UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2009
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ________________ to _______________
000-53000
(Commission
file number)
SPICY
PICKLE FRANCHISING, INC.
(Exact
name of registrant as specified in its charter)
|
Colorado
(State
or other jurisdiction
of
incorporation or organization)
|
38-3750924
(IRS
Employer Identification No.)
|
|
90
Madison Street, Suite 700, Denver, Colorado
(Address
of principal executive offices)
|
80206
(Zip
Code)
|
(303)
297-1902
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
þ
No
¨
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).
Yes
¨
No
þ
(Not
required)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
|
(Do
not check if smaller reporting company)
|
Smaller
reporting company
ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of November 13, 2009 there
were 80,994,274 shares of common stock outstanding.
|
|
|
Page
Number
|
|
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009
(unaudited)
and December 31, 2008
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (unaudited)
for
the three months and the nine months ended September 30, 2009 and
2008
|
4
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (unaudited)
for
the nine months ended September 30, 2009 and 2008
|
5
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
29
|
|
|
|
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|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
30
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
30
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
30
|
|
|
|
|
|
Item
5.
|
Other
Information
|
30
|
|
|
|
|
|
Item
6.
|
Exhibits
|
30
|
|
|
|
|
|
SIGNATURES
|
33
|
|
Spicy
Pickle Franchising, Inc.
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,228,844
|
|
|
$
|
287,482
|
|
|
Note
receivable
|
|
|
10,500
|
|
|
|
35,000
|
|
|
Accounts
receivable, trade, net
|
|
|
219,175
|
|
|
|
251,173
|
|
|
Inventory
|
|
|
29,686
|
|
|
|
34,180
|
|
|
Prepaid
expenses and other current assets
|
|
|
131,544
|
|
|
|
63,449
|
|
|
Total
current assets
|
|
|
1,619,749
|
|
|
|
671,284
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,658,325
|
|
|
|
1,897,639
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
61,389
|
|
|
|
81,806
|
|
|
Goodwill
|
|
|
1,597,461
|
|
|
|
1,597,461
|
|
|
Other
intangible assets
|
|
|
1,250,796
|
|
|
|
1,317,000
|
|
|
Total
other assets
|
|
|
2,909,646
|
|
|
|
2,996,267
|
|
|
Total
assets
|
|
$
|
6,187,720
|
|
|
$
|
5,565,190
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and equity:
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
Accounts
payable
|
|
|
372,078
|
|
|
|
440,190
|
|
|
Accrued
expenses and compensation
|
|
|
168,671
|
|
|
|
247,340
|
|
|
Accrued
dividends
|
|
|
68,521
|
|
|
|
137,889
|
|
|
Deferred
franchise revenue
|
|
|
668,329
|
|
|
|
771,500
|
|
|
Total
current liabilities
|
|
|
1,307,599
|
|
|
|
1,596,919
|
|
|
Notes
payable to related parties
|
|
|
660,088
|
|
|
|
100,000
|
|
|
Long-term
debt, net of current portion
|
|
|
458,000
|
|
|
|
500,000
|
|
|
Deferred
rent expense
|
|
|
82,555
|
|
|
|
93,052
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
Spicy
Pickle Franchising, Inc. stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 20,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
of
Series A Variable Rate Convertible Preferred Stock, stated
|
|
|
|
|
|
|
|
|
|
value
$8,500 per share, none issued or outstanding in 2009, and
|
|
|
|
|
|
|
|
|
|
649
shares issued and outstanding in 2008
|
|
|
-
|
|
|
|
4,418,941
|
|
|
Common
stock, $.001 par value, 200,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
80,609,659
and 53,535,247 shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
in
2009 and 2008, respectively
|
|
|
80,610
|
|
|
|
53,535
|
|
|
Additional
paid in capital
|
|
|
16,848,084
|
|
|
|
9,843,872
|
|
|
Fair
value of common stock warrants
|
|
|
446,607
|
|
|
|
873,825
|
|
|
Deferred
compensation
|
|
|
(209,993
|
)
|
|
|
-
|
|
|
Accumulated
(deficit)
|
|
|
(13,517,335
|
)
|
|
|
(11,953,494
|
)
|
|
Accumulated
comprehensive (loss)
|
|
|
(20,450
|
)
|
|
|
(13,415
|
)
|
|
Total
Spicy Pickle Franchising, Inc. stockholders' equity
|
|
|
3,627,523
|
|
|
|
3,223,264
|
|
|
Noncontrolling
interest
|
|
|
51,955
|
|
|
|
51,955
|
|
|
Total
equity
|
|
|
3,679,478
|
|
|
|
3,275,219
|
|
|
Total
liabilities and equity
|
|
$
|
6,187,720
|
|
|
$
|
5,565,190
|
|
See the
accompanying notes to the consolidated financial statements
|
Spicy
Pickle Franchising, Inc.
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Loss
|
|
|
Three
Months and Nine Months Ended September 30, 2009 and 2008
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
and bakery sales
|
|
$
|
658,209
|
|
|
$
|
1,012,699
|
|
|
$
|
2,087,274
|
|
|
$
|
2,306,286
|
|
|
Franchise
fees and royalties
|
|
|
295,979
|
|
|
|
355,596
|
|
|
|
1,094,367
|
|
|
|
913,216
|
|
|
Total
revenues
|
|
|
954,188
|
|
|
|
1,368,295
|
|
|
|
3,181,641
|
|
|
|
3,219,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
and bakery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
223,652
|
|
|
|
355,103
|
|
|
|
694,293
|
|
|
|
828,010
|
|
|
Labor
|
|
|
291,660
|
|
|
|
402,907
|
|
|
|
888,516
|
|
|
|
1,010,550
|
|
|
Occupancy
|
|
|
110,688
|
|
|
|
130,998
|
|
|
|
317,458
|
|
|
|
307,487
|
|
|
Depreciation
|
|
|
69,275
|
|
|
|
91,504
|
|
|
|
211,064
|
|
|
|
178,975
|
|
|
Other
operating costs
|
|
|
76,255
|
|
|
|
168,931
|
|
|
|
238,180
|
|
|
|
394,382
|
|
|
Total
restaurant and bakery operating costs
|
|
|
771,530
|
|
|
|
1,149,443
|
|
|
|
2,349,511
|
|
|
|
2,719,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
and general:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
707,149
|
|
|
|
1,568,461
|
|
|
|
2,055,138
|
|
|
|
5,046,315
|
|
|
Depreciation
amortization
|
|
|
30,059
|
|
|
|
7,165
|
|
|
|
91,506
|
|
|
|
20,403
|
|
|
Total
franchise and general
|
|
|
737,208
|
|
|
|
1,575,626
|
|
|
|
2,146,644
|
|
|
|
5,066,718
|
|
|
Total
operating costs and expenses
|
|
|
1,508,738
|
|
|
|
2,725,069
|
|
|
|
4,496,155
|
|
|
|
7,786,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from operations
|
|
|
(554,550
|
)
|
|
|
(1,356,774
|
)
|
|
|
(1,314,514
|
)
|
|
|
(4,566,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense)
|
|
|
(19,254
|
)
|
|
|
8,888
|
|
|
|
(50,622
|
)
|
|
|
66,296
|
|
|
Other
income (expense)
|
|
|
2,892
|
|
|
|
(12,515
|
)
|
|
|
1,998
|
|
|
|
(30,005
|
)
|
|
Total
other income (expense):
|
|
|
(16,361
|
)
|
|
|
(3,627
|
)
|
|
|
(48,624
|
)
|
|
|
36,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
(570,911
|
)
|
|
|
(1,360,401
|
)
|
|
|
(1,363,138
|
)
|
|
|
(4,530,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock
|
|
|
(62,815
|
)
|
|
|
(68,954
|
)
|
|
|
(200,702
|
)
|
|
|
(226,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) attributable to common shareholders
|
|
$
|
(633,726
|
)
|
|
$
|
(1,429,355
|
)
|
|
$
|
(1,563,840
|
)
|
|
$
|
(4,756,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange gain (loss)
|
|
|
25,536
|
|
|
|
-
|
|
|
|
(7,035
|
)
|
|
|
-
|
|
|
Comprehensive
(loss)
|
|
$
|
(608,190
|
)
|
|
$
|
(1,429,355
|
)
|
|
$
|
(1,570,875
|
)
|
|
$
|
(4,756,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information - basic and fully diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
64,740,137
|
|
|
|
48,184,053
|
|
|
|
57,832,327
|
|
|
|
48,137,594
|
|
|
Net
(loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.10
|
)
|
See
accompanying notes to condensed consolidated financial statements
|
Spicy
Pickle Franchising, Inc.
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
Nine
Months Ended September 30, 2009 and 2008
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net
cash (used in) operating activities
|
|
$
|
(1,154,344
|
)
|
|
$
|
(3,262,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(7,129
|
)
|
|
|
(668,264
|
)
|
|
Disposal
of property and equipment
|
|
|
13,500
|
|
|
|
-
|
|
|
Investment
in purchased subsidiaries
|
|
|
|
|
|
|
(640,555
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
6,371
|
|
|
|
(1,308,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock and warrants
|
|
|
2,190,485
|
|
|
|
-
|
|
|
Cash
redemption of preferred stock
|
|
|
(798,998
|
)
|
|
|
-
|
|
|
Proceeds
from note payable to related parties
|
|
|
717,252
|
|
|
|
-
|
|
|
Repayment
of notes payable
|
|
|
(12,000
|
)
|
|
|
-
|
|
|
Cash
payment of preferred stock dividend
|
|
|
-
|
|
|
|
(157,296
|
)
|
|
Proceeds
from exercise of common stock options
|
|
|
-
|
|
|
|
25,500
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
2,096,739
|
|
|
|
(131,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes
|
|
|
(7,404
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) in cash and cash equivalents
|
|
|
941,362
|
|
|
|
(4,703,113
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
287,482
|
|
|
|
5,405,069
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,288,844
|
|
|
$
|
701,956
|
|
See the
accompanying notes to the consolidated financial statements
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
1.
Basis of Presentation of
Interim Period
Throughout
this report, the terms “our,” “we,” “us,” and “Company” refer to Spicy Pickle
Franchising, Inc. including its subsidiaries. The accompanying
unaudited financial statements of Spicy Pickle Franchising, Inc. at September
30, 2009 and 2008 have been prepared in accordance with generally accepted
accounting principles (“GAAP”) for interim financial statements, instructions to
Form 10-Q, and Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in our annual report on Form 10-K for the year ended December
31, 2008. In management's opinion, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation to make our
financial statements not misleading have been included. The results of
operations for the periods ended September 30, 2009 and 2008 presented are not
necessarily indicative of the results to be expected for the full year. The
December 31, 2008 balance sheet has been derived from our audited financial
statements included in our annual report on Form 10-K for the year ended
December 31, 2008.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Recent
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification (the “Codification” or “ASC”) as the single
source of authoritative nongovernmental GAAP. All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force and other related literature, excluding guidance from
the Securities and Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting literature not
included in the Codification has become nonauthoritative. The Codification did
not change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods ending
after September 15, 2009, and impacts our financial statements as all references
to authoritative accounting literature will be referenced in accordance with the
Codification. Pursuant to the provisions of FASB ASC 105 Topic
Generally Accepted Accounting
Principles
(“ASC 105”) we have updated references to GAAP in our
financial statements for the periods ended September 30, 2009. The
adoption of ASC 105 did not impact our financial position or results of
operations.
Also in
June 2009, the FASB issued new accounting guidance related to the accounting and
disclosure for transfers of financial assets, which is included in ASC Topic
860,
Transfers and
Servicing
. This guidance will require entities to provide more
information about sales of securitized financial assets and similar
transactions, particularly if the seller retains some risk with respect to the
assets. This guidance is effective for fiscal years beginning after
November 15, 2009. We do not anticipate that the adoption of this
guidance will have a material impact on our financial position or results of
operations.
