, 2011 respectively |
47,641 | 40,487 | ||||||
Additional paid-in capital |
43,455,378 | 42,845,625 | ||||||
Accumulated deficit |
(43,551,157 | ) | (41,416,598 | ) | ||||
Total stockholders equity (deficit) |
(48,052 | ) | 1,469,610 | |||||
Total liabilities and stockholders equity (deficit) |
$ | 2,320,928 | $ | 4,312,968 | ||||
See accompanying notes.
- 5 -
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Unaudited
For the Three and Six Month Periods Ended October 2, 2011 and September 26, 2010
For the Three and Six Month Periods Ended October 2, 2011 and September 26, 2010
Three Months Ended | Nine months Ended | |||||||||||||||
October 2, | September 26, | October 2, | September 26, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Store sales |
$ | 1,057,986 | $ | 1,178,874 | $ | 3,044,199 | $ | 3,447,118 | ||||||||
Franchise royalties and fees |
48,789 | 101,055 | 141,766 | 208,819 | ||||||||||||
Other revenue |
| | 2,903 | 22,298 | ||||||||||||
1,106,775 | 1,279,929 | 3,188,868 | 3,678,235 | |||||||||||||
Costs and expenses: |
||||||||||||||||
Store operating expenses: |
||||||||||||||||
Food and paper costs |
343,408 | 356,628 | 945,409 | 1,016,192 | ||||||||||||
Cost of nutritional products |
65,908 | 70,787 | 214,662 | 255,140 | ||||||||||||
Labor |
333,222 | 332,455 | 951,182 | 957,840 | ||||||||||||
Occupancy |
112,996 | 74,847 | 329,700 | 309,571 | ||||||||||||
Other store operating expenses |
167,971 | 153,663 | 460,135 | 497,806 | ||||||||||||
General and administrative expenses |
667,240 | 2,104,249 | 2,490,645 | 3,760,979 | ||||||||||||
Advertising, marketing and promotion expenses |
38,753 | 44,472 | 157,246 | 158,345 | ||||||||||||
Depreciation and amortization |
91,060 | 80,636 | 272,281 | 244,711 | ||||||||||||
Loss on disposal of assets |
| 25,782 | | 25,782 | ||||||||||||
Total costs and expenses |
1,820,558 | 3,243,519 | 5,821,260 | 7,226,366 | ||||||||||||
Operating loss |
(713,783 | ) | (1,963,590 | ) | (2,632,392 | ) | (3,548,131 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
858 | 672 | 4,803 | 4,829 | ||||||||||||
Interest expense |
(12,701 | ) | (408,434 | ) | (35,116 | ) | (1,192,473 | ) | ||||||||
Other income(expense) |
253,479 | (1,969,761 | ) | 1,062,871 | (2,191,846 | ) | ||||||||||
Other income (expense), net |
241,636 | (2,377,523 | ) | 1,032,558 | (3,379,490 | ) | ||||||||||
Loss before income taxes |
(472,147 | ) | (4,341,113 | ) | (1,599,834 | ) | (6,927,621 | ) | ||||||||
Income taxes |
| | | | ||||||||||||
Net loss |
$ | (472,147 | ) | $ | (4,341,113 | ) | $ | (1,599,834 | ) | $ | (6,927,621 | ) | ||||
Dividends on preferred stock |
(168,420 | ) | (19,778 | ) | (534,724 | ) | (19,778 | ) | ||||||||
Net loss attributable to common stockholders |
$ | (640,567 | ) | $ | (4,360,891 | ) | $ | (2,134,559 | ) | $ | (6,947,399 | ) | ||||
Weighted average number of shares
outstanding-basic and diluted |
45,461,761 | 40,014,225 | 42,619,229 | 39,039,355 | ||||||||||||
Basic and diluted loss per share |
$ | (0.01 | ) | $ | (0.11 | ) | $ | (0.05 | ) | $ | (0.18 | ) | ||||
See accompanying notes.
- 6 -
Table of Contents
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Unaudited
For the Nine months Ended October 2, 2011 and September 26, 2010
For the Nine months Ended October 2, 2011 and September 26, 2010
Nine months Ended | ||||||||
October 2, | September 26, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,599,834 | ) | $ | (6,927,621 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
272,281 | 244,711 | ||||||
Amortization of the beneficial conversion feature |
20,203 | 569,090 | ||||||
Deferred financing costs |
4,634 | 257,263 | ||||||
Provision for doubtful accounts |
| (66,322 | ) | |||||
Stock-based compensation |
406,717 | 853,083 | ||||||
Change in fair value of warrant liability |
(1,062,871 | ) | 2,191,846 | |||||
Loss on disposal of assets |
| 25,782 | ||||||
Non-cash promotion expenses |
149,592 | 1,178,545 | ||||||
Non-cash interest payments |
| 312,884 | ||||||
Increase (decrease) in cash from changes in assets and liabilities: |
||||||||
Accounts receivable |
(19,574 | ) | 224,247 | |||||
Inventories |
4,103 | (21,464 | ) | |||||
Prepaid expenses and other current assets |
(22,413 | ) | 46,798 | |||||
Other assets and noncurrent liabilities |
2,254 | 2,779 | ||||||
Accounts payable |
89,228 | 64,236 | ||||||
Franchisee deposits |
42,500 | (46,079 | ) | |||||
Accrued expenses and other current and non-current liabilities |
(3,814 | ) | (149,611 | ) | ||||
Net cash used in operating activities |
(1,716,994 | ) | (1,239,833 | ) | ||||
Cash flows from investing activities: |
||||||||
Acquisition of property and equipment |
(252,435 | ) | (70,700 | ) | ||||
Investment in APG JV, LLC |
(510 | ) | | |||||
Net cash used in investing activities |
(252,945 | ) | (70,700 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock, net |
| 53,846 | ||||||
Payments for financing costs |
(9,461 | ) | (69,881 | ) | ||||
Payments on long-term debt |
| (407,882 | ) | |||||
Payments on capital lease obligations |
(24,299 | ) | (46,221 | ) | ||||
(Increase) decrease in restricted cash |
(88 | ) | 20,384 | |||||
Net cash used in financing activities |
(33,848 | ) | (449,754 | ) | ||||
Decrease in cash and cash equivalents |
(2,003,787 | ) | (1,760,287 | ) | ||||
Cash and cash equivalents beginning of year |
2,797,452 | 2,278,427 | ||||||
Cash and cash equivalents end of period |
$ | 793,665 | $ | 518,140 | ||||
See accompanied notes.
