Unassociated Document
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-142220
Prospectus
Supplement No. 2 dated August 15, 2007
(To
Prospectus dated May 3, 2007 and filed on May 4, 2007 - File No.
333-142220)
ORGANIC
TO GO FOOD
CORPORATION
(formerly
known as SP Holding Corporation)
PROSPECTUS
14,301,918
shares of Common Stock
This
Prospectus Supplement No. 2 (the “Prospectus Supplement”) supplements our
prospectus dated May 3, 2007, as previously supplemented by the prospectus
supplement dated May 17, 2007 (the “Prospectus”). This Prospectus Supplement and
the Prospectus are required to be delivered by certain holders of the
above-referenced shares or by their transferees, pledges, donees or their
successors in connection with the offer and sale of the above-referenced
shares.
This
Prospectus Supplement includes financial information for the period ended
June
30, 2007.
The
information contained herein, including the information attached hereto,
supplements and supercedes, in part, the information contained in the
Prospectus. This Prospectus Supplement should be read in conjunction with
the
Prospectus, and is qualified by reference to the Prospectus except to the
extent
that the information in this Prospectus Supplement supercedes the information
contained in the Prospectus.
INDEX
TO FILINGS
|
|
|
Annex
|
|
|
|
|
|
|
Financial
Information for the period
ended June 30, 2007 |
|
|
A
|
|
ANNEX
A
Item 1.
|
Financial
Statements
|
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Condensed
Consolidated Balance Sheets
(in
thousands, except share amounts)
|
|
December
31
|
|
June
30
|
|
|
|
audited
|
|
unaudited
|
|
|
|
2006
|
|
2007
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
865
|
|
$
|
6,410
|
|
Accounts
receivable, net
|
|
|
365
|
|
|
674
|
|
Inventory
|
|
|
236
|
|
|
322
|
|
Prepaid
expenses and other current assets
|
|
|
189
|
|
|
418
|
|
Total
current assets
|
|
|
1,655
|
|
|
7,824
|
|
Property
and equipment, net
|
|
|
2,148
|
|
|
3,256
|
|
Identifiable
intangible assets, net
|
|
|
851
|
|
|
1,544
|
|
Goodwill
|
|
|
-
|
|
|
-
|
|
Deposits
and other assets
|
|
|
623
|
|
|
173
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
5,277
|
|
$
|
12,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,389
|
|
$
|
1,762
|
|
Accrued
liabilities
|
|
|
829
|
|
|
475
|
|
Current
portion of notes payable, net of discount
|
|
|
6,281
|
|
|
1,474
|
|
Current
portion of capital lease obligations
|
|
|
50
|
|
|
93
|
|
Total
current liabilities
|
|
|
8,549
|
|
|
3,804
|
|
Notes
payable, net of current portion
|
|
|
592
|
|
|
1,050
|
|
Capital
lease obligations, net of current portion
|
|
|
137
|
|
|
264
|
|
Total
liabilities
|
|
|
9,278
|
|
|
5,118
|
|
Stockholders'
equity (deficit)
|
|
|
|
|
|
|
|
Preferred
Stock; $0.001 par value; 9,670,000 and 10,000,000 shares
|
|
|
8
|
|
|
-
|
|
authorized,
9,670,000 and no shares issued and outstanding
|
|
|
|
|
|
|
|
Common
stock and additional paid-in capital; $0.001 par value;
|
|
|
|
|
|
|
|
15,100,000
and 500,000,000 shares authorized; 3,454,910 and
|
|
|
|
|
|
|
|
24,208,676
Exchange Ratio adjusted shares issued and outstanding
|
|
|
10,414
|
|
|
27,222
|
|
Accumulated
deficit
|
|
|
(14,423
|
)
|
|
(19,543
|
)
|
Total
stockholders' equity (deficit)
|
|
|
(4,001
|
)
|
|
7,679
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
5,277
|
|
$
|
12,797
|
|
See
accompanying notes to condensed consolidated financial statements.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Condensed
Consolidated Statements of Operations
(in
thousands, except share amounts)
|
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
|
|
unaudited
|
|
unaudited
|
|
unaudited
|
|
unaudited
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,347
|
|
$
|
3,854
|
|
$
|
4,457
|
|
$
|
7,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,155
|
|
|
1,799
|
|
|
2,218
|
|
|
3,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
1,192
|
|
|
2,055
|
|
|
2,239
|
|
|
3,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,244
|
|
|
3,915
|
|
|
4,305
|
|
|
7,384
|
|
Depreciation
and amortization
|
|
|
170
|
|
|
704
|
|
|
340
|
|
|
1,138
|
|
Loss
from operations
|
|
|
(1,222
|
)
|
|
(2,564
|
)
|
|
(2,406
|
)
|
|
(4,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(54
|
)
|
|
(68
|
)
|
|
(15
|
)
|
|
(415
|
)
|
Other
income (expense), net
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
(14
|
)
|
Loss
before income taxes
|
|
|
(1,276
|
)
|
|
(2,646
|
)
|
|
(2,421
|
)
|
|
(5,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,276
|
)
|
$
|
(2,646
|
)
|
$
|
(2,421
|
)
|
$
|