Also in
June 2009, the FASB issued new accounting guidance related to the accounting and
disclosure for the consolidation of variable interest entities regarding certain
guidance for determining whether an entity is a variable interest entity and
modifies the methods allowed for determining the primary beneficiary of a
variable interest entity. The guidance is included in ASC Topic 810,
Consolidation
. The
amendments include: (1) the elimination of the exemption for qualifying special
purpose entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity. The guidance is
effective for the first annual reporting period beginning after November 15,
2009. We do not anticipate that the adoption of this guidance will
have a material impact on our financial position or results of
operations.
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
In August
2009, the FASB issued an update of ASC Topic 820,
Measuring Liabilities at Fair
Value
. The new guidance provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using prescribed
techniques. We adopted the new guidance in the third quarter of 2009 and it did
not materially affect our financial position and results of
operations.
In
October 2009, the FASB issued an update to ASC Topic 605,
Revenue
Recognition
. This amendment addresses how to determine whether
an arrangement involving multiple deliverables contains more than one unit of
accounting and how to allocate consideration to each unit of accounting in the
arrangement. This amendment replaces all references to fair value as the
measurement criteria with the term selling price and establishes a hierarchy for
determining the selling price of a deliverable. The amendment also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, the amendment requires expanded
disclosures. This amendment will become effective for us for revenue
arrangements entered into or materially modified on or after April 1, 2011.
Earlier application is permitted with required transition disclosures based on
the period of adoption. We are currently evaluating the application date and the
impact of this standard on our condensed consolidated financial
statements.
2. Per
Share Information
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
Topic 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 by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per common share are computed by dividing net
income by the weighted average number of shares of common stock outstanding and
dilutive securities outstanding during the year. We had a net loss
for the three-month and nine-month periods ended September 30, 2009 and 2008,
and accordingly, any outstanding equivalents would be
anti-dilutive.
3. Goodwill
and Other Intangible Assets
Goodwill
and other intangible assets include the following:
|
|
|
|
|
|
Goodwill
|
|
$
|
1,597,461
|
|
|
Other
intangibles
|
|
|
|
|
|
Acquired
trademarks
|
|
|
291,000
|
|
|
Acquired
franchise agreements, net of amortization
|
|
|
908,345
|
|
|
Reacquired
franchise agreements, net of amortization
|
|
|
51,451
|
|
|
Total
other intangibles
|
|
$
|
1,250,796
|
|
We
recognized goodwill and identifiable intangibles arising from the allocation of
the purchase prices of assets acquired in accordance with ASC Topic 805,
Business Combinations
(“ASC
805”). Goodwill represents the excess of cost over fair value of all
identifiable assets less any liabilities assumed. ASC 805 gives
guidance on five types of assets: marketing-related, customer-related,
artistic-related, contract-related and technology based intangible
assets. We identified identifiable intangibles that are
market-related and contract-related. Acquired trademarks represent
the trademarks associated with the Bread Garden Urban Café franchise business
acquired in 2008. These trademarks were determined to have an
indefinite life. Acquired franchise agreements represent franchise agreements
between Bread Garden Franchising, Inc. (“Bread Garden”), the company that we
purchased the assets from, and the then existing
franchisees. Reacquired franchise agreements represent franchise
agreements that were in place between us and the franchisees that we purchased
assets from. Acquired and reacquired franchise agreements have
determinable lives between 5.5 years and 11 years.
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Goodwill
and other intangible assets with indefinite lives are not subject to
amortization, but are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired.
ASC Topic 350,
Intangibles –
Goodwill and Other
(“ASC 350”), requires a two-step approach for testing
impairment. For goodwill, the fair value of each reporting unit is compared to
its carrying value to determine whether an indication of impairment exists. If
impairment is indicated, the fair value of the reporting unit’s goodwill is
determined by allocating the unit’s fair value to its assets and liabilities
(including any unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. For intangibles with indefinite lives, the
fair value is compared to the carrying value. The amount of impairment for
goodwill and other intangible assets is measured as the excess of its carrying
amount over its fair value.
In
accordance with ASC 350 we perform an impairment analysis of the goodwill and
indefinite lived intangibles assets on an annual basis. We performed the
analysis at December 31, 2008 and there was no indication of impairment in
goodwill and indefinite lived intangible assets. We will test for
impairment between our annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of the asset.
4. Fair
Value
Effective
January 1, 2008, we adopted ASC Topic 825
Financial Instruments
(“ASC
825). ASC 825 permits entities to choose to measure many financial
instruments and certain other items at fair value. We did not elect the fair
value reporting option for any assets and liabilities not previously recorded at
fair value.
Effective
January 1, 2008, we adopted the provisions of ASC Topic 820
Fair Value Measurement and
disclosures
(“ASC 820”) applicable to all financial assets and
liabilities and for nonfinancial assets and liabilities recognized or disclosed
at fair value in the consolidated financial statements on a recurring
basis. ASC 820 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The standard
also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. ASC 820 describes three levels of inputs that
may be used to measure fair value:
|
Level 1
|
Quoted
market prices in active markets for identical assets or
liabilities.
|
|
Level 2
|
Observable
market-based inputs or unobservable inputs that are corroborated by market
data.
|
|
Level 3
|
Unobservable
inputs that are not corroborated by market
data.
|
We have
identified the following as financial assets and liabilities:
Cash and
cash equivalents
Notes
receivable
Accounts
receivable, trade
Accounts
payable, accrued expenses and accrued dividends Notes payable to related
parties
Long-term
debt
At
September 30, 2009 and December 31, 2008 the carry amount of financial
instruments approximated the fair value of those instruments.
During
the nine month period ended September 30, 2009, we finalized the purchase price
allocation of the Bread Garden acquisition. The fair value of the
intangibles identified (see note 3) were valued using a discounted cash flow
model for which the assumptions used are considered level 3 inputs.
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
5.
Related Party Transactions
In
December 2008, two members of our Board of Directors granted us a line of credit
which expires January 31, 2010. The line of credit was for an
aggregate of $550,000 and bears interest at a rate of one percent above the
prime rate and is secured by certain of our assets. During the nine
months ended September 30, 2009 the amount of the line was increased to
$800,000. Interest expense for the three months and nine months ended
September 30, 2009 was $8,020 and $17,252, respectively. At September
30, 2009 At September 30, 2009, the interest rate on the borrowings was
4.25%.
During
September 2009, the line of credit was renegotiated and the outstanding
principal and accrued interest totaling, $817,252, was converted to a
convertible promissory note (“Convertible Note”). The Convertible
Note is due January 31, 2012, bears interest at the same rate that the line of
credit did, one percent above the prime rate. Interest is payable
semi-annually. The holders of the Convertible Note may convert any
amount of the principal and accrued interest due into our par value $.001 common
stock (“Common Stock”) at the rate of $0.13 per share. In addition,
for every two dollars converted into Common Stock, we will issue to the holder
of the Convertible Note a warrant to purchase one share of Common
Stock. The exercise price of the warrant will be equal to 120% of the
price per share of the Common Stock calculated using the average of the volume
weighted average prices per share for the 10 trading days prior to the election
to convert.
The
conversion feature in the Convertible Note is considered to be a beneficial
conversion feature. We have accounted for the beneficial conversion
feature in accordance with ASC Topic 470,
Liabilities
. We
accounted for a portion of the proceeds, $157,164, from the Convertible Note
which related to the intrinsic value of the beneficial conversion feature by
allocating that amount to additional paid in capital. The following
summarizes the carrying amount of the Convertible Promissory Note:
|
Face value of the
note to be repaid if not converted
|
|
$
|
817,252
|
|
|
Amount allocated to
additional paid in capital
|
|
|
(
157,164
|
)
|
|
Note payable to
related parties
|
|
$
|
660,088
|
|
In
accordance with ASC Topic 835,
Interest
, the amount
allocated to the beneficial conversion will be amortized as interest expense
over the life of the note in such a way as to result in a constant rate of
interest.
The
annual interest rate giving effect to the amortization of the beneficial
conversion is 9.188% per annum. When combined with the stated
interest rate of one percent above the prime rate, the effective rate is 10.188%
over the prime rate. At September 30, 2009, the interest rate on the
borrowings was 12.438%.
6. Long-term
Debt
Long-term
debt represents notes issued in connection with the acquisition of certain
assets during the year ended December 31, 2008. The notes bear
interest at the rate of 10% per annum payable monthly. The notes have
payment terms of $30,000 per year with the balance due and payable in March
2011.
7. Stockholders’
Equity
On
September 22, 2009, we entered into an Amendment, Redemption and Conversion
Agreement (the “Agreement”) with the holders of all 638.88 outstanding shares of
our Series A Variable Rate Convertible Preferred Stock (the “Preferred
Stock”). Under the terms of the Agreement, the holders of 402 shares
of Preferred Stock agreed to allow us to redeem 94.12 of the shares for a total
of $799,998 and convert their remaining shares of Preferred Stock into 2,093,601
shares of our Common Stock. The holders of 236.88 shares of Preferred
Stock agreed to convert their shares into 4,737,600 shares of our Common
Stock.
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
All of
the holders were issued warrants when they originally purchased their shares of
Preferred Stock. Such warrants were exercisable at $1.60 per share
and expired December 14, 2012. The Agreement amended the warrants to
lower the exercise price to $0.20 per share and extend the expiration date to
September 22, 2014.
The
Agreement was contingent upon us completing a private placement of at least $1.8
million of equity securities (the “New Financing”) and entering into an
agreement with the original placement agent of the Preferred Stock (“Placement
Agent”). The Placement Agent had received warrants to purchase
288,400 shares of our common stock at $1.60 per share exercisable through
December 14, 2012. Under the terms of the agreement, the Placement
Agent agreed to cancel these warrants in exchange for new warrants exercisable
at $0.20 per share through September 22, 2014.
As
discussed above, as of September 30, 2009, we sold a total of 22 Units for cash
in the amount of $2,200,000 in the New Financing. Each Unit consisted
of 769,231 shares of our Common Stock and a warrant to purchase an additional
384,615 shares of Common Stock at $.19 per share. The warrants expire
September 22, 2014. We issued a total of 16,923,082 shares of our
Common Stock and warrants to purchase 8,461,530 shares. Of the
securities purchased, 13,846,158 shares and 6,923,070 warrants were purchased by
members of our Board of Directors.
Prior to
the transactions described above holders of our Preferred stock converted 10
shares of the Preferred Stock into 100,000 shares of our Common
Stock.
During
the nine months ended September 30, 2009, we issued 1,590,084 shares of our
Common Stock in lieu of a cash payment for dividends payable on our Preferred
Stock of $270,071. The number of shares of Common Stock issued was
calculated as per terms of the Preferred Stock. The terms required we
determine the average of the volume weighted average prices of our Common Stock
for a period of 20 days prior to the dividend date and then use a value equal to
90% of that average. The calculation was performed for two periods,
the dividends that were payable January 1, 2009 and July 1, 2009. The
value calculated was $.1691 and $.1706 for January 1, 2009 and July 1, 2009,
respectively and we issued 798,555 shares and 791,529 shares of Common Stock,
respectively.
In
addition, during the nine months ended September 30, 2009, we issued 53,545
shares of our Common Stock in lieu of a cash payment of accounts payable of
$46,361 which existed at December 31, 2008. The number of shares
issued was determined by negotiation with the creditor.
In
addition, during the nine months ended September 30, 2009, we issued 100,000
shares of our Common Stock in lieu of a cash payment for services rendered and
recorded an expense of $16,000. The value was determined based upon
the trading value of the Common Stock on the date of issuance.
We also
issued 1,476,500 shares of our Common Stock to a consultant currently under
contract to the Company. The contract was entered into as part of the
acquisition of the franchise rights to the Bread Garden Urban Café restaurant
chain. The stock was issued in lieu of future cash payments of
$236,241 under the contract for services to be rendered from July 1, 2009 until
the termination of the contract on September 1, 2012. The number of
shares issued was based upon the trading value of the stock on July 1,
2009. The amounts will be amortized over the period to which the
payments relate.