- 7 -
Table of Contents
UFOOD
RESTAURANT GROUP, INC. and SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity (Deficit)
For the nine months ended October 2, 2011
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 | |||||||||||||||
Conversion of Preferred Stock Series A into common stock |
(5,000 | ) | (5 | ) | 3,846,154 | 3,846 | (3,841 | ) | | | ||||||||||||||||||
Conversion of Preferred Stock Series B into common stock |
(5,615 | ) | (6 | ) | 2,441,304 | 2,441 | (2,436 | ) | | | ||||||||||||||||||
Common stock issued for consulting, marketing & promotional services |
| | 469,711 | 470 | 82,370 | | 82,840 | |||||||||||||||||||||
Common stock-based compensation for consulting, marketing and
promotional expenses |
| | | | 66,752 | | 66,752 | |||||||||||||||||||||
Common stock-based compensation |
| | | | 406,717 | | 406,717 | |||||||||||||||||||||
Payments for financing costs |
| | | | (9,461 | ) | | (9,461 | ) | |||||||||||||||||||
Payment of dividends to preferred stock converted into common stock |
| | 396,347 | 396 | 69,652 | | 70,048 | |||||||||||||||||||||
Dividends on preferred stock |
| | | | | (534,724 | ) | (534,724 | ) | |||||||||||||||||||
Net loss for the nine months ended October 2, 2011 |
| | | | | (1,599,834 | ) | (1,599,834 | ) | |||||||||||||||||||
Balance, October 2, 2011 |
85,710 | $ | 86 | 47,640,810 | $ | 47,641 | $ | 43,455,378 | $ | (43,551,157 | ) | $ | (48,052 | ) | ||||||||||||||
See accompanied notes.
- 8 -
Table of Contents
UFOOD RESTAURANT GROUP, INC.
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, UFood was a development stage company
headquartered in Vancouver, Canada. As Axxent Media Corp., the Companys business was to
obtain reproduction and distribution rights to foreign films within North America and also to
obtain the foreign rights to North American films for reproduction and distribution to
foreign countries. On August 8, 2007, the Company changed its name to UFood Franchise
Company, Inc., and on September 25, 2007, changed its name to UFood Restaurant Group, Inc.
(UFood or the Company). Following the Merger described below, the Company abandoned its
former plans with respect to film reproduction and distribution rights.
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. 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 of
October 2, 2011, the Companys operations consisted of four Company-owned restaurants and
four franchisee owned restaurants.
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 October 2, 2011, and the results of its operations and cash flows for
the fiscal quarters ended October 2, 2011 and September 26, 2010. The results of operations
for the three and nine months ended October 2, 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.
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 October 2, 2011, the Company had approximately $794,000 of unrestricted
cash. The Company is currently in the process of trying to raise additional equity capital
necessary to enable the Company to meet its obligations as they become due without
substantial disposition of assets outside the ordinary course of business, restructuring of
debt, externally forced revisions of its operations, or similar actions. 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. 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 franchisees, and the ability to obtain
adequate additional financing necessary to fund continuing operations.
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, 2010 and January
2nd, 2011.
- 9 -
Table of Contents
Principles of Consolidation
The consolidated financial statements include the assets, liabilities and results of
operations of UFood Restaurant Group, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual amounts could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to conform previously reported data to the current
presentation.
Investments in Companies Accounted for using the Equity Method
The Companys invest in APG JV, LLC (see Note 6) is accounted for by the equity method as a
result of the ownership percentage and/or the Companys ability to exercise significant
influence over the operating and financial policies of the investee. Investments of this
nature are recorded at original cost and adjusted periodically to recognize the Companys
proportionate share of the investees net income or losses after the date of the investment.
When net losses from an investment accounted for under the equity method exceed its carrying
amount, the investment balance is reduced to zero and additional losses are not provided for.
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 $4,634 and
$257,263 for the nine months ended October 2, 2011 and September 26, 2010, respectively, and
is included in interest expense. The amortization expense recorded by the Company for the
three months ended October 2, 2011 and September 26, 2010 was $1,545 and $83,435
respectively.
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. As of the first day of the fourth
quarter of the year ended January 2, 2011 according to our policy we have tested the carrying
value of the Goodwill attributable to our store operations and no impairment was necessary.
The carrying amount of goodwill may be impaired in the future if our actual operating results
and cash flows fall short of our expectations.
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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.
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 year. Diluted
earnings per common share are computed by dividing net income allocable to common
stockholders by the weighted average number of shares of common stock outstanding and
dilutive securities outstanding during the year.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and other accrued expenses and debt
obligations approximate their fair values due to the short-term maturity of these
instruments.
Stock-Based Compensation
The Company maintains two stock-based incentive plans. The Company grants options to purchase
common stock at an option price equal to the market value of the stock at the date of grant.
Options generally vest over a three year period beginning on the date of grant and have a ten
year contractual term.
- 11 -
Table of Contents
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 three months ended October 2, 2011
totaled approximately $86,803 for stock options. Stock-based compensation expense recognized
during the nine months ended October 2, 2011 totaled approximately $406,716 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 October 2, 2011, the aggregate fair value of the derivative was $388,798. The decrease in
the fair value of the derivative was in the aggregate amount of $253,479 and $1,062,871
during the fiscal quarter and nine months ended October 2, 2011 respectively. The decrease in
the fair value of the derivative was recorded in the consolidated statement of operations as
other income(expense). 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:
Liability Derivatives | ||||||||||||
Fair Value | ||||||||||||
As of October 2, | As of January 2, | |||||||||||
Balance Sheet Location | 2011 | 2011 | ||||||||||
Derivatives designated as hedging
instruments under ASC No. 815-10: |
||||||||||||
None |
||||||||||||
Derivatives not designated as hedging
instruments under ASC No. 815-10: |
||||||||||||
Derivative warrant liability |
Long-term liabilities | $ | 388,798 | $ | 1,451,669 | |||||||
Total derivatives |
$ | 388,798 | $ | 1,451,669 | ||||||||
The
effect of the derivative instrument on the consolidated statements of operations for the quarter and nine months ended October 2, 2011 and
September 26, 2010 follows:
Location of Gain | Amount of Gain (Loss) Recognized in Income on Derivative | |||||||||||||||||||
(Loss) | Nine months | Nine months | ||||||||||||||||||
Recognized in | ended | ended | ||||||||||||||||||
Income on | Fiscal quarter ended | Fiscal quarter ended | October 2, | September 26, | ||||||||||||||||
Derivative | October 2, 2011 | September 26, 2010 | 2011 | 2010 | ||||||||||||||||
Derivatives not designated as
hedging instruments
under ASC No. 815-10: |
||||||||||||||||||||
Derivative warrant liability |
Other Income (Expense) | $ | 253,479 | $ | (1,969,761 | ) | $ | 1,062,871 | $ | (2,191,846 | ) | |||||||||
Total |
$ | 253,479 | $ | (1,969,761 | ) | $ | 1,062,871 | $ | (2,191,846 | ) | ||||||||||
The fair value of the warrant liability was determined using the Black Scholes Option Pricing method. The valuation methodology uses a
combination of observable (Level 2) and unobservable (Level 3) inputs in calculating fair value. As required by ASC 820, assets are
classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
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The fair value of the warrant liability was estimated on the date of issuance, as of January 2, 2011, and as of October 2, 2011, using the
following assumptions:
At Issuance | January 2, 2011 | October 2, 2011 | ||||||||||
Expected term (years) |
5 - 7 Years | 2 - 4 Years | 1 - 3 Years | |||||||||
Expected volatility |
32.34 | % | 156.3 | % | 121.22 | % | ||||||
Risk-free interest rate |
2.46 | % | 0.61 | % | 0.13 | % | ||||||
Expected annual dividend |
0.00 | % | 0.00 | % | 0.00 | % |
The table below sets forth a summary of changes in the fair value of the Companys level 3 derivative at December 29, 2008, and for the nine
months ended October 2, 2011:
Balance as of December 29, 2008 |
$ | | ||
Fair Value of warrant liability at issuance |
3,512,272 | |||
Decrease in fair value at December 29, 2008 |
(3,159,024 | ) | ||
Decrease in fair value 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 | ) | ||
Decrease in fair value during quarter ended July 3, 2011 |
(490,987 | ) | ||
Decrease in fair value during quarter ended October 2, 2011 |
(253,479 | ) | ||
Balance as of October 2, 2011 |
$ | 388,798 |
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.