(5,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.45
|
)
|
$
|
(0.13
|
)
|
$
|
(0.84
|
)
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
2,852
|
|
|
20,683
|
|
|
2,869
|
|
|
15,788
|
|
See
accompanying notes to condensed consolidated financial
statements.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Condensed
Consolidated Statement of Stockholders' Equity (Deficit)
(unaudited)
(in
thousands, except share amounts)
|
|
|
|
|
|
|
|
Total
|
|
|
|
Series
A, B & C
Preferred
Stock
|
|
Common
Stock and
Additional
Paid-in Capital
|
|
Accumulated
Equity
|
|
Stockholders'
Equity
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
(Deficit)
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
5,652,836
|
|
$
|
8
|
|
|
2,898,904
|
|
$
|
10,414
|
|
$
|
(14,423
|
)
|
$
|
(4,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock
|
|
|
(5,652,836
|
)
|
|
(8
|
)
|
|
5,734,769
|
|
|
8
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of bridge notes into common stock
|
|
|
|
|
|
|
|
|
4,629,340
|
|
|
4,225
|
|
|
|
|
|
4,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SP
Holding Corporation shares outstanding at merger
|
|
|
|
|
|
|
|
|
1,126,659
|
|
|
(15
|
)
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares and warrants for cash
|
|
|
|
|
|
|
|
|
8,872,992
|
|
|
13,428
|
|
|
|
|
|
13,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issue costs
|
|
|
|
|
|
|
|
|
|
|
|
(1,406
|
)
|
|
|
|
|
(1,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercised
|
|
|
|
|
|
|
|
|
546,012
|
|
|
|
|
|
|
|
|
|
|
Stock
issued in connection with acquisition of assets
|
|
|
|
|
|
|
|
|
400,000
|
|
|
472
|
|
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,120
|
)
|
|
(5,120
|
)
|
Balance
at June 30, 2007
|
|
|
-
|
|
$
|
-
|
|
|
24,208,676
|
|
$
|
27,222
|
|
$
|
(19,543
|
)
|
$
|
7,679
|
|
See
accompanying notes to condensed consolidated financial
statements.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Condensed
Consolidated Statements of Cash Flows
(unaudited)
(in
thousands)
|
|
Six
months ended
June
30
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,421
|
)
|
$ |
(5,120
|
)
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
cash
used by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
340
|
|
|
1,138
|
|
Amortization
of debt issue costs and debt
|
|
|
|
|
|
|
|
discount
included in interest expense
|
|
|
62
|
|
|
232
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(136
|
)
|
|
(309
|
)
|
Inventory
|
|
|
(212
|
)
|
|
(53
|
)
|
Prepaid
expenses and other current assets
|
|
|
(84
|
)
|
|
(230
|
)
|
Accounts
payable
|
|
|
46
|
|
|
45
|
|
Accrued
liabilities
|
|
|
84
|
|
|
(354
|
)
|
Other
|
|
|
(115
|
)
|
|
(26
|
)
|
Net
cash used by operating activities
|
|
|
(2,436
|
)
|
|
(4,677
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, equipment and other assets
|
|
|
(63
|
)
|
|
(1,030
|
)
|
Purchase
of intangible assets
|
|
|
-
|
|
|
(837
|
)
|
Net
cash used by investing activities
|
|
|
(64
|
)
|
|
(1,867
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Principal
payments of notes payable
|
|
|
(64
|
)
|
|
(397
|
)
|
Payments
of capital lease obligations
|
|
|
(12
|
)
|
|
(38
|
)
|
Proceeds
from issuance of notes payable, net
|
|
|
-
|
|
|
500
|
|
Proceeds
from sale of preferred stock, net of issue costs
|
|
|
2,633
|
|
|
-
|
|
Redemption
of common stock
|
|
|
(1
|
)
|
|
12,025
|
|
Proceeds
from sale of common stock, net of issue costs
|
|
|
-
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,556
|
|
|
12,090
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
57
|
|
|
5,545
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
250
|
|
|
865
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
307
|
|
$ |
6,410
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
100
|
|
$ |
340
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
-
|
|
$ |
-
|
|
Non-cash
investing and financing activities:
|
|
Equipment
purchased through acquisition
|
|
Capital
leases
|
|
Assets
purchased through issuance of common stock
|
|
Conversion
of debt into common stock
|
|
Conversion
of preferred stock into common stock
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
2007
|
|
$
|
160,000
|
|
$
|
227,000
|
|
$
|
400,000
|
|
$
|
4,600,000
|
|
$
|
5,700,000
|
|
See
accompanying notes to condensed consolidated financial statements.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
Note
1. Description of Business and Summary of Significant Accounting
Policies
Organization
and business
- SP
Holding Corporation (“SP”) and its wholly-owned subsidiary Organic To Go, Inc.