We
account for income taxes in interim periods in accordance with ASC Topic 740
Income Taxes
(“ASC
740”). We have determined an estimated annual effective tax
rate. The rate will be revised, if necessary, as of the end of each
successive interim period during our fiscal year to our best current
estimate.
The
estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
ASC 740
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This pronouncement also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
9. Stock-Based
Compensation
In
October 2006, our Board of Directors adopted the 2006 Stock Option Plan (the
“2006 Plan”), which was approved by our shareholders the same
month. The 2006 Plan provides for the granting of up to 7,500,000
shares of our common stock (subject to certain adjustments in the event of stock
splits or other similar events) as incentive stock options. Our Board
of Directors has delegated authority to grant awards under the 2006 Plan to our
Compensation Committee.
There
were no options granted during the nine-month period ended September 30,
2009.
During
September 2009 we reduced the exercise price of all of the outstanding options
to $.20 per share. In accordance with ASC Topic 718,
Compensation- Stock
Compensation
(“ASC 718”) the amount of additional compensation recognized
was determined by calculating the fair value of the options immediately before
the modification less the fair value of the options as modified. The
amount recognized as additional compensation was $61,287 for the three and nine
months ended September 30, 2009.
A summary
of stock option activity under our stock-based compensation plan is set forth
below:
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
January 1, 2009
|
|
|
6,146,250
|
|
|
$
|
0.67
|
|
|
|
4.02
|
|
|
$
|
1,148,040
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(546,250
|
)
|
|
$
|
0.75
|
|
|
|
3.20
|
|
|
|
|
|
|
Outstanding
September 30, 2009
|
|
|
5,590,000
|
|
|
$
|
0.20
|
|
|
|
3.30
|
|
|
$
|
91,117
|
|
|
Exercisable
September 30, 2009
|
|
|
5,590,000
|
|
|
$
|
.20
|
|
|
|
3.30
|
|
|
$
|
91,117
|
|
Stock-based
compensation expense accounted for in accordance with ASC 718
for the three-month
periods ended September 30, 2009 and 2008 was $64,366 and $319,333 respectively,
and for the nine-month periods ended September 30, 2009 and 2008 was $68,803 and
$554,916, respectively, which consisted of stock-based compensation expense
related to employee stock options.
10.
Business Segment information
We
operate in three business segments. Our Restaurant Operations segment
is comprised of restaurants owned by the Company. The company-owned
restaurants conduct business under the Spicy Pickle name. These restaurants
specialize in fast casual dining featuring fresh, made-to-order, premium
submarine, deli and panini sandwiches, salads, soups and soft drinks.
Information for this segment for the periods ended September 30, 2009 and 2008
include the operating activities of seven company-owned restaurants in 2009 and
eight company-owned restaurants in 2008.
Our
Bakery Operations segment is comprised of the operating activities of a bakery
co-located at one our Denver restaurants, which supplies breads and other bakery
products for Company and franchisee-owned locations in Colorado.
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Our
Franchise Operations segment is comprised of the operating activities of the
franchise business unit, which licenses qualified operators to conduct business
under the Spicy Pickle name or the Bread Garden Urban Café name, and also of the
costs to monitor the operations of these restaurants. Under the terms of the
agreements, the licensed operators pay royalties and fees to the Company in
return for the use of the Spicy Pickle or the Bread Garden Urban Café name, as
the case may be.
In 2008,
we operated in one geographic segment, the United States of America (“US”) and
in 2009, we are operating in two geographic segments, US and
Canada.
There
were no differences from the financial statements for the year ended December
31, 2008 in the basis of measurement of segment profit or
loss. Segment information related to the Company's three business
segments follows:
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurants operations
|
|
$
|
554,836
|
|
|
$
|
836,184
|
|
|
$
|
1,767,875
|
|
|
$
|
1,954,228
|
|
|
Company
bakery operations
|
|
|
103,373
|
|
|
|
176,515
|
|
|
|
319,399
|
|
|
|
352,058
|
|
|
Franchise
operations
|
|
|
295,979
|
|
|
|
355,596
|
|
|
|
1,094,367
|
|
|
|
913,216
|
|
|
Total
Revenues
|
|
$
|
954,188
|
|
|
$
|
1,368,295
|
|
|
$
|
3,181,641
|
|
|
$
|
3,219,502
|
|
|
Segment
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurants operations
|
|
$
|
(112,830
|
)
|
|
$
|
(165,095
|
)
|
|
$
|
(266,292
|
)
|
|
$
|
(352,486
|
)
|
|
Company
bakery operations
|
|
|
(491
|
)
|
|
|
28,351
|
|
|
|
4,055
|
|
|
|
(60,632
|
)
|
|
Franchise
operations
|
|
|
(441,229
|
)
|
|
|
(1,220,030
|
)
|
|
|
(1,052,277
|
)
|
|
|
(4,153,502
|
)
|
|
Total
segment (loss)
|
|
|
(554,550
|
)
|
|
|
(1,356,774
|
)
|
|
|
(1,314,514
|
)
|
|
|
(4,566,620
|
)
|
|
Interest
income (expense)
|
|
|
(19,253
|
)
|
|
|
8,888
|
|
|
|
(50,623
|
)
|
|
|
66,296
|
|
|
Other
income (expense)
|
|
|
2,892
|
|
|
|
(12,515
|
)
|
|
|
1,998
|
|
|
|
(30,005
|
)
|
|
Net
loss
|
|
$
|
(570,911
|
)
|
|
$
|
(1,360,401
|
)
|
|
$
|
(1,363,138
|
)
|
|
$
|
(4,530,329
|
)
|
11.
Subsequent Events
Subsequent
to September 30, 2009 we sold a half unit in the New Financing described in
Note 7 above and issued 384,615 shares of our common stock.
The
Company has evaluated subsequent events through November 16, 2009 the date the
financial statements were available to be issued.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results could differ materially from those anticipated in the
forward-looking statements.
Overview
Our
business is the franchise and operation of Spicy Pickle™ and Bread Garden Urban
Café restaurants. Spicy Pickle is a fast casual restaurant where made-to-order
panini, submarine-style sandwiches, pizzetti (Neapolitan thin crust pizza), and
salads created by our founders are served using fresh-baked breads and
high-quality ingredients. Spicy Pickle restaurants are located in 11
states in the United States. Bread Garden Urban Café restaurants also
specialize in fast casual dining. Unlike our Spicy Pickle
restaurants, our Bread Garden Urban Café restaurants offer a full line of
specialty coffees, pastries, and desserts along with hot entrees, salads, soups,
and sandwiches. Bread Garden Urban Cafés are located primarily in
metropolitan Vancouver, British Columbia, Canada.
We market
our menu primarily through targeted local store marketing efforts, mail drops,
media advertising, and print campaigns, as well as through other grass roots
efforts. The "Spicy Pickle" brand name has existed for ten years. The
“Bread Garden Urban Café” brand name has existed since 1979. We are
headquartered in Denver, Colorado.
The first
Spicy Pickle restaurant was launched in 1999 by founders Kevin Morrison and
Anthony Walker under the name Spicy Pickle, LLC. In late 2001, there were three
restaurants, two in Denver and one in Lakewood, a Denver suburb. By January
2003, we organized Spicy Pickle Franchising, LLC and launched the Spicy Pickle
brand as a national franchise and recruited Marc Geman, former president of the
PretzelMaker franchise, as our Chief Executive Officer.
As of
September 30, 2009, we had 30 franchised Spicy Pickle restaurants and seven
company-owned Spicy Pickle restaurants opened. Co-located with one of
the restaurants is a bakery which provides fresh baked breads to the local area
Denver restaurants. This bakery has replaced the previous supplier of
our artisan breads and is expected to result in a food cost savings for the
franchisees in that market. Spicy Pickle restaurants outside this market are
equipped for bread baking at the store location.
Our
franchise agreements include build-out schedules for franchisee restaurants.
Through September 30, 2009, the Company has signed agreements with franchisees
to open 60 additional restaurants under the Spicy Pickle Brand. Based
on current franchise agreements and construction schedules, we believe there
will be approximately 31 Spicy Pickle, franchisee-owned and operated restaurants
and at least 7 company-operated restaurants open by the end of
2009. The Company continues to interview prospective franchisees and
relies on the cash deposits from the franchise sales as well as royalty fees
from the existing stores to support the expenses of the business.
Our
locations and marketing efforts are directed principally to white collar
administrative, managerial, professional, and sales personnel, who are generally
found in and near downtown districts, technological centers, universities,
hospitals and government complexes.
We
currently derive our revenue from the sale of franchises, from royalties paid by
franchisees and from the sale of food and beverages at the company owned
restaurants. Our business is headquartered in Colorado, and we have a
high concentration of restaurants in the Rocky Mountain region. Additionally, we
have franchises opened and planned in a number of other regions in the United
States. Our Spicy Pickle restaurant locations (including both company-owned and
franchisee-owned), including those under construction and lease negotiation as
of September 30, 2009, are:
|
Location
|
Restaurants
Operating
|
Under
Construction
|
In
Lease Negotiation
|
|
Denver,
Colorado
|
5
|
|
|
|
Boulder,
Colorado
|
2
|
|
|
|
Ft.
Collins, Colorado
|
2
|
|
|
|
Aurora,
Colorado
|
2
|
|
|
|
Littleton,
Colorado
|
1
|
|
|
|
Centennial,
Colorado
|
1
|
|
|
|
Lone
Tree, Colorado
|
1
|
|
|
|
Greenwood
Village, Colorado
|
1
|
|
|
|
Federal
Heights, Colorado
|
1
|
|
|
|
Johnstown,
Colorado
|
1
|
|
|
|
Colorado
Springs, Colorado
|
1
|
|
|
|
Louisville,
Colorado
|
1
|
|
|
|
Englewood,
Colorado
|
1
|
|
|
|
Ashburn,
Virginia
|
1
|
|
|
|
Portland,
Oregon
|
2
|
|
|
|
Poway,
California
|
1
|
|
|
|
Henderson,
Nevada
|
1
|
|
|
|
Reno,
Nevada
|
2
|
|
|
|
Chicago,
Illinois
|
1
|
|
1
|
|
Cincinnati,
Ohio
|
1
|
|
|
|
Austin,
Texas
|
1
|
|
1
|
|
San
Diego, California
(1)
|
1
|
1
|
|
|
Chandler,
Arizona
|
1
|
|
|
|
Hattiesburg,
Mississippi
|
1
|
|
|
|
Edmond,
Oklahoma
|
1
|
|
|
|
Cedar
Park, Texas
|
1
|
|
|
|
Houston,
Texas
|
1
|
|
2
|
|
San
Antonio, Texas
|
|
|
|
|
Las
Vegas, Nevada
|
|
|
1
|
|
Naperville,
Illinois
|
1
|
|
|
|
Temecula,
California
|
|
1
|
|
|
|
37
|
2
|
5
|
|
(1)
|
Restaurant
under construction opened subsequent to September 30,
2009.
|
In
October 2008 we acquired the franchise rights to the Bread Garden Urban Café
restaurant chain. We believe that our core competence is the building
and operation of franchised restaurant chains. Our purpose in
acquiring the Bread Garden Urban Café restaurant chain was to allow us to better
utilize our existing infrastructure by expanding our operating
base. In addition we made the acquisition to increase our
revenues. We are currently working towards increasing the number of
franchised restaurants in the Bread Garden Urban Café chain. We are
also working to improve the menu offerings, develop new operating procedures and
manuals, and to develop a more comprehensive marketing strategy.