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Table of Contents
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.
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 39,942,308. 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.
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.
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Table of Contents
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 October 2,
2011, there were 5,711,849 stock options outstanding under the 2007 Plan. At October 2, 2011,
options to purchase 5,711,849 shares of Common Stock were exercisable at a weighted average
exercise price of $0.19.
Activity under the 2007 Plan for the nine months ended October 2, 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 | $ | | ||||||||||
Granted |
| | | |||||||||||||
Exercised |
| | | |||||||||||||
Forfeited |
(173,141 | ) | ||||||||||||||
Outstanding at October 2, 2011 |
5,711,849 | $ | 0.19 | 7.2 | $ | | ||||||||||
Exercisable at October 2, 2011 |
5,711,849 | $ | 0.19 | 7.2 | $ | | ||||||||||
At October 2, 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 $0.12 as of October 2, 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 its 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, the Company recorded an expense of $500,000 of stock-based
compensation expense. The Board of Directors have agreed to reinstate the Summit Trading
Limited service agreement with a covenant of performance of 60 days after the Investor
Relations campaign begins in November.
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 October 2, 2011 there was $395,498 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 recognized an expense in
the total amount of $55,631 over the vesting period.
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Table of Contents
On April 27, 2011 the Companys Board of Directors awarded the following grants:
Name | Type | Number of Shares | Exercise Price | Termination | Vesting Schedule | |||||||||
Charles Yelen
|
Warrant | 10,000 | $0.16 | 5 years from the date of grant | All shares vest upon date of grant | |||||||||
Charles Yelen
|
Warrant | 10,000 to be granted upon the opening of each of three stores | Market closing price at grant | 5 years from the date of grant | All shares vest upon date of grant | |||||||||
Charles Yelen
|
Warrant | 2,000 to be granted upon the opening of each of store after the third store | Market closing price at grant | 5 years from the date of grant | All shares vest upon date of grant | |||||||||
Jeffrey Bonasia
|
Non-Qualified stock options |
500,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 24 months following the date of the grant. | |||||||||
Health Corp
|
Shares of common stock | 20,000 | None | None | None | |||||||||
MK3
|
Non-qualified stock options |
69,625 | $0.16 | 10 years from the date of grant | All shares vest upon date of the grant | |||||||||
John Howell
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant. | |||||||||
Raymund c. King
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant | |||||||||
Paul W. Essex
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant. | |||||||||
William A. Chatfield
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant. | |||||||||
William J. Blalock
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant. | |||||||||
Mark R. Milliken
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant. | |||||||||
Stacey Bell
|
Non-qualified stock options |
25,000 | $0.16 | 5 years from the date of grant | Equal monthly amounts for 12 months following the date of the grant. |
Activity of Non-Qualified Stock Options outside of any plan from January 2, 2011 through
October 2, 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 |
744,625 | 0.16 | | |||||||||||||
Forfeited |
(174,000 | ) | 0.19 | | ||||||||||||
Outstanding at October 2, 2011 |
9,299,298 | $ | 0.19 | 7.4 | $ | -0- | ||||||||||
Exercisable at October 2, 2011 |
6,775,815 | $ | 0.19 | 7.4 | $ | -0- | ||||||||||
- 17 -
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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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Table of Contents
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 nine 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 39,922,308. 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.
- 19 -
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6. | Other investment |
On September 9, 2011, UFood Restaurant Group, Inc. (UFood Restaurant) entered into a
(Delaware) limited liability company agreement of APG JV, LLC (the LLC), with: KFLG
Watertown, Inc., a Massachusetts corporation and an indirect wholly-owned subsidiary of UFood
Restaurant (KFLG and, collectively with UFood, UFood or the Company), and MBUF LLC, a
Delaware limited liability company (MBUF). The purpose of the LLC is to build and operate
3 UFood Grill outlets at the Aberdeen Proving Ground (the Aberdeen units). The Company owns
51% of the membership units and the right to nominate two of the four Board of Managers (all
decisions or actions requiring an affirmative vote by the majority).
UFood Restaurant will provide management services to the LLC (via separate management
agreement), in exchange for a 5% (of LLC gross sales) management fee, paid quarterly by the
LLC; conduct operations and affairs of the Aberdeen Units for the benefit of the LLC; grant
and license to the LLC branding, materials and know-how, intellectual property rights,
franchise rights, trademarks and service marks, etc.; and hold and operate under all leases,
awards, contracts and rights re: Aberdeen Units for the benefit of the LLC.
A joint venture relationship must first be evaluated under the variable interest entity
subsections of ASC 810-10, to determine if the joint venture is a variable interest entity
(VIE), and whether one investor is the primary beneficiary required to consolidate the
Joint Venture. Based on ASC 810-10-25-26, since APG JV, LLC (the LLC) is receiving financing
(loan) from MBUF, the related liability creates variability, which is absorbed by MBUF. The
LLC is the creator of variability.
Once the loan is repaid, UFood Restaurant and MBUF will share in the profits and
distributions of the LLC in proportion to their respective interests (51% and 49%,
respectively). As a result, both members absorb variability in terms of expected residual
returns from the LLCs assets and operations.