Our Bread
Garden Urban Café locations, including those under construction and in lease
negotiation as of September 30, 2009, are:
|
Location
|
Restaurants
Operating
|
Under
Construction
|
In
Lease Negotiation
|
|
Vancouver,
British Columbia
|
5
|
4
|
1
|
|
Richmond,
British Columbia
|
1
|
|
1
|
|
Cloverdale,
British Columbia
(1)
|
1
|
|
|
|
Surrey,
British Columbia
|
1
|
|
|
|
Burnaby,
British Columbia
|
1
|
|
|
|
Coquitlam,
British Columbia
|
2
|
|
|
|
New
Westminster, British Columbia
|
|
|
1
|
|
Kelowna,
British Columbia
|
|
|
1
|
|
Kamloops,
British Columbia
|
1
|
|
|
|
Brisbane,
Australia
|
1
|
|
|
|
Whistler
Resort, British Columbia
|
1
|
|
|
|
|
14
|
4
|
4
|
(1) Closed subsequent to September 30,
2009.
We intend
to increase our revenues by adding new company-owned stores, selling new
franchises and expanding consumption of our food products at all restaurants.
General economic and industry conditions may affect our ability to do so and our
revenue performance.
We have
been developing our franchise network through the sale of franchises and through
acquisition. We have relied on fund raising and the sales of new
franchises to augment the cash we receive from continuing royalty payments for
our cash flow. The unanticipated economic conditions that surfaced in
2008 and continued into 2009 resulted in a significant reduction in the sales of
new franchises which has resulted in a significant decrease in our cash
position. As soon as it became apparent that the economic downturn
would not correct itself in the short term, we significantly reduced our
corporate overhead, mostly in the area of personnel cost.
Our
ability to fund our operations will depend on the length of time of the current
economic downturn, our future performance and our ability to successfully
implement our business and growth strategies. In the event that we
need additional capital and are unable to obtain it, we could be left without
sufficient liquidity. The nature of our business is that a portion of
our revenue is a continuing stream from franchisees. We will
continually monitor our expenses and reduce those expenses as best we can to
match the revenue flow. We may elect to raise money during the
current year to meet any shortfalls from operations. However,
realization of a significant portion of the assets on the balance sheet is
dependent on our continued operations, which in turn is dependent on the
increase in sales of new franchises, the number of operating franchise
restaurants, or the additional capital raised through a placement of our
securities.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from those estimates. A summary
of accounting policies that have been applied to the historical financial
statements presented in this report can be found in the footnotes
thereto. We consider certain of these accounting policies to be
critical as they are important to the portrayal of our financial condition and
results of operations and may require judgments on the part of management about
matters that are uncertain. We have identified the following accounting policies
that are important to the presentation of financial information in this
report.
Goodwill
and Other Intangible Assets
We
recognized goodwill and identifiable intangibles arising from the allocation of
the purchase prices of assets acquired in accordance with ASC Topic 805,
Business Combinations
(“ASC
805”). Goodwill represents the excess of cost over fair value of all
identifiable assets less any liabilities assumed. ASC 805 gives
guidance on five types of assets: marketing-related, customer-related,
artistic-related, contract-related and technology based intangible
assets. We identified identifiable intangibles that are
market-related and contract-related. Acquired trademarks represent
the trademarks associated with the Bread Garden Urban Café franchise business
acquired in 2008. These trademarks were determined to have an
indefinite life. Acquired franchise agreements represent franchise agreements
between Bread Garden Franchising, Inc., the company that we purchased the assets
from, and the then existing franchisees. Reacquired franchise
agreements represent franchise agreements that were in place between us and the
franchisees that we purchased assets from. Acquired and reacquired
franchise agreements have determinable lives between 5.5 years and 11
years.
Goodwill
and other intangible assets with indefinite lives are not subject to
amortization, but are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired.
ASC Topic 360,
Intangibles –
Goodwill and Other
(“ASC 360”), requires a two-step approach for testing
impairment. For goodwill, the fair value of each reporting unit is
compared to its carrying value to determine
whether
an indication of impairment exists. If impairment is indicated, the fair value
of the reporting unit’s goodwill is determined by allocating the unit’s fair
value to its assets and liabilities (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination.
For intangibles with indefinite lives, the fair value is compared to the
carrying value. The amount of impairment for goodwill and other intangible
assets is measured as the excess of its carrying amount over its fair
value.
In
accordance with ASC 360 we perform an impairment analysis of the goodwill and
indefinite lived intangibles assets on an annual basis. We performed the
analysis at December 31, 2008 and there was no indication of impairment in
goodwill and indefinite lived intangible assets. In making an
estimate of future cash flow we considered the following items:
|
·
|
The
economic forecast in Canada with particular emphasis on British Columbia
and western Canada.
|
|
·
|
Industry
forecast for the restaurant industry in Canada with particular emphasis on
British Columbia and western
Canada.
|
|
·
|
Historical
operating history of acquired assets as adjusted for
forecast.
|
|
·
|
Management’s
estimates of new franchisees.
|
|
·
|
Trends
in the real estate markets.
|
We will
test for impairment between our annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of the
asset. Since our acquisition of the Bread Garden eight new franchised
restaurants have opened, one is in lease negotiation and we are in discussion
with a number of other potential franchisees. We will continue to
monitor our growth and the economic climate in British Columbia. At
the time of our last analysis the fair value of goodwill and other indefinite
lived intangibles was approximately 190% of the carrying value.
Revenue
Recognition
Initial
Franchise Fees - We enter into franchise agreements, which grant franchisees the
exclusive right to develop and operate businesses at certain locations. Initial
franchise fees are recognized as revenue when all material services and
conditions required to be performed by us have been substantially completed,
which is generally when the restaurant opens. Initial franchise fees
for Spicy Pickle restaurants is $45,000 and the fee for Bread Garden Urban Café
restaurants is Canadian dollars (“CN$”) 50,000. In certain instances
we charge a transfer fee when an existing restaurant is transferred to a new
franchisee. These fees are less than the full fee
charged. Franchise fees recognized were $35,584 and $65,000 for the
three months ended September 30, 2009 and 2008, respectively, and $247,634 and
$145,000 for the nine months ended September 30, 2009 and 2008,
respectively.
Royalty
Fees - Pursuant to the franchise agreements of both our Spicy Pickle and Bread
Garden Urban Café brands, franchisees are required to pay royalties to us based
on 5% of weekly gross sales as reported to us through the franchisees’ point of
sales systems. The royalties are recognized as revenue in the period
corresponding to the sales reporting period. Royalty fees were $219,434 and
$204,054 for the three months ended September 30, 2009 and 2008 respectively,
and $663,060 and $595,227 for the nine months ended September 30, 2009 and 2008,
respectively.
With
regard to royalty fees, our franchisees grant us the right to extract data from
their point of sale systems in each restaurant they operate. We receive weekly
reports on sales at each franchise location and calculate our revenue directly
from those reports. This allows for extremely accurate accounting of our revenue
stream from royalty fees. We do not anticipate any future change in the method
of reporting.
Rebates -
We receive rebates from certain purveyors that supply products to our
franchisees, these rebates are included in Franchise Fees and Royalties on the
statement of operations. The rebates are recorded when earned. Rebates that
relate to company-owned restaurants are offset against restaurant cost of sales.
Rebates related to franchisees were $40,961 and $86,542, for the three months
ended September 30, 2009 and 2008 respectively, and $183,673 and $172,989 for
the nine months ended September 30, 2009 and 2008, respectively.
Restaurant
and Bakery Sales - We record revenue from company-owned restaurant sales upon
delivery of the related food and other products to customers. Our restaurant
sales are either cash or credit card (which are pre-approved) sales and,
therefore, no estimate for allowance for doubtful accounts is
necessary. We record revenue from bakery sales when sold to the
bakery customers, which are our franchisees.
Advertising
Costs
Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales. At our discretion, we may spend more or less than
our actual advertising receipts from the franchisees. Advertising fees collected
were $90,781 and $99,961 for the three months ended September 30, 2009 and 2008,
respectively and $277,101 and $275,312 for the nine months ended September 30,
2009 and 2008, respectively. These fees are offset against actual
advertising expenses, which are recognized when incurred. We incurred
advertising expenses of $155,706 and $225,944 for the three months ended
September 30, 2009 and 2008, respectively, and $286,302 and $601,633 for the
nine months ended September 30, 2009 and 2008, respectively. We
anticipate that for the year ending December 31, 2009 we will spend at least as
much as we collect. To the extent we do not spend all that we have
collected we are allowed to utilize the funds to offset amounts spent in
previous periods and other indirect costs associated with marketing and
promotion. The net amounts reflected as advertising costs in the
financial statements were $64,925 and $125,982 for the three months ended
September 30, 2009 and 2008, respectively. The net amounts reflected
as advertising costs in the financial statements were $9,201 and $326,321 for
the nine months ended September 30, 2009 and 2008, respectively.
Rent
Expense
We
recognize rent expense on a straight-line basis over the reasonably assured
lease term as defined in the Financial Accounting Standards Board ("FASB")
Accounting Standards Codification (the “Codification” or “ASC”) Topic 840
Leases
. In
addition, certain of our lease agreements provide for scheduled rent increases
during the lease term or for rental payments commencing on a date other than the
date of initial occupancy. We include any rent escalations and construction
period and other rent holidays in our determination of straight-line rent
expense. Therefore, rent expense for new locations is charged to expense
beginning with the start of the construction period.
Equity-Based
Compensation
We
account for stock-based compensation expense in accordance with ASC Topic
718
Compensation- Stock
Compensation
(“ASC 718”) which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair
values.
ASC 718
requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our statement of operations. Prior to the adoption
of ASC 718, we had no stock-based compensation awarded to employees and
directors.
During
September 2009 we reduced the exercise price of all of the outstanding options
to $.20 per share. In accordance with ASC 718 the amount of
additional compensation recognized was determined by calculating the fair value
of the options immediately before the modification less the fair value of the
options as modified. The amount recognized as additional compensation
was $61,287 for the three and nine months ended September 30, 2009.
Recent
Pronouncements
In June
2009, the FASB approved the Accounting Standards Codification as the single
source of authoritative nongovernmental GAAP. All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force and other related literature, excluding guidance from
the Securities and Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting literature not
included in the Codification has become nonauthoritative. The Codification did
not change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods ending
after September 15, 2009, and impacts our financial statements as all references
to authoritative accounting literature will be referenced in accordance with the
Codification. Pursuant to the provisions of FASB ASC Topic 105,
Generally Accepted Accounting
Principles
(“ASC 105”) we have updated references to GAAP in our
financial statements for the periods ended September 30, 2009. The
adoption of ASC 105 did not impact our financial position or results of
operations.
Also in
June 2009, the FASB issued new accounting guidance related to the accounting and
disclosure for transfers of financial assets, which is included in ASC Topic
860,
Transfers and
Servicing
. This guidance will require entities to provide more
information about sales of securitized financial assets and similar
transactions, particularly if the seller retains some risk with respect to the
assets. This guidance is effective for fiscal years beginning after
November 15, 2009. We do not anticipate that the adoption of this
guidance will have a material impact on our financial position or results of
operations.
Also in
June 2009, the FASB issued new accounting guidance related to the accounting and
disclosure for the consolidation of variable interest entities regarding certain
guidance for determining whether an entity is a variable interest entity and
modifies the methods allowed for determining the primary beneficiary of a
variable interest entity. The guidance is included in ASC Topic 810,
Consolidation
. The
amendments include: (1) the elimination of the exemption for qualifying special
purpose entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity. The guidance is
effective for the first annual reporting period beginning after November 15,
2009. We do not anticipate that the adoption of this guidance will
have a material impact on our financial position or results of
operations.
In August
2009, the FASB issued an update of ASC Topic 820, “
Measuring Liabilities at Fair
Value
”. The new guidance provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using prescribed
techniques. We adopted the new guidance in the third quarter of 2009 and it did
not materially affect our financial position and results of
operations.
In
October 2009, the FASB issued an update to ASC Topic 605,
Revenue Recognition
(“ASC
605”). This amendment addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how to allocate consideration to each unit of accounting in the
arrangement. This amendment replaces all references to fair value as the
measurement criteria with the term selling price and establishes a hierarchy for
determining the selling price of a deliverable. The amendment also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, the amendment requires expanded
disclosures. This amendment will become effective for us for revenue
arrangements entered into or materially modified on or after April 1, 2011.
Earlier application is permitted with required transition disclosures based on
the period of adoption. We are currently evaluating the application date and the
impact of this standard on our condensed consolidated financial
statements.
Results
of Operations
Operating
Statistics
The
following analysis shows operating statistics for the three months ended
September 30, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
Amount
|
|
|
As
a Percentage of Total Revenue
|
|
|
Amount
|
|
|
As
a Percentage of Total Revenue
|
|
|
Restaurant
sales
|
|
$
|
554,836
|
|
|
|
58.15
|
%
|
|
$
|
836,184
|
|
|
|
61.11
|
%
|
|
Bakery
sales
|
|
|
103,373
|
|
|
|
10.83
|
%
|
|
|
176,515
|
|
|
|
12.90
|
%
|
|
Franchise
fees and royalties
|
|
|
295,979
|
|
|
|
31.02
|
%
|
|
|
355,596
|
|
|
|
25.99
|
%
|
|
Total
revenue
|
|
$
|
954,188
|
|
|
|
100.00
|
%
|
|
$
|
1,368,295
|
|
|
|
100.00
|
%
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant:
|
|
|
|
|
As
a Percentage of Restaurant Sales
|
|
|
|
|
|
As
a Percentage of Restaurant Sales
|
|
|
Cost
of sales
|
|
$
|
195,829
|
|
|
|
35.30
|
%
|
|
$
|
307,643
|
|
|
|
36.79
|
%
|
|
Labor
|
|
|
245,238
|
|
|
|
44.20
|
%
|
|
|
346,641
|
|
|
|
41.46
|
%
|
|
Occupancy
|
|
|
102,542
|
|
|
|
18.48
|
%
|
|
|
123,550
|
|
|
|
14.78
|
%
|
|
Depreciation
|
|
|
59,649
|
|
|
|
10.75
|
%
|
|
|
73,019
|
|
|
|
8.73
|
%
|
|
Other
operating cost
|
|
|
64,408
|
|
|
|
11.61
|
%
|
|
|
150,426
|
|
|
|
17.99
|
%
|
|
Total
restaurant operating expenses
|
|
$
|
667,666
|
|
|
|
120.34
|
%
|
|
$
|
1,001,279
|
|
|
|
119.75
|
%
|
|
Bakery:
|
|
|
|
|
|
As
a Percentage of Bakery Sales
|
|
|
|
|
|
|
As
a Percentage of Bakery Sales
|
|
|
Cost
of sales
|
|
$
|
27,823
|
|
|
|
26.91
|
%
|
|
$
|
47,460
|
|
|
|
26.89
|
%
|
|
Labor
|
|
|
46,422
|
|
|
|
44.91
|
%
|
|
|
56,266
|
|
|
|
31.88
|
%
|
|
Occupancy
|
|
|
8,146
|
|
|
|
7.88
|
%
|
|
|
7,448
|
|
|
|
4.22
|
%
|
|
Depreciation
|
|
|
9,626
|
|
|
|
9.31
|
%
|
|
|
9,600
|
|
|
|
5.44
|
%
|
|
Other
operating cost
|
|
|
11,847
|
|
|
|
11.46
|
%
|
|
|
27,390
|
|
|
|
15.52
|
%
|
|
Total
bakery operating expenses
|
|
$
|
103,864
|
|
|
|
100.47
|
%
|
|
$
|
148,164
|
|
|
|
83.95
|
%
|
|
Franchise
and general:
|
|
|
|
|
|
As
a Percentage of Franchise Fees and Royalties
|
|
|
|
|
|
|
As
a Percentage of Franchise Fees and Royalties
|
|
|
General
and administrative
|
|
$
|
707,149
|
|
|
|
238.92
|
%
|
|
$
|
1,568,461
|
|
|
|
441.08
|
%
|
|
Depreciation
|
|
|
30,059
|
|
|
|
10.16
|
%
|
|
|
7,165
|
|
|
|
2.01
|
%
|
|
Total
franchise and general expenses
|
|
$
|
737,208
|
|
|
|
249.08
|
%
|
|
$
|
1,575,626
|
|
|
|
443.09
|
%
|
|
|
|
|
|
|
As
a Percentage of Total Revenue
|
|
|
|
|
|
As
a Percentage of Total Revenue
|
|
|
Total
operating costs and expenses
|
|
$
|
1,508,738
|
|
|
|
158.12
|
%
|
|
$
|
2,725,069
|
|
|
|
199.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from operations
|
|
|
(554,550
|
)
|
|
|
(58.12
|
)%
|
|
|
(1,356,774
|
)
|
|
|
(99.16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
|
(19,253
|
)
|
|
|
(2.02
|
)%
|
|
|
8,888
|
|
|
|
0.65
|
%
|
|
Other
(income) expense
|
|
|
2,892
|
|
|
|
.30
|
%
|
|
|
(12,515
|
)
|
|
|
(0.91
|
)%
|
|
Total
other income and (expense)
|
|
|
(16,361
|
)
|
|
|
(1.72
|
)%
|
|
|
3,627
|
|
|
|
(0.26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(570,911
|
)
|
|
|
(59.83
|
)%
|
|
$
|
(1,360,401
|
)
|
|
|
(99.42
|
)%
|
The
components of revenue are restaurant sales for company-owned restaurants, bakery
sales for the company-owned bakery and royalties and franchise fees for our
franchise operations.
For the
three months ended September 30, 2009, total revenue decreased $414,107 (30.26%)
from $1,368,295 for the three months ended September 30, 2008 to $954,188 for
the same period in 2009. For the three months ended September 30,
2009, restaurant sales decreased by $281,348 (33.65%) from $836,184 in 2008 to
$554,836 in 2009. The decrease in restaurant revenue is principally
due to the number of restaurants operating in each period as well as the changes
in economic conditions. In 2009 we had 7 restaurants
operating. In 2008 we had 8 restaurants operating.
For the
three months ended September 30, 2009, bakery sales decreased by $73,142
(41.44%) from $176,515 in 2008 to $103,373 in 2009. Our bakery was
operating for the both three-month periods in 2009 and 2008; however we had
fewer customers, both franchise and our restaurants, in 2009 than we did in
2008. In addition our customers’ revenues were down in 2009 resulting
in lower bread sales.
The loss
from restaurant operations decreased $52,265(31.66%) from $165,095 for the three
months ended September 30, 2008 to $112,830 for the three months ended September
30, 2009. The improvement results from the sale of one of our less
profitable restaurants. In addition we have reduced controllable
operating costs. We believe that we will see continued improvement in
the operation of our restaurants as we work towards adding new day parts, such
as breakfast or dinner, to our menu.
Operating
results for the bakery decreased $28,842 (101.73%) from operating income of
$28,351 for the three months ended September 30, 2008 to a loss of $491 for the
three months ended September 30, 2009. The loss results from an
increase in labor cost as a percentage of revenue. Bakery labor,
which is a significant component of cost, is semi variable with a higher
percentage of revenue at the current revenue levels.
Franchise
fees and royalty revenue decreased $59,617 (16.77%) from $355,596 for the three
months ended September 30, 2008 to $295,979 in 2009. Initial
franchise fee are collected when a franchisee enters into a franchise
agreement. At that point in time these fees are recorded as deferred
revenue and are recognized as revenue on the statement of operations when the
franchised restaurant is opened. In certain cases if a franchisee
fails to meet its obligation under its franchise/development agreement we can
terminate that agreement and we recognize revenue at that time. One
Spicy Pickle restaurant was opened and no agreements were terminated during the
three-month period ending September 30, 2009 and we recognized fees of
$35,000. Two new Spicy Pickle restaurants were opened during the
three months ended September 30, 2008. We collected the balance of a
fee in the amount of $584 during the three months ended September 30, 2009 for
the transfer of one of the Bread Garden Urban Café restaurants. As of
September 30, 2009 there were 14 Bread Garden Urban Café restaurants opened for
which 12 paid us royalties for all or part of the period and two will begin
paying royalties subsequent to September 30, 2009.There were no deferred
franchise fees collected during the three-month period ended September 30, 2009
as compared to $5,000 for the three months ended September 30,
2008. Royalty fees increased $15,380 (7.54%) from $204,054 for the
three-month period ended September 30, 2008 to $219,434 for the three months
ended September 30, 2009. The increase is due primarily to the
addition of the Bread Garden Urban Cafés restaurants offset by an overall
decline in restaurant revenues. There also were fewer Spicy Pickle
restaurants operating during 2009.
In
general during the year ended December 31, 2008, we were in the process of
growing the infrastructure related to our franchise operations. The
growth was to meet expected needs as new franchise restaurants were anticipated
to be opened. In the first quarter of 2008, we entered into
agreements for 23 new franchises. Although we continued to have
inquires and visits from potential franchisees in the second and third quarters
of 2008, we did not sell any new franchises. We believe that the lack
of sales of new franchises is directly related to the economic downturn in
2008. Towards the end of the third quarter of 2008, we began to scale
back in the infrastructure we had in place. Our most significant
expense is personnel and related costs. We reduced the number of full
time employees from a high of 28 during the year ended 2008 to 13 by September
30, 2009. We also reduced overhead expenses that have a direct
bearing on the number of personnel employed as well as other areas such as
travel and entertainment and communication. We will continue to
review our general and administrative costs and respond to the effects of the
general economy as timely as possible.
The
following sets forth details of the costs that make up general and
administrative expenses and the difference for the three-month period ended
September 30, 2009 and compared to the three-month period ended September 30,
2008.
|
|
|
2009
|
|
|
2008
|
|
|
Difference
|
|
|
Personnel
cost
|
|
$
|
293,989
|
|
|
$
|
737,849
|
|
|
$
|
(443,860
|
)
|
|
Professional
fees
|
|
|
81,248
|
|
|
|
61,834
|
|
|
|
19,414
|
|
|
Rent
|
|
|
43,659
|
|
|
|
41,810
|
|
|
|
1,849
|
|
|
Travel
and entertainment
|
|
|
34,098
|
|
|
|
110,138
|
|
|
|
(76,040
|
)
|
|
Stock
options
|
|
|
64,366
|
|
|
|
171,585
|
|
|
|
(107,219
|
)
|
|
Investor
relations
|
|
|
25,847
|
|
|
|
202,428
|
|
|
|
(176,581
|
)
|
|
MIS
|
|
|
25,131
|
|
|
|
46,397
|
|
|
|
(21,266
|
)
|
|
Marketing,
advertising, promotion
|
|
|
64,925
|
|
|
|
125,982
|
|
|
|
(61,057
|
)
|
|
Other
general and administrative expenses
|
|
|
73,886
|
|
|
|
70,438
|
|
|
|
3,448
|
|
|
Total
general and administrative expenses
|
|
$
|
707,149
|
|
|
$
|
1,568,461
|
|
|
$
|
(861,312
|
)
|
General
and administrative expenses decreased $861,312 (54.91%) from $1,568,461 for the
three-month period ended September 30, 2008 to $707,149 for the three-month
period ended September 30, 2009. Our most significant expense
continues to be personnel costs. We reduced the number of full time
employees from 27 at September 30, 2008 to 13 at September 30,
2009. We also reduced the salary levels of remaining
employees. The two reductions resulted in a decrease in personnel
cost of $443,860 (60.16%) from $737,849 for the three-month period ended
September 30, 2008 to $293,989 for the three-month period ended September 30,
2009.
Professional
fees increased $19,414 (31.40%) from $61,834 for the three-month period ended
September 30, 2008 to $81,248 for the three-month period ended September 30,
2009. The increase is a result of increased consulting expenses in
connection with our Bread Garden operations which was approximately $22,000 and
offset by a reduction in legal fees as a result of bringing a portion of our
legal work in house. We expect to see further reduction to legal
fees.