Given that MBUF will absorb a majority of the VIEs expected losses and UFood Restaurant will
receive a majority of the VIEs expected residual returns (51%), the reporting entity
absorbing a majority of the losses (MBUF) should consolidate the VIE. As such, MBUF is the
primary beneficiary in relation to the LLC VIE. UFood Restaurant would not have to
consolidate the VIE. Instead, UFood Restaurant would need to include VIE disclosures within
its financial statements, in relation to the counterparty (APG JV, LLC).
Although UFood Restaurant has a 51.0% membership unit interest, as far as initial membership
units in APG JV, LLC, the Board of Managers, which makes decisions and actions based upon an
affirmative vote of the majority, is comprised of two managers designated by UFood
Restaurant, and two managers designated by MBUF. Thus, true voting power is split 50/50
between the two entities. Based upon this 50% voting interest, UFood Restaurant can exercise
significant influence (but not control) over APG JV, LLC.
As a result, UFood Restaurant recorded for its investment in APG JV, LLC of 51,000 membership
units for $510 under the equity method of accounting.
7. | 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 three and nine months ended
October 2, 2011 and September 26, 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.
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The Companys income tax returns have not been audited by the Internal Revenue Service
(IRS) or any state taxing authority. The years 2008 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.
8. | 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. Based on information currently available, we believe the amount, or
range, of reasonably possible losses in connection with the actions against us, in excess of
established reserves, in the aggregate, not to be material to our consolidated financial
condition or cash flows. However, losses may be material to our operating results for any
particular future period, depending on the level of our income for such period.
9. | Supplemental Disclosures of Cash Flow Information |
Three Months Ended | Nine months Ended | |||||||||||||||
October 2, | September 26, | October 2, | September 26, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cash paid during the period for interest |
$ | 3,409 | $ | 15,174 | $ | 7,112 | $ | 51,993 | ||||||||
Preferred stock dividends paid with common
stock |
$ | 42,078 | $ | | $ | 70,048 | $ | | ||||||||
Property and equipment acquired with capital
lease |
$ | | $ | | $ | | $ | 8,163 | ||||||||
10. | Loss Per Share |
The amounts used for basic and diluted per share calculations are as follows:
Three Months Ended | Nine months Ended | |||||||||||||||
October 2, | September 26, | October 2, | September 26, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss allocable to common stockholders |
$ | (640,567 | ) | $ | (4,360,891 | ) | $ | (2,134,559 | ) | $ | (6,947,399 | ) | ||||
Weighted average number of shares
outstanding basic and diluted |
45,461,761 | 40,014,225 | 42,619,229 | 39,039,355 | ||||||||||||
Basic and diluted per common share |
$ | (0.01 | ) | $ | (0.11 | ) | $ | (0.05 | ) | $ | (0.18 | ) | ||||
Diluted earnings (loss) per share are not presented since the effect of the assumed exercise
of options and warrants to purchase common stock would have been anti-dilutive. A total of a
66,004,677 and 59,768,7150 potential common shares from the assumed exercise of options and
warrants were excluded from the calculation of diluted net loss per share for the three and
nine month periods ended October 2, 2011 and September 26, 2010 respectively, because their
inclusion would have been anti-dilutive.
11. | 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.
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The accounting policies of the segments are the same. Interest expense has been allocated
based on operating results and total assets employed in each segment. Inter-segment
transactions are uncommon and not material. Therefore, they have not been separately
reflected in the financial table below. The totals of the reportable segments revenues and
net loss agree with the comparable amounts contained in the Companys consolidated financial
statements.
Segment information for the Companys two business segments follows:
Three Months Ended | Nine months Ended | |||||||||||||||
October 2, | September 26, | October 2, | September 26, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Store operations |
$ | 1,057,986 | $ | 1,178,874 | $ | 3,044,199 | $ | 3,477,118 | ||||||||
Franchise operations |
48,789 | 101,055 | 144,669 | 231,117 | ||||||||||||
Total revenue |
$ | 1,106,775 | $ | 1,279,929 | $ | 3,188,868 | $ | 3,678,235 | ||||||||
Segment income (loss): |
||||||||||||||||
Store operations |
$ | (44,881 | ) | $ | 116,370 | $ | (98,206 | ) | $ | 178,774 | ||||||
Franchise operations |
(114,521 | ) | (498,277 | ) | (441,730 | ) | (820,520 | ) | ||||||||
Total segment loss |
$ | (159,402 | ) | $ | (381,907 | ) | $ | (539,936 | ) | $ | (641,746 | ) | ||||
Unallocated general and administrative expenses |
$ | 424,568 | $ | 1,456,575 | $ | 1,662,931 | $ | 2,503,329 | ||||||||
Advertising, marketing and promotion |
38,753 | 44,472 | 157,244 | 158,345 | ||||||||||||
Depreciation and amortization |
91,060 | 80,636 | 272,281 | 244,711 | ||||||||||||
Interest expense, net |
11,843 | 407,762 | 30,313 | 1,187,644 | ||||||||||||
Other (income) expense |
(253,479 | ) | 1,969,761 | (1,062,871 | ) | 2,191,846 | ||||||||||
Net loss |
$ | (472,147 | ) | $ | (4,341,113 | ) | $ | (1,599,834 | ) | $ | (6,927,621 | ) | ||||
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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 four area development agreements
and three franchise agreements covering 65 franchise units in five states (California,
Florida, Texas, Ohio and Massachusetts) and the Washington, DC area; including four franchise
locations currently open and operating, and requiring the construction by franchisees of 61
future UFood Grill outlets.
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 initiatives that we
believe are most beneficial.
We include in this discussion information on Company, franchisee, and/or system-wide
comparable sales. System-wide sales are a non-GAAP financial measure that includes sales at
all Company-owned and franchise-operated stores, as reported by franchisees. Management uses
system-wide sales information internally in connection with store development decisions,
planning and budgeting analysis. Management believes system-wide sales are useful in
assessing customer acceptance of our brand and facilitating an understanding of financial
performance as our franchisees pay royalties and contribute to marketing funds based on a
percentage of their sales.
We derive revenues from three sources: (i) store sales which include sales of hot and cold
prepared food in a fast casual dining environment as well as sales of health and nutrition
related products; (ii) franchise royalties and fees represent amounts earned under franchise
and area development agreements; and (iii) other revenues derived primarily from the sale of
marketing materials to franchisees. Store operating expenses include the cost of goods, food
and paper products sold in Company-owned stores as well as labor and other operating costs
incurred to operate Company-owned stores. General and administrative expenses, advertising,
marketing and promotion expenses and depreciation expense relate to all three revenue
sources.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based
upon our consolidated financial statements for the three and nine months ended October 2,
2011 and September 26, 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.