Rent
expense increased $1,849 (4.42%) from $41,810 for the three months ended
September 30, 2008 to $43,659 for the three months ended September 30,
2009. The increase was due to the additional space rented to
accommodate the increase in personnel during 2008 as well as added space for our
Bread Garden operations in Vancouver, Canada. During the three months
ended September 30, 2009, we reduced the amount of space we rent by subleasing a
portion of our headquarters office. We have reduced future rent
expense by approximately $2,100 per month. In addition we negotiated
with our landlord for a deferral of a portion of the monthly rental
payments. Effective April 2009, we are deferring $3,000 per
month. The amount is included in rent expense but will be due and
payable in the future.
Travel
and entertainment decreased $76,040 (69.04%) from $110,138 for the three months
ended September 30, 2008 to $34,098 for the three months ended September 30,
2009. The decrease was due to less travel related to our operations
department in visiting franchised location to perform onsite
evaluations. We have temporarily reduced the number of visits made
each year and combine multiple locations on each trip.
Stock
option expense is a non-cash expense. We estimate the fair value of
share-based payment awards on the date of grant using the Black-Scholes
option-pricing model. Stock option expense decreased $107,219
(62.49%) from $171,585 for the three months ended September 30, 2008 to $64,366
for the three months ended September 30, 2009. We did not grant any
options during the three-months periods ended September 30, 2009 and
2008. All of the employee options are fully vested at September 30,
2009. During September 2009, we reduced the exercise price of all of
the outstanding options to $.20 per share. In accordance with ASC 718
the amount of additional compensation recognized was determined by calculating
the fair value of the options immediately before the modification less the fair
value of the options as modified. The amount recognized as additional
compensation was $61,287 for the three and nine months ended September 30,
2009.
Investor
relations decreased $176,581 (87.23%) from $202,428 for the three months ended
September 30, 2008 to $25,847 for the three months ended September 30,
2009. In the past we engaged a number of investor relation firms to
assist in attracting new shareholders for our company. We have
minimized the cost by not engaging as many firms on a regular
basis.
MIS
decreased $21,266 (45.83%) from $46,397 for the three months ended September 30,
2008 to $25,131 for the three months ended September 30, 2009. The
decrease was due primarily as a result of mature systems, and reducing the third
party support of our systems.
Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales. At our discretion, we may spend more or less than
our actual advertising receipts from the franchisees. Advertising fees collected
were $90,781 and $99,961 for the three months ended September 30, 2009 and 2008,
respectively. These fees are offset against actual advertising
expenses, which are recognized when incurred. We incurred advertising expenses
of $155,706 and $225,944 for the three months ended September 30, 2009 and 2008,
respectively. We anticipate that for the year ending December 31,
2009 we will spend at least as much as we collect. To the extent we
do not spend all that we have collected we are allowed to utilize the funds to
offset amounts spent in previous periods and other indirect costs associated
with marketing and promotion. The net amounts included in the
financial statements as advertising costs in the financial statements were
$64,925 and $125,982 for the three months ended September 30, 2009 and 2008,
respectively.
Other
general and administrative expenses increased $3,448 (4.90%) from $70,438 for
the three months ended September 30, 2008 to $73,886 for the three months ended
September 30, 2009. The increase resulted from a guaranty on a lease
of a franchisee in the amount of $80,000. This is the only franchisee
lease that we guaranteed. The remaining decrease results from the
reduced number of personnel, reductions in contributions, automobile expenses
and other miscellaneous items. These reductions were
planned.
The loss
from operations was $554,550 for the three months ended September 30, 2009 as
compared to $1,356,774 for the three months ended September 30, 2008. The
decrease in the loss from operations of $802,224 (59.13%) was primarily due to
the decrease to personnel expenses, investor relations, stock options and other
operating expenses.
Other income (expense) was
an expense of $16,361 for the three months ended September 30, 2009 as compared
to an expense of $3,627 for 2008. The increase in the expense results
from having interest expense in 2009 and interest income in 2008 due to higher
cash balances during the three months ended September 30, 2008 as compared to
2009. This was offset by a gain of $2,892 on the sale of assets in
the three months ended September 30, 2009 as compared to a loss of $12,515 in
2008. The net loss for the three months ended September 30, 2009 was
$570,911 compared to a net loss of $1,360,401 for the three months ended
September 30, 2008, a decreased loss of $789,490 (58.03%).
The
following analysis shows operating statistics for the nine months ended
September 30, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
Amount
|
|
|
As
a Percentage of Total Revenue
|
|
|
Amount
|
|
|
As
a Percentage of Total Revenue
|
|
|
Restaurant
sales
|
|
$
|
1,767,875
|
|
|
|
55.56
|
%
|
|
$
|
1,954,228
|
|
|
|
60.70
|
%
|
|
Bakery
sales
|
|
|
319,399
|
|
|
|
10.04
|
%
|
|
|
352,058
|
|
|
|
10.93
|
%
|
|
Franchise
fees and royalties
|
|
|
1,094,367
|
|
|
|
34.40
|
%
|
|
|
913,216
|
|
|
|
28.37
|
%
|
|
Total
revenue
|
|
$
|
3,181,641
|
|
|
|
100.00
|
%
|
|
$
|
3,219,502
|
|
|
|
100.00
|
%
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant:
|
|
|
|
|
As
a Percentage of Restaurant Sales
|
|
|
|
|
|
As
a Percentage of Restaurant Sales
|
|
|
Cost
of sales
|
|
$
|
611,101
|
|
|
|
34.57
|
%
|
|
$
|
692,065
|
|
|
|
35.41
|
%
|
|
Labor
|
|
|
748,175
|
|
|
|
42.32
|
%
|
|
|
841,630
|
|
|
|
43.07
|
%
|
|
Occupancy
|
|
|
296,208
|
|
|
|
16.76
|
%
|
|
|
285,792
|
|
|
|
14.62
|
%
|
|
Depreciation
|
|
|
181,036
|
|
|
|
10.24
|
%
|
|
|
149,524
|
|
|
|
7.65
|
%
|
|
Other
operating cost
|
|
|
197,647
|
|
|
|
11.18
|
%
|
|
|
337,703
|
|
|
|
17.28
|
%
|
|
Total
restaurant operating expenses
|
|
$
|
2,034,167
|
|
|
|
115.07
|
%
|
|
$
|
2,306,714
|
|
|
|
118.03
|
%
|
|
|
|
|
|
|
|
As
a Percentage of Bakery Sales
|
|
|
|
|
|
|
As
a Percentage of Bakery Sales
|
|
|
Bakery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
83,192
|
|
|
|
26.05
|
%
|
|
$
|
135,945
|
|
|
|
38.61
|
%
|
|
Labor
|
|
|
140,341
|
|
|
|
43.94
|
%
|
|
|
168,920
|
|
|
|
47.98
|
%
|
|
Occupancy
|
|
|
21,250
|
|
|
|
6.65
|
%
|
|
|
21,695
|
|
|
|
6.16
|
%
|
|
Depreciation
|
|
|
30,028
|
|
|
|
9.40
|
%
|
|
|
29,451
|
|
|
|
8.37
|
%
|
|
Other
operating cost
|
|
|
40,533
|
|
|
|
12.69
|
%
|
|
|
56,679
|
|
|
|
16.10
|
%
|
|
Total
bakery operating expenses
|
|
$
|
315,344
|
|
|
|
98.73
|
%
|
|
$
|
412,690
|
|
|
|
117.22
|
%
|
|
Franchise
and general:
|
|
|
|
|
|
As
a Percentage of Franchise Fees and Royalties
|
|
|
|
|
|
|
As
a Percentage of Franchise Fees and Royalties
|
|
|
General
and administrative
|
|
$
|
2,055,138
|
|
|
|
187.79
|
%
|
|
$
|
5,046,315
|
|
|
|
552.59
|
%
|
|
Depreciation
|
|
|
91,506
|
|
|
|
8.36
|
%
|
|
|
20,403
|
|
|
|
2.23
|
%
|
|
Total
franchise and general expenses
|
|
$
|
2,146,644
|
|
|
|
196.15
|
%
|
|
$
|
5,066,718
|
|
|
|
554.82
|
%
|
|
|
|
|
|
|
As
a Percentage of Total Revenue
|
|
|
|
|
|
As
a Percentage of Total Revenue
|
|
|
Total
operating costs and expenses
|
|
$
|
4,496,155
|
|
|
|
141.32
|
%
|
|
$
|
7,786,122
|
|
|
|
241.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from operations
|
|
|
(1,314,514
|
)
|
|
|
(41.32
|
)%
|
|
|
(4,566,620
|
)
|
|
|
(141.84
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
|
(50,622
|
)
|
|
|
(1.59
|
)%
|
|
|
66,296
|
|
|
|
2.06
|
%
|
|
Other
(income) expense
|
|
|
1,998
|
|
|
|
0.06
|
%
|
|
|
(30,005
|
)
|
|
|
(0.93
|
)%
|
|
Total
other income and (expense)
|
|
|
(48,624
|
)
|
|
|
(1.53
|
)%
|
|
|
36,291
|
|
|
|
2.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,363,138
|
)
|
|
|
(42.84
|
)%
|
|
$
|
(4,530,329
|
)
|
|
|
(140.72
|
)%
|
The
components of revenue are restaurant sales for company-owned restaurants, bakery
sales for the company-owned bakery and royalties and franchise fees for our
franchise operations.
For the
nine months ended September 30, 2009, total revenue decreased $37,861 (1.18%)
from $3,219,502 for the nine months ended September 30, 2008 to $3,181,641 for
the same period in 2009. For the nine months ended September 30,
2009, restaurant sales decreased by $186,353 (9.54%) from $1,954,228 in 2008 to
$1,767,875 in 2009. The decrease in restaurant revenue is principally
due to the number of restaurants operating in each period as well as changes in
economic conditions. In 2009 we had 7 restaurants
operating. In 2008 we had 8 restaurants operating.
For the
nine months ended September 30, 2009, bakery sales decreased by $32,659 (9.28%)
from $352,058 in 2008 to $319,399 in 2009. Our bakery was operating
for the both nine-month periods in 2009 and 2008; however we had fewer
customers, both franchisee and our own restaurants, in 2009 than we did in
2008. In addition our franchisee customers’ revenues were down in
2009 resulting in lower bread sales.
The loss
from restaurant operations decreased $86,194 (24.45%) from $352,486 for the nine
months ended September 30, 2008 to $266,292 for the nine months ended September
30, 2009. The improvement results from the sale of one of our less
profitable restaurants. In addition we have reduced controllable
operating costs. We believe that we will see continued improvement in
the operation of our restaurants as we work towards adding new day parts to our
menu.
Operating
results for the bakery increased $64,687 (106.69%) from an operating loss of
$60,632 for the nine months ended September 30, 2008 to income of $4,055 for the
nine months ended September 30, 2009. The improvement resulted
primarily from decreases in controllable costs.
Franchise
fees and royalty revenue increased $181,151 (19.84%) from $913,216 for the nine
months ended September 30, 2008 to $1,094,367 in 2009. Initial
franchise fee are collected when a franchisee enters into a franchise
agreement. At that point in time these fees are recorded as deferred
revenue and are recognized as revenue on the statement of operations when the
franchised restaurant is opened. In certain cases if a franchisee
fails to meet its obligation under its franchise/development agreement we can
terminate that agreement and we recognize revenue at that time. Four
restaurants were opened and 3 agreements terminated during the nine- month
period ending September 30, 2009 and we recognized fees of
$240,000. Five restaurants were opened during the nine months ended
September 30, 2008 which accounted for $145,000 in revenue. We
collected a fee of $7,634 during the nine months ended September 30, 2009 for
the transfer of one of the Bread Garden Urban Café restaurants. As of
September 30, 2009 there were 14 Bread Garden Urban Café restaurants opened of
which 12 paid us royalties for all or part of the period and two will begin
paying royalties subsequent to September 30, 2009. Deferred franchise
fees collected but not recognized as revenue during the nine-month period ended
September 30, 2009 was $55,000 as compared to $316,500 for the nine months ended
September 30, 2008. Royalty fees increased $67,833 (11.40%) from
$595,227 for the nine-month period ended September 30, 2008 to $663,060 for the
nine months ended September 30, 2009. The increase is due primarily
to the addition of the Bread Garden Urban Cafés restaurants. The net
number of franchised Spicy Pickle restaurants opened as of September 30, 2009
was 30 and 33 at September 30, 2008.