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.
- 23 -
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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, 2010 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.
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.
Investments in Companies Accounted for using the Equity Method
The Companys invest in APG JV, LLC (see Note 6) is accounted for by the equity method as a
result of the ownership percentage and/or the Companys ability to exercise significant
influence over the operating and financial policies of the investee. Investments of this
nature are recorded at original cost and adjusted periodically to recognize the Companys
proportionate share of the investees net income or losses after the date of the investment.
When net losses from an investment accounted for under the equity method exceed its carrying
amount, the investment balance is reduced to zero and additional losses are not provided for.
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 $4,634 and
$257,263 for the nine months ended October 2, 2011 and September 26, 2010, respectively, and
is included in interest expense. The amortization expense recorded by the Company for the
three months ended October 2, 2011 and September 26, 2010 was $1,545 and $83,435
respectively.
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. As of the first day of the fourth
quarter of the year ended January 1, 2012 according to our policy we have tested the carrying
value of the Goodwill attributable to our store operations and no impairment was necessary.
The carrying amount of goodwill may be impaired in the future if our actual operating results
and cash flows fall short of our expectations.
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Table of Contents
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.
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 year. Diluted
earnings per common share are computed by dividing net income allocable to common
stockholders by the weighted average number of shares of common stock outstanding and
dilutive securities outstanding during the year.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable and other accrued expenses and debt
obligations approximate their fair values due to the short-term maturity of these
instruments.
Stock-Based Compensation
The Company maintains two stock-based incentive plans. The Company grants options to purchase
common stock at an option price equal to the market value of the stock at the date of grant.
Options generally vest over a three year period beginning on the date of grant and have a ten
year contractual term.
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Table of Contents
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 three months ended October 2, 2011
totaled approximately $86,803 for stock options. Stock-based compensation expense recognized
during the nine months ended October 2, 2011 totaled approximately $406,716 for stock
options. Stock-based compensation expense was included in general and administrative expenses
in the accompanying Consolidated Statements of Operations.
Executive Summary of Results
The following table sets forth the percentage relationship to total revenues, except where
otherwise indicated, of certain items included in our consolidated statements of operations
for the periods indicated. Percentages may not add due to rounding:
Three Months Ended | Nine months Ended | |||||||||||||||
October 2, | September 26, | October 2, | September 26, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Store sales |
95.6 | % | 92.1 | % | 95.5 | % | 93.7 | % | ||||||||
Franchise royalties and fees |
4.4 | 7.9 | 4.4 | 5.7 | ||||||||||||
Other revenue |
0.0 | 0.0 | 0.1 | 0.6 | ||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Costs and expenses: |
||||||||||||||||
Store operating expenses (1): |
||||||||||||||||
Food and paper costs |
35.9 | % | 33.7 | % | 34.6 | % | 33.3 | % | ||||||||
Cost of nutritional products |
6.2 | 6.0 | 7.1 | 7.4 | ||||||||||||
Labor |
31.5 | 28.2 | 31.2 | 27.8 | ||||||||||||
Occupancy |
10.7 | 6.3 | 10.8 | 9.0 | ||||||||||||
Other store operating expenses |
15.9 | 13.0 | 15.1 | 14.4 | ||||||||||||
General and administrative expenses |
60.3 | 164.4 | 78.1 | 102.2 | ||||||||||||
Advertising, marketing and promotion
expenses |
3.5 | 3.5 | 4.9 | 4.3 | ||||||||||||
Depreciation and amortization |
8.2 | 6.3 | 8.5 | 6.7 | ||||||||||||
Loss on disposal of assets |
| 2.0 | | 0.7 | ||||||||||||
Total costs and expenses |
164.5 | 253.4 | 182.5 | 196.5 | ||||||||||||
Operating loss |
(64.5 | ) | (153.4 | ) | (82.5 | ) | (96.5 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
0.0 | 0.1 | 0.2 | 0.2 | ||||||||||||
Interest expense |
(1.1 | ) | (31.9 | ) | (1.1 | ) | (32.4 | ) | ||||||||
Other income |
22.9 | (153.9 | ) | 33.3 | (59.6 | ) | ||||||||||
Other income (expense), net |
21.8 | (185.8 | ) | 32.4 | (91.9 | ) | ||||||||||
Loss before income taxes |
(42.7 | ) | (185.8 | ) | (50.2 | ) | (188.3 | ) | ||||||||
Income taxes |
| | | | ||||||||||||
Net loss |
(42.7 | )% | (106.7 | )% | (50.2 | )% | (188.3 | )% | ||||||||
(1) | Food and paper costs are shown as a percentage of food sales. Cost of nutritional products, labor, occupancy and other store operating expenses are shown as a percentage of total store sales. |
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The following table sets forth certain data relating to the number of Company-owned,
franchise-operated and system-wide store locations:
Three Months Ended | Nine months Ended | |||||||||||||||
October 2, | September 26, | October 2, | September 26, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Company-owned locations: |
||||||||||||||||
Locations at the beginning of the
year |
4 | 4 | 4 | 4 | ||||||||||||
Locations opened |
| | | | ||||||||||||
Locations closed |
| | | | ||||||||||||
Locations sold |
| | | | ||||||||||||
Locations transferred |
| | | | ||||||||||||
Locations at the end of the period |
4 | 4 | 4 | 4 | ||||||||||||
Franchise-owned locations: |
||||||||||||||||
Locations at the beginning of the
year |
4 | 4 | 4 | 4 | ||||||||||||
Locations opened |
| 1 | | 2 | ||||||||||||
Locations closed |
| (1 | ) | | (2 | ) | ||||||||||
Locations sold |
| | | | ||||||||||||
Locations transferred |
| | | | ||||||||||||
Locations at the end of the period |
4 | 4 | 4 | 4 | ||||||||||||
System-wide locations |
||||||||||||||||
Locations at the beginning of the
year |
8 | 8 | 8 | 8 | ||||||||||||
Locations opened |
| 1 | | 2 | ||||||||||||
Locations closed |
| (1 | ) | | (2 | ) | ||||||||||
Locations sold |
| | | | ||||||||||||
Locations transferred |
| | | | ||||||||||||
Locations at the end of the period |
8 | 8 | 8 | 8 | ||||||||||||
Three Months Ended October 2, 2011 Compared to Three Months Ended September 26, 2010
General
For the three months ended October 2, 2011, our comparable store sales for Company owned
stores decreased by 10.3% Comparable store sales of Company-owned and franchisee-owned
locations were adversely impacted by the economic downturn and the corresponding slowdown in
consumer spending. Comparable store sales are based on sales for stores that have been in
operation for the entire period of comparison. Comparable store sales exclude closed
locations.