In
general during the year ended December 31, 2008, we were in the process of
growing the infrastructure related to our franchise operations. The
growth was to meet expected needs as new franchise restaurants were anticipated
to be opened. In the first quarter of 2008, we entered into
agreements for 23 new franchises. Although we continued to have
inquires and visits from potential franchisees in the second and third quarters
of 2008, we did not sell any new franchises. We believe that the lack
of sales of new franchises is directly related to the economic downturn in
2008. Towards the end of the third quarter of 2008, we began to scale
back in the infrastructure we had in place. Our most significant
expense is personnel and related costs. We reduced the number of
employees from a high of 28 during the year ended 2008 to 13 by September 30,
2009. We also reduced overhead expenses that have a direct bearing on
the number of personnel employed as well as other areas such as travel and
entertainment and communication. We will continue to review our
general and administrative costs and respond to the effects of the general
economy as timely as possible.
The
following sets forth details of the costs that make up general and
administrative expenses and the difference for the nine-month period ended
September 30, 2009 and compared to the nine-month period ended September 30,
2008.
|
|
|
2009
|
|
|
2008
|
|
|
Difference
|
|
|
Personnel
cost
|
|
$
|
1,118,089
|
|
|
$
|
2,099,253
|
|
|
$
|
(981,164
|
)
|
|
Professional
fees
|
|
|
211,266
|
|
|
|
240,130
|
|
|
|
(28,864
|
)
|
|
Rent
|
|
|
143,107
|
|
|
|
111,407
|
|
|
|
31,700
|
|
|
Travel
and entertainment
|
|
|
122,900
|
|
|
|
336,091
|
|
|
|
(213,191
|
)
|
|
MIS
|
|
|
69,335
|
|
|
|
91,374
|
|
|
|
(22,039
|
)
|
|
Stock
options
|
|
|
68,803
|
|
|
|
726,501
|
|
|
|
(657,698
|
)
|
|
Investor
relations
|
|
|
35,546
|
|
|
|
798,189
|
|
|
|
(762,643
|
)
|
|
Marketing,
advertising, promotion
|
|
|
9,201
|
|
|
|
326,321
|
|
|
|
(317,120
|
)
|
|
Other
general and administrative expenses
|
|
|
276,891
|
|
|
|
317,049
|
|
|
|
(40,158
|
)
|
|
Total
general and administrative expenses
|
|
$
|
2,055,138
|
|
|
$
|
5,046,315
|
|
|
$
|
(2,991,177
|
)
|
General
and administrative expenses decreased $2,991,177 (59.27%) from $5,046,315 for
the nine-month period ended September 30, 2008 to $2,055,138 for the nine-month
period ended September 30, 2009. Our most significant expense
continues to be personnel costs. We reduced the number of employees
from a high of 28 at September 30, 2008 to 13 at September 30,
2009. We also reduced the salary levels of remaining
employees. The two reductions resulted in a decrease in personnel
cost of $981,164 (46.74%) from $2,099,253 for the nine-month period ended
September 30, 2008 to $1,118,089 for the nine-month period ended September 30,
2009.
Professional
fees decreased $28,864 (12.02%) from $240,130 for the nine-month period ended
September 30, 2008 to $211,266 for the nine-month period ended September 30,
2009. The reduction was a result of bringing a portion of our legal
work in house, offset by increased consulting expenses in connection with our
Bread Garden operations which was approximately $46,000. We expect to
see further reduction to legal fees through the remainder of 2009.
Rent
expense increased $31,700 (28.45%) from $111,407 for the nine months ended
September 30, 2008 to $143,107 for the nine months ended September 30,
2009. The increase was due to the additional space rented to
accommodate the increase in personnel during 2008 as well as added space for our
Bread Garden operations in Vancouver, Canada. During the third
quarter of 2009 we reduced the amount of space we rent by subleasing a portion
of our headquarters office. We have reduced future rent expense by
approximately $2,100 per month. In addition we negotiated with our
landlord for a deferral of a portion of the monthly rental
payments. Effective April 2009, we are deferring $3,000 per
month. The amount is included in rent expense but will be due and
payable in the future.
Travel
and entertainment decreased $213,191 (63.43%) from $336,091 for the nine months
ended September 30, 2008 to $122,900 for the nine months ended September 30,
2009. The decrease was due to less travel related to our operations
department in visiting franchised location to perform onsite
evaluations. We have temporarily reduced the number of visits made
each year and combine multiple locations on each trip.
MIS
decreased $22,039 (24.12%) from $91,347 for the nine months ended September 30,
2008 to $69,335 for the nine months ended September 30, 2009. The
decrease was due primarily as a result of mature systems, and reducing the third
party support of our systems.
Stock
option expense is a non-cash expense. We estimate the fair value of
share-based payment awards on the date of grant using the Black-Scholes
option-pricing model. Stock option expense decreased $657,698
(90.53%) from $726,501 for the nine months ended September 30, 2008 to $68,803
for the nine months ended September 30, 2009. We did not grant any
options during the nine months ended September 30, 2009 and granted 1,460,000
stock options during the nine months ended September 30, 2008. All of
the employee options are fully vested at September 30, 2009. During
September 2009 we reduced the exercise price of all of the outstanding options
to $.20 per share. In accordance with ASC 718 the amount of
additional compensation recognized was determined by calculating the fair value
of the options immediately before the modification less the fair value of the
options as modified. The amount recognized as additional compensation
was $61,287 for the three and nine months ended September 30, 2009.
Investor
relations decreased $762,643 (95.55%) from $798,189 for the nine months ended
September 30, 2008 to $35,546 for the nine months ended September 30,
2009. In the past we engaged a number of investor relation firms to
assist in attracting new shareholders for our company. We have
minimized the cost by not engaging as many firms on a regular
basis.
Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales. In our discretion, we may spend more or less than
our actual advertising receipts from the franchisees. Advertising fees collected
were $277,101 and $275,312 for the nine months ended September 30, 2009 and
2008, respectively. These fees are offset against actual advertising
expenses, which are recognized when incurred. We incurred advertising expenses
of $286,302 and $601,633 for the nine months ended September 30, 2009 and 2008,
respectively. We anticipate that for the year ending December 31,
2009 we will spend at least as much as we collect. To the extent we
do not spend all that we have collected we are allowed to utilize the funds to
offset amounts spent in previous periods and other indirect costs associated
with marketing and promotion. The net amounts included in the
financial statements as advertising expense in the financial statements were
$9,201 and $326,321 for the nine months ended September 30, 2009 and 2008,
respectively.
Other
general and administrative expenses decreased $40,158 (12.67%) from $317,049 for
the nine months ended September 30, 2008 to $276,891 for the nine months ended
September 30, 2009. During the nine months ended September 30, 2009
we became obligated to pay a guaranty on a lease of a franchisee in the amount
of $80,000. This is the only franchisee lease we have
guaranteed. This one time increase was offset by the cost savings of
the reduced number of personnel, reductions in contributions, automobile
expenses and other miscellaneous items. These reductions were
planned.
The loss
from operations was $1,314,514 for the nine months ended September 30, 2009 as
compared to $4,566,620 for the nine months ended September 30, 2008. The
decrease in the loss from operations of $3,252,106 (71.21%) was primarily due to
the decrease to personnel expenses, investor relations, stock options and other
operating expenses. Other income (expense) was an expense of $48,624 for the
nine months ended September 30, 2009 as compared to an income of $36,291 for
2008. The increase in the expense results from having interest
expense in 2009 and interest income in 2008 due to higher cash balances during
the nine months ended September 30, 2008 as compared to 2009. This
was offset by a gain of $1,998 on the sale of assets in the nine months ended
September 30, 2009 as compared to a loss of $30,005 in 2008. The net
loss for the nine months ended September 30, 2009 was $1,363,139 compared to a
net loss of $4,530,329 for the nine months ended September 30, 2008, a decreased
loss of $3,167,190 (69.91%).
Liquidity
and Capital Resources
At
September 30, 2009, we had working capital of $312,150, as compared to working
capital deficit of $925,635 at December 31, 2008. Of the working
capital at September 30, 2009, $668,329 was deferred franchise fee revenue and
does not represent a cash liability. The increase in working capital
is primarily due to an equity offering in September 2009. On
September 22, 2009, we entered into an Amendment, Redemption and Conversion
Agreement (the “Agreement”) with the holders of all 638.88 outstanding shares of
our Series A Variable Rate Convertible Preferred Stock (the “Preferred
Stock”). Under the terms of that Agreement, the holders of 402 shares
of Preferred Stock agreed to allow us to redeem 94.12 of the shares for a total
of $799,998 and convert their remaining shares of Preferred Stock into 2,093,601
shares of our $.001 par value common stock (“Common Stock”). The
holders of 236.88 shares of Preferred Stock agreed to convert their shares into
4,737,600 shares of our Common Stock.
All of
the holders were issued warrants when they originally purchased their shares of
Preferred Stock. Those warrants were exercisable at $1.60 per share
and expired December 14, 2012. The Agreement amended the warrants to
lower the exercise price to $0.20 per share and extend the expiration date to
September 22, 2014.
The
Agreement was contingent upon us completing a private placement of at least $1.8
million of equity securities (the “New Financing”) and entering into an
agreement with the original placement agent of the Preferred Stock (“Placement
Agent”). The Placement Agent had received warrants to purchase
288,400 shares of our common stock
at $1.60
per share exercisable through December 14, 2012. Under the terms of
the agreement, the Placement Agent agreed to cancel these warrants in exchange
for new warrants exercisable at $0.20 per share through September 22,
2014.
As
discussed above, as of September 30, 2009 we sold a total of 22 Units for cash
in the amount of $2,200,000 in the New Financing. Each Unit consisted
of 769,231 shares of our Common Stock and a warrant to purchase an additional
384,615 shares of Common Stock at $.19 per share. The warrants expire
September 22, 2014. We issued a total of 16,923,082 shares of our
Common Stock and warrants to purchase 8,461,530 shares. Of the
securities purchased, 13,846,158 shares and 6,923,070 warrants were purchased by
members of our Board of Directors.
In
addition to the above, in December 2008, two members of our Board of Directors
granted us a line of credit which was to expire January 31, 2010. The
line of credit was for an aggregate of $550,000 and bears interest at a rate of
one percent above the prime rate and is secured by certain of our
assets. During the nine months ended September 30, 2009, the amount
of the line was increased to $800,000. At September 30, 2009, the
interest rate on the borrowings was 4.25%.
During
September 2009, the line of credit was renegotiated and the outstanding
principal and accrued interest totaling, $817,252, was converted to a
convertible promissory note (“Convertible Note”). The Convertible
Note is due January 31, 2012, bears interest at the same rate that the line of
credit did, one percent above the prime rate. Interest is payable
semi-annually. The holders of the Convertible Note may convert any
amount of the principal and accrued interest due into our Common Stock at the
rate of $0.13 per share. In addition, for every two dollars converted
into Common Stock, we will issue to the holder of the Convertible Note a warrant
to purchase one share of Common Stock. The exercise price of the
warrant will be equal to 120% of the price per share of the Common Stock
calculated using the average of the volume weighted average prices per share for
the 10 trading days prior to the election to convert.