Results of Operations
Revenues
Total revenues for the three months ended October 2, 2011 decreased by $173,154 or 13.5% to
$1,106,775 from $1,279,929 for the three months ended September 26, 2010. The decrease in
total revenues for the three months ended October 2, 2011 as compared to the prior year was
primarily due to lower same store sales and no openings of franchisee stores.
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Sales at Company-operated stores for the three months ended October 2, 2011 decreased by
$120,888, or 10.3% to $1,057,986 from $1,178,874 for the three months ended September 26,
2010. As a percentage of total sales revenues, sales at Company-operated stores increased to
95.6% of the total revenues for the three months ended October 2, 2011 up from 92.1% of the
total revenues for the three months ended September 26, 2010. The decrease in sales at
Company-operated stores for the three months ended October 2, 2011 was primarily due to a
significant sales decline at our Logan Airport Terminal B location resulting from a reduction
in customers caused by the decrease in airline passengers. Also, the decrease in sales is
attributable to the fewer customers visiting our other stores locations slightly offset by a
small increase of the average ticket.
During the three months ended October 2, 2011, franchise royalties and fees decreased by
$52,266, or 51.7% to $48,789 from $101,055 for the three months ended September 26, 2010 due
to the opening of a franchise store in 2010 and the associated franchise fee of $35,000,
compared to the same period this year with no openings.
Costs and Expenses
Food and paper costs for the three months ended October 2, 2011 decreased by $13,220, or
3.7%, to $343,408 from $356,628 for the three months ended September 26, 2010. As a
percentage of food sales, food and paper costs increased to 35.9% of food sales for the three
months ended October 2, 2011 from 33.7% of food sales for the three months ended September
26, 2010. The increase in food and paper costs as a percentage of food sales was primarily
attributable to the increase in promotional discounts which were 157% more than the same
period last year.
The cost of nutritional products for the three months ended October 2, 2011 decreased by
$4,879, or 6.9%, to $65,908 from $70,787 for the three months ended September 26, 2010. As a
percentage of store sales, the cost of nutritional products increased to 6.2% of store sales
for the three months ended October 2, 2011 from 6% of store sales for the three months ended
September 26, 2010. The decrease in the cost of nutritional products as a percentage of store
sales was primarily attributable to the decline in sales of nutritional products.
Store labor expense for the three months ended October 2, 2011 increased by $767, or 0.2%, to
$333,222 from $332,455 for the three months ended September 26, 2010. As a percentage of
store sales, labor expense increased to 31.5% of store sales for the three months ended
October 2, 2011 from 28.2% of store sales for the three months ended September 26, 2010. The
increase in the labor percentage as a percentage of sales was due to the decline in sales and
pay rate increases to employees.
Store occupancy costs for the three months ended October 2, 2011 increased by $38,149, or
51.0%, to $112,996 from $74,847 for the three months ended September 26, 2010. The increase
in occupancy costs was primarily attributable to the rent relief we received for one of our
locations, resulting in an adjustment to eliminate the rent accrual booked in the three
months ended September 26, 2010. As a percentage of store sales, occupancy costs increased
to 10.7% of store sales for the three months ended October 2, 2011 from 6.3% of store sales
for the three months ended September 26, 2010.
Other store operating expenses for the three months ended October 2, 2011 increased by
$14,308, or 9.3%, to $167,971 from $153,663 for the three months ended September 26, 2010.
The increase was primarily due an increase in maintenance expenses. As a percentage of store
sales, other store operating expenses increased to 15.9% of store sales for the three months
ended October 2, 2011 from 13% of store sales during the three months ended September 26,
2010, primarily due to the decline of same store sales.
General and administrative expenses for the three months ended October 2, 2011 decreased by
$1,437,009 or 68.3%, to $667,240 from $2,104,249 for the fiscal quarter ended September 26,
2010. The decrease in general and administrative expenses for the three months ended October
2, 2011 compared to the same period in the prior year is primarily due to non-cash
transactions booked last year. The stock based compensation for employees was $512,561 lower
than last year during the same period. Also, the stock based compensation issued for Investor
relations services was $989,209 lower than last year during the same period. As a result of
the foregoing, general and administrative expenses decreased to 60.3% of total revenues
during the three months ended October 2, 2011 down from 164.4% of total revenues for the
three months ended September 26, 2010.
Advertising, marketing and promotion expenses for the three months ended October 2, 2011
decreased by $5,719 or 12.9%, to $38,753 from $44,472 for the three months ended September
26, 2010. The decrease in advertising, marketing and promotion expenses was primarily due to
printing posters and promotional coupons in the prior year which were not incurred this year.
As a percentage of total revenues, advertising, marketing and promotion expenses stayed at
3.5% for both years.
Depreciation and amortization expense for the three months ended October 2, 2011 increased by
$10,424, or 12.9%, to $91,060 from $80,636 for the three months ended September 26, 2010. As
a percentage of total revenues, depreciation and amortization expense increased to 8.2% of
total revenues for the three months ended October 2, 2011 up from 6.3% of total revenues for
the three months ended September 26, 2010.
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Net other income (expense) changed to $241,636 of income for the three months ended October
2, 2011 from $2,377,523 of expense for the three months ended September 26, 2010. The detail
of the other expense is as follows:
Three months | Three months | |||||||||||
ended | ended | |||||||||||
October 2, | September 26, | |||||||||||
2011 | 2010 | Variance | ||||||||||
Other income (expense) |
$ | 253,479 | $ | (1,969,761 | )(1) | $ | 2,223,240 | |||||
Interest income |
858 | 672 | 186 | |||||||||
Interest expense |
(12,701 | ) | (408,434 | )(2) | 395,733 | |||||||
Total other income(expense) |
241,636 | (2,377,523 | ) | 2,619,159 | ||||||||
(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 October 2, 2011, the aggregate fair value of the derivative was $388,798. The decrease in the fair value of the derivative was in the aggregate amount of $253,479 during the Fiscal quarter ended October 2, 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. |
The net loss for the three months ended October 2, 2011 decreased by $3,868,966, or 89.1% to
$472,147, from $4,341,113 for the three months ended September 26, 2010. Our net loss
decreased primarily due to the increase in other income and the decrease of General and
Administrative expenses. Both variances were as a result of non-cash transactions such
stock-based compensation and the valuation market-to-market of the outstanding 2008 Warrants
as well as the beneficial conversion feature of the debentures extinguished last year. As a
percentage of total revenues, our net loss decreased to 42.7% of total revenues for the three
months ended October 2, 2011 down from 185.8% of total revenues for the three months ended
September 26, 2010.
Nine months Ended October 2, 2011 Compared to Nine months Ended September 26, 2010
General
For the nine months ended October 2, 2011, our comparable store sales for Company owned
stores decreased by 11.7%. The decrease in comparable store sales of Company-owned stores
was primarily due to significant decline in passengers in Logan Airport Terminal B resulting
in fewer customers at our store located within the food court in this terminal. Also, the
decrease of sales was due to the closing of our stores for at least two days as a result of
severe snow storms, the decrease of customer count slightly offset by a small increase of the
average ticket. Comparable store sales are based on sales for stores that have been in
operation for the entire period of comparison. Comparable store sales exclude closed
locations.
Results of Operations
Revenues
Our total revenues for the nine months ended October 2, 2011 decreased by $489,367, or 13.3%,
to $3,188,868 from $3,678,235 for the nine months ended September 26, 2010. The decrease in
total revenues was primarily due to the decline in
comparable store sales and less franchisee stores openings during the nine months ended
October 2, 2011 compares to the same period last year.
Total store sales at Company-owned stores for the nine months ended October 2, 2011 decreased
by $402,919, or 11.7%, to $3,044,199 from $3,447,118 for the nine months ended September 26,
2010. As a percentage of total revenues, sales at Company-owned stores increased to 95.5% of
total revenues for the nine months ended October 2, 2011 from 93.7% of total revenues for
the nine months ended September 26, 2010. The decrease in sales at Company-owned stores for
the nine months ended October 2, 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 and a decrease in customer counts at our Boston stores due to severe
weather which forced the Company to close the Boston stores for several days during the first
nine months of 2011.
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During the nine months ended October 2, 2011, franchise royalties and fees decreased by
$67,053, or 32.1% to $141,766 from $208,819 for the nine months ended September 26, 2010
primarily due to a decrease in franchise fees from new store openings.
Costs and Expenses
Food and paper costs for the nine months ended October 2, 2011 decreased by $70,783, or 7.0%,
to $945,409 from $1,016,192 for the nine months ended September 26, 2010. The decrease was
primarily attributable to the decline in comparable sales. As a percentage of food sales,
food and paper costs increased to 34.6% of food sales during the nine months ended October
2, 2011 up from 33.3% of food sales during the nine months ended September 26, 2010. The
increase in food and paper costs as a percentage of food sales was primarily attributable to
the significant increase in promotional discounts, an increase of wholesale costs partially
offset by price increase in menu items that took place in the third week of May.
The cost of nutritional products for the nine months ended October 2, 2011 decreased by
$40,478, or 15.9%, to $214,662 from $255,140 for the nine months ended September 26, 2010. As
a percentage of store sales, the cost of nutritional products decreased to 7.1% of store
sales for the nine months ended October 2, 2011 down from 7.4% of store sales for the nine
months ended September 26, 2010, the decrease was primarily due to lower total revenues.
Store labor expense for the nine months ended October 2, 2011 decreased by $6,658, or 0.7%,
to $951,182 from $957,840 for the nine months ended September 26, 2010. The decrease in labor
expense was primarily attributable to a reduction in labor hours in response to the response
of total store sales. As a percentage of store sales, labor expense increased to 31.2% of
store sales for the nine months ended October 2, 2011 up from 27.8% of store sales for the
nine months ended September 26, 2010. The increase in the labor percentage of store sales is
primarily due the decline in stores sales and the general pay rate increases.
Store occupancy costs for the nine months ended October 2, 2011 increased by $20,129, or
6.5%, to $329,700 from $309,571 for the nine months ended September 26, 2010. The increase in
store occupancy costs was primarily attributable to the reversal of the accrual for the
straight line basis rent due to the amendment of one of our Company-owned store leases with a
reduction for the remaining period in the lease. As a percentage of store sales, occupancy
costs increased to 10.8% of store sales for the nine months ended October 2, 2011 up from 9%
of store sales for the nine months ended September 26, 2010.
Other store operating expenses for the nine months ended October 2, 2011 decreased by
$37,672, or 7.6%, to $460,135 from $497,807 for the nine months ended September 26, 2010. The
decrease was primarily due to the reduction of utilities cost as a result of a charge back
from prior years for utilities at one of our locations. As a percentage of store sales, other
store operating expenses increased to 15.1% of store sales for the nine months ended October
2, 2011 from 14.4% of store sales for the nine months ended September 26, 2010, primarily due
to the decrease in comparable store sales.
General and administrative expenses for the nine months ended October 2, 2011 decreased by
$1,270,334 or 33. 8%, to $2,490,645 from $3,760,979 for the nine months ended September 26,
2010. The decrease in general and administrative expenses for the nine months ended October
2, 2011 compared to the same period in the prior year is primarily due to the following:
| The personnel cost decreased by $467,536 due to the granting of stock options during the third quarter of 2010 and with vesting schedules from one year to three years. | ||
| The Investor and public relations expenses were lower by $933,233, due to the engagement of an investor relations firm in the third quarter of 2010 with fully vested shares. | ||
| The above decreases were slightly offset by an increase in Consulting, leased equipment and Licenses fees. |
As a result of the foregoing, general and administrative expenses decreased to 78.1% of total
revenues during the nine months ended October 2, 2011 from 102.2% of total revenues for the
nine months ended September 26, 2010.
Advertising, marketing and promotion expenses for the nine months ended October 2, 2011
decreased by $1,099, or 0.7%, to $157,246 from $158,345 for the nine months ended September
26, 2010. As a percentage of total revenues, advertising, marketing and promotion expenses
increased to 4.9% of total revenues during the nine months ended October 2, 2011 from 4.3% of
total revenues during the nine months ended September 26, 2010.
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Depreciation and amortization expense for the nine months ended October 2, 2011 increased by
$27,570, or 11.3%, to $272,281 from $244,711 for the nine months ended September 26, 2010. As
a percentage of total revenues, depreciation and amortization expense increased to 8.5% of
total revenues for the nine months ended October 2, 2011 from 6.7% of total revenues for the
nine months ended September 26, 2010.