The
conversion feature in the Convertible Note is considered to be a beneficial
conversion feature. We have accounted for the beneficial conversion
feature in accordance with ASC Topic 470,
Liabilities
. We
accounted for a portion of the proceeds, $157,164, from the Convertible Note
which related to the intrinsic value of the beneficial conversion feature by
allocating that amount to additional paid in capital. The following
summarizes the carrying amount of the Convertible Promissory Note:
|
Face value of the
note to be repaid if not converted
|
|
$
|
817,252
|
|
|
Amount allocated to
additional paid in capital
|
|
|
(
157,164
|
)
|
|
Note payable to
related parties
|
|
$
|
660,088
|
|
In
accordance with ASC Topic 835,
Interest
, the amount
allocated to the beneficial conversion will be amortized as interest expense
over the life of the note in such a way as to result in a constant rate of
interest.
The
annual interest rate giving effect to the amortization of the beneficial
conversion is 9.188% per annum. When combined with the stated
interest rate of one percent above the prime rate, the effective rate is 10.188%
over the prime rate. At September 30, 2009, the interest rate on the
borrowings was 12.438%.
During
the nine months ended September 30, 2009, we used cash in operating activities
of $1,154,344 as compared to cash used in operations of $3,262,498 for the same
period in 2008. Cash in the amount of $6,371 was provided from the
sale of assets netted against purchases for the nine months ended September 30,
2009 as compared to cash of $1,308,819 used for the same period in
2008.
We
receive payments from franchisees when they sign a franchise agreement. We do
not include those payments in revenue until such time as the franchisee opens
the restaurant. The amount recorded as deferred revenue at September 30, 2009
was $668,329, a decrease of $103,171 compared to December 31, 2008. Although not
recorded as revenue, any payments received will provide working
capital.
At
September 30, 2009, we had contractual obligations for operating leases of
approximately $2,581,869, of which $112,766 is due by December 31,
2009.
|
2009
|
|
$
|
112,766
|
|
|
2010
|
|
|
441,787
|
|
|
2011
|
|
|
420,854
|
|
|
2012
|
|
|
378,369
|
|
|
2013
|
|
|
351,734
|
|
|
Later
years
|
|
|
876,359
|
|
|
|
|
$
|
2,581,869
|
|
During
the nine months ended September 30, 2009, we issued 1,590,084 shares of our
Common Stock in lieu of a cash payment for dividends payable on our Preferred
Stock of $270,071. The number of shares of Common Stock issued was
calculated as per terms of the Preferred Stock. The terms required we
determine the average of the volume weighted average prices of our Common Stock
for a period of 20 days prior to the dividend date and then use a value equal to
90% of that average. The calculation was performed for two periods,
the dividends that were payable January 1, 2009 and July 1, 2009. The
value calculated was $0.1691 and $0.1706 for January 1, 2009 and July 1, 2009,
respectively and we issued 798,555 shares and 791,529 shares of Common Stock,
respectively.
Summary
– September 30, 2009
The
difficult economic conditions of 2008 resulted in us not selling as many new
franchises as we initially projected. The extent of the recession was
not clear until the third or fourth quarter of 2008. We reacted to
the downturn as soon as it became apparent that it would not correct itself in
the short term. Our need to raise additional equity or debt financing
and our ability to generate cash flow from operations will depend on the length
of time the U.S. economy is in a recession, the availability of financing for
existing and potential franchisees to open new restaurants, our future
performance and our ability to successfully implement our stated business and
growth strategies. Many of these factors are beyond our control. If
our working capital is insufficient to fund the implementation of our business
plan we will be required to seek additional financing sooner than currently
anticipated in order to proceed with our business goals. In the event
that we need additional capital and are unable to obtain it, we could be left
without sufficient liquidity. The nature of our business is that a
portion of our revenue is a continuing stream from franchisees. We
will continually monitor our expenses and reduce those expenses as best we can
to match the revenue flow. In the past we have issued common stock to
our consultants and professional services providers in lieu of cash payments for
these services. We may continue this practice to conserve our cash to pay for
operations, product development and inventory.
Off-Balance
Sheet Arrangements
At
September 30, 2009, we had no obligations that would qualify to be disclosed as
off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures
About Market Risk
Not
required.
Item
4T. Controls and Procedures
Our
management, with the participation of our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report. Based
on such evaluation, our CEO and CFO have concluded that, as of the end of such
period, the Company’s disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act and are effective in ensuring that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including the Company’s CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
There have been no changes in the Company’s
internal control over financial reporting during the last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Part
II – OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
Not
required.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
During
the three months ended September 30, 2009, we issued 100,000 shares of common
stock in lieu of cash in payment of a contract valued at $16,000.
During
the three months ended September 30, 2009, we issued 1,476,500 shares of our
Common Stock to a consultant currently under contract to the
Company. The stock was issued in lieu of future cash payments of
$236,241 under the contract for services to be rendered from July 1, 2009 until
the termination of the contract on September 1, 2012.
During
the three months ended September 30, 2009, we sold a total of 22 Units for cash
in the amount of $2,200,000. Each Unit consisted of 769,231 shares of
common stock and a warrant to purchase an additional 384,615 shares of common
stock at $.19 per share. The warrants expire September 22,
2014. We issued a total of 16,923,082 shares of common stock and
warrants to purchase 8,461,530 shares. Of the securities purchased,
13,846,158 shares and 6,923,070 warrants were purchased by member of our Board
of Directors.
No
underwriter was used in these transactions. We relied upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as the investors were deemed to be sophisticated with respect to the
investment in the securities due to its financial condition and involvement in
the Company’s business. Restrictive legends were placed on the
certificates evidencing the securities issued in the transactions.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
Not
applicable
Item
6. Exhibits
|
Regulation
S-K
Number
|
Exhibit
|
|
2.1
|
Asset
Purchase Agreement between SPBG Franchising, Inc. and Bread Garden
Franchising, Inc. dated September 30, 2008
(1)
|
|
Regulation
S-K Number
|
Exhibit
|
|
3.1
|
Amended
and Restated Articles of Incorporation (2)
|
|
3.2
|
Bylaws
(3)
|
|
4.1
|
Certificate
of Designation of Series A Variable Rate Convertible Preferred Stock
(4)
|
|
4.2
|
Form
of warrant to be issued to Midtown Partners & Co, LLC and assigns
(5)
|
|
4.3
|
Form
of warrant to be issued to private placement investors
(6)
|
|
10.1
|
Employment
Agreement – Marc Geman (3)
|
|
10.2
|
Employment
Agreement – Anthony Walker (3)
|
|
10.3
|
Employment
Agreement – Kevin Morrison (3)
|
|
10.4
|
2006
Stock Option Plan (3)
|
|
10.5
|
Promissory
Note to Spicy Pickle, LLC (3)
|
|
10.6
|
Securities
Purchase Agreement dated as of December 14, 2007 (7)
|
|
10.7
|
Form
of Warrant (8)
|
|
10.8
|
Registration
Rights Agreement dated as of December 14, 2007 (9)
|
|
10.9
|
Lock-Up
Agreement of Marc Geman (10)
|
|
10.10
|
Form
of Lock-Up Agreement executed by other officers and directors
(11)
|
|
10.11
|
Amendment
No. 1 to Securities Purchase Agreement dated as of May 22, 2008
(12)
|
|
10.12
|
Amendment,
Redemption and Conversion Agreement (13)
|
|
10.13
|
Agreement
with Midtown Partners & Co, LLC and assigns (14)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(15)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(15)
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer (15)
|
|
32.2
|
Section
1350 Certification of Chief Financial Officer
(15)
|
|
(1)
|
Incorporated
by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K
filed on October 2, 2008.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to Amendment No. 1 to the
registrant’s registration statement on Form SB-2 filed on December 12,
2006.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
registration statement on Form SB-2 filed on October 26,
2006.
|
|
(4)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s Current
Report on Form 8-K filed on December 19,
2007
|
|
(5)
|
Incorporated
by reference to exhibit 4.1 in the registrant’s Current Report on Form 8-K
filed on September 23, 2009.
|
|
(6)
|
Incorporated
by reference to exhibit 4.2 in the registrant’s Current Report on Form 8-K
filed on September 23, 2009.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.2 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(9)
|
Incorporated
by reference to Exhibit 10.3 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.4 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(11)
|
Incorporated
by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
Current Report on Form 8-K filed on December 27,
2007.
|
|
(12)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on May 23, 2008.
|
|
(13)
|
Incorporated
by reference to exhibit 10.1 in the registrant’s Current Report on Form
8-K filed on September 23, 2009.
|
|
(14)
|
Incorporated
by reference to exhibit 10.2 in the registrant’s Current Report on Form
8-K filed on September 23, 2009.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
SPICY PICKLE FRANCHISING,
INC.
|
|
|
|
|
|
|
|
November
16, 2009
|
By:
|
/s/
Marc Geman
|
|
|
|
|
Marc
Geman
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
November
16, 2009
|
By:
|
/s/
Arnold Tinter
|
|
|
|
|
Arnold
Tinter
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
EXHIBIT
INDEX
|
Regulation
S-K
Number
|
Exhibit
|
|
2.1
|
Asset
Purchase Agreement between SPBG Franchising, Inc. and Bread Garden
Franchising, Inc. dated September 30, 2008 (1)
|
|
3.1
|
Amended
and Restated Articles of Incorporation (2)
|
|
3.2
|
Bylaws
(3)
|
|
4.1
|
Certificate
of Designation of Series A Variable Rate Convertible Preferred Stock
(4)
|
|
4.2
|
Form
of warrant to be issued to Midtown Partners & Co, LLC and assigns
(5)
|
|
4.3
|
Form
of warrant to be issued to private placement investors
(6)
|
|
10.1
|
Employment
Agreement – Marc Geman (3)
|
|
10.2
|
Employment
Agreement – Anthony Walker (3)
|
|
10.3
|
Employment
Agreement – Kevin Morrison (3)
|
|
10.4
|
2006
Stock Option Plan (3)
|
|
10.5
|
Promissory
Note to Spicy Pickle, LLC (3)
|
|
10.6
|
Securities
Purchase Agreement dated as of December 14, 2007 (7)
|
|
10.7
|
Form
of Warrant (8)
|
|
10.8
|
Registration
Rights Agreement dated as of December 14, 2007 (9)
|
|
10.9
|
Lock-Up
Agreement of Marc Geman (10)
|
|
10.10
|
Form
of Lock-Up Agreement executed by other officers and directors
(11)
|
|
10.11
|
Amendment
No. 1 to Securities Purchase Agreement dated as of May 22, 2008
(12)
|
|
10.12
|
Amendment,
Redemption and Conversion Agreement (13)
|
|
10.13
|
Agreement
with Midtown Partners & Co, LLC and assigns (14)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(15)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(15)
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer (15)
|
|
32.2
|
Section
1350 Certification of Chief Financial Officer
(15)
|
|
(1)
|
Incorporated
by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K
filed on October 2, 2008.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to Amendment No. 1 to the
registrant’s registration statement on Form SB-2 filed on December 12,
2006.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
registration statement on Form SB-2 filed on October 26,
2006.
|
|
(4)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s Current
Report on Form 8-K filed on December 19,
2007
|
|
(5)
|
Incorporated
by reference to exhibit 4.1 in the registrant’s Current Report on Form 8-K
filed on September 23, 2009.
|
|
(6)
|
Incorporated
by reference to exhibit 4.2 in the registrant’s Current Report on Form 8-K
filed on September 23, 2009.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.2 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(9)
|
Incorporated
by reference to Exhibit 10.3 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.4 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(11)
|
Incorporated
by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
Current Report on Form 8-K filed on December 27,
2007.
|
|
(12)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on May 23, 2008.
|
|
(13)
|
Incorporated
by reference to exhibit 10.1 in the registrant’s Current Report on Form
8-K filed on September 23, 2009.
|
|
(14)
|
Incorporated
by reference to exhibit 10.2 in the registrant’s Current Report on Form
8-K filed on September 23, 2009.
|
35