Net other expense changed from $3,379,490 of expense for the nine months ended September 26,
2010 to $1,032,558 of income for the nine months ended October 2, 2011. The detail of the
other expense is as follows:
Nine months | Nine months | |||||||||||
ended | ended | |||||||||||
October 2, | September 26, | |||||||||||
2011 | 2010 | Variance | ||||||||||
Other income (expense) |
$ | 1,062,871 | $ | (2,191,846 | )(1) | $ | 3,254,717 | |||||
Interest income |
4,803 | 4,829 | (26 | ) | ||||||||
Interest expense |
(35,116 | ) | (1,192,473 | )(2) | 1,157,357 | |||||||
Total other income(expense) |
1,032,558 | (3,379,490 | ) | 4,412,048 | ||||||||
(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 October 2, 2011, the aggregate fair value of the derivative was $388,798. The decrease in the fair value of the derivative was in the aggregate amount of $1,062,871 during the nine months ended October 2, 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 nine months ended October 2, 2011 decreased by $5,327,787, or 76.9%, to
$1,599,834, from $6,927,621, for the nine months ended September 26, 2010. Our net loss
decreased primarily due to the change in market-to-market value of warrants with derivative
characteristics and the significant decrease in interest expenses due to the extinguishment
of debt executed in October 2010 slightly offset by the increase in our operating loss due to
the sales decline. As a percentage of total revenues, our net loss decreased to 50.2% of
total revenues for the nine months ended October 2, 2011 from 188.3% of total revenues for
the nine months ended September 26, 2010.
Liquidity and Capital Resources
Cash and cash equivalents and restricted cash at October 2, 2011 were $833,794 compared to
$2,837,493 at January 2, 2011. Cash is primarily used to fund our (i) capital expenditures
for company-owned stores, (ii) working capital requirements and (iii) net operating losses.
At
October 2, 2011, we had negative working capital of $737,335 compared to positive working
capital of $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, the accrual of preferred stock dividends and
the acquisition of fixed assets.
We used $1,716,994 of cash to fund our operating activities in the nine months ended October
2, 2011 compared with $1,239,833 of cash used to fund our operating activities in nine months
ended September 26, 2010. The increase in cash used to fund our operating activities was
primarily due to increase in operating losses, reduction in collection of account
receivables, and increase in account payable, partially offset by an increase in franchisee
deposits.
During the nine months ended October 2, 2011, we spent $252,435 for the acquisition of
equipment compared with $70,700 spent for the acquisition of equipment during the nine months
ended September 26, 2010.
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During the nine months ended October 2, 2011, financing activities used $33,848 of cash,
primarily due to payments capital lease obligations. During the nine
months ended September 26, 2010, the financing activities used $449,754 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. The Company is currently in the process of trying to raise
additional equity capital necessary to enable the Company to meet its obligations as they
become due without substantial disposition of assets outside the ordinary course of business,
restructuring of debt, externally forced revisions of its operations, or similar actions.
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. |
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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 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. The Company paid the
placement agent retained in connection with the offering a commission of $344,000 and granted
warrants to purchase 2,243,478 shares of Common Stock in connection with the offering.
The holders of Series B Preferred Stock will be entitled to receive, before any cash is paid
out or set aside for any shares of the Companys Common Stock (but on an equal basis with the
Companys Series A 8% Redeemable Convertible Preferred Stock) dividends at the annual rate of
8% of the Stated Value of the Preferred Shares, subject to adjustment for stock splits, etc.
The dividends will be accruing and cumulative and will be paid upon the occurrence of a
liquidation, deemed liquidation, dissolution or redemption if not previously declared and
paid.
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 shares (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 nine 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.
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Contractual Obligations and Other Commitments
In addition to our capital expenditures requirements, we have certain other contractual and
committed cash obligations. Our contractual cash obligations primarily consist of
non-cancelable operating leases for our stores and administrative offices. Lease terms for
our stores and administrative offices are generally for seven to ten years with renewal
options at most locations and generally require us to pay a proportionate share of real
estate taxes, insurance, common area, and other operating costs. Some store leases provide
for contingent rental (i.e. percentage rent) payments based on sales in excess of specified
amount. Certain of our lease agreements provide for scheduled rent increases during the lease
terms or for rental payments commencing at a date other than the date of initial occupancy.
The following table sets forth information as of October 2, 2011 with respect to our
contractual obligations and the effect they are expected to have on our liquidity and cash
flows in future periods:
Less Than | 1 Year to | 4 Years to | More than | |||||||||||||||||
Total | 1 Year | 3 Years | 5 Years | 5 Years | ||||||||||||||||
Long-term debt |
$ | 532,323 | $ | 450,000 | (1) | $ | 82,323 | $ | | $ | | |||||||||
Capital leases |
21,040 | 13,117 | 7,923 | | ||||||||||||||||
Operating leases |
1,809,000 | 234,000 | 943,000 | 596,000 | 36,000 |
(1) | Long-term debt due in less than 1 year is $450,000 that becomes due upon the sale of the Companys Landmark Center restaurant and store. The Company currently has no plans to sell its Landmark Center unit. |
Our 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
operations have not been materially adverse.
Many of our employees are paid hourly rates related to federal and state minimum wage laws.
Although we have and will continue to attempt to pass along any increased labor costs through
food price increases, there can be no assurance that all such increased labor costs can be
reflected in our prices or that increased prices will be absorbed by consumers without
diminishing to some degree consumer spending at our stores. However, we have not experienced
to date a significant reduction in store profit margins as a result of changes in such laws,
and management does not anticipate any related future significant reductions in gross profit
margins.
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 October 2, 2011, our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) were not effective, due to our material weakness in internal control over
financial reporting described below, in ensuring that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated to our management, including
our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
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Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for our Company. Internal control over financial reporting is defined as
a process designed by, or under the supervision of, a Companys principal executive and
principal financial officers and effected by the Companys board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures
that:
| pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | ||
| provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made in accordance with authorizations of management and directors of the Company; and | ||
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, under the supervision of and with the participation of the Chief Executive
Officer and Chief Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of October 2, 2011. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission in Internal Control An Integrated Framework (September 1992). Because material
weakness existed and continue to exist due to our inability to perform sufficient testing of
internal controls over financial reporting, management concluded that, as of October 2, 2011,
our internal controls over financial reporting were not effective.
Remediation Plans
Management, in coordination with the input, oversight and support of our Audit Committee, has
contracted with a Consultant to assist us in our controls re-design and testing and
remediation efforts. As a result of the testing of Internal Controls over Financial
Reporting, the Company may determine additional material weaknesses. 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
quarterly 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, and we intend to defend vigorously each such case. Based on information
currently available, we believe the amount, or range, of reasonably possible losses in
connection with the actions against us, in excess of established reserves, in the aggregate,
not to be material to our consolidated financial condition or cash flows. However, losses may
be material to our operating results for any particular future period, depending on the level
of our income for such period. In the opinion of management, the ultimate liabilities with
respect to these actions will not have a material adverse effect on the Companys financial
position, results of operations or cash flow.
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. | Exhibits |
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: November 14, 2011 | By: | /s/ George Naddaff | ||
George Naddaff | ||||
Chairman and Chief Executive Officer (principal executive officer) |
||||
Date: November 14, 2011 | By: | /s/ Irma Norton | ||
Irma Norton | ||||
Chief Financial Officer (principal financial officer) |
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