(“Organic”), which was acquired in a reverse merger on February 12, 2007,
provides convenient retail cafes and delivery and catering facilities, which
prepare and serve “grab and go” lunch, dinner, and breakfast foods and beverages
prepared using organic ingredients, whenever possible. The company also
distributes its products through select wholesale accounts. In October 2006,
Organic expanded its catering operations in the California area by acquiring
the
assets of a catering operation headquartered in Los Angeles, California, and
in
March 2007, it expanded its catering operations by acquiring the assets of
a
catering operation located in Seattle, Washington. In May 2007, SP changed
its
name to Organic To Go Food Corporation (“the Company”). At June 30, 2007, the
Company operates five stores in Washington and eight stores in
California.
Reverse
merger with public shell company in February 2007
-
Pursuant to the terms of an Agreement and Plan of Merger and Reorganization
by
and among Organic and SP, on February 12, 2007, all of the outstanding shares
of
Organic common and preferred stock were exchanged for shares of SP common stock
as determined by multiplying each such outstanding share of Organic stock by
the
exchange ratio of 0.69781 (the “Exchange Ratio”). In connection with the merger,
Organic convertible promissory bridge notes approximating $5.3 million
automatically converted into SP common stock. As a result, among other things,
Organic became a wholly-owned subsidiary of SP. Outstanding Organic options,
warrants and purchase rights were converted into options, warrants and purchase
rights to purchase of shares of SP common stock in accordance with the Exchange
Ratio. The closing of the merger was conditioned upon SP closing a private
placement offering of a minimum of eighty units (the “Units”) at a purchase
price of $50,000 per Unit for $4 million. Each Unit consists of (i) 40,000
shares of SP common stock and (ii) a warrant to purchase 8,000 shares of SP
common stock at an exercise price of $2.50 per share, exercisable for a period
of five years from the date of issuance. Consummation of the merger occurred
concurrently with completion of a private placement of 138 Units, for an
aggregate of approximately $6.9 million. Prior to the merger, SP was a
non-operating “public shell” company. The merged company operates under the name
of Organic To Go, Inc.
From
an
accounting perspective, the merger transaction is considered a recapitalization
of Organic accompanied by the issuance of stock by Organic for the assets and
liabilities of SP, as a result of SP not having operations immediately prior
to
the merger, and following the merger, SP becoming an operating company. After
the merger and private placement, former SP stockholders own approximately
5% of
the common stock of the merged company, former Organic stockholders and
convertible bridge note holders own approximately 70% of the merged company,
and
new investors owns approximately 25% of the merged company. The board of
directors and executive officers are comprised of Organic directors and
executive officers. In these circumstances, the merger transaction is accounted
for as a capital transaction rather than as a business combination, in that
the
transaction is equivalent to the issuance of stock by Organic for the assets
and
liabilities of SP, accompanied by a recapitalization. The accounting is
identical to that resulting from a reverse acquisition, except that no goodwill
or other intangible is recorded. All share and per share information presented
and disclosed in these financial statements have been Exchange Ratio adjusted.
Basis
of presentation and going concern
- The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the
Company as a going concern. Since inception, the Company has reported recurring
losses and cash used by operating activities that could raise doubt about its
ability to continue as a going concern. Since inception, the Company has
funded its operations and business development and growth through debt and
equity financings. In this regard, during 2006 the Company raised approximately
$8.1 million pursuant to sales
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
of
debt
and equity securities in connection with its private placement and subordinated
debt offerings. Further, during the three months ended March 31, 2007, proceeds
of approximately $6.9 million were received
from the sale of equity securities in connection with the merger and private
placement, and approximately $5.3 million of notes payable have been converted
into common shares. Additionally, during the three months ended June 30,
2007, proceeds of approximately $7.2 million have been received from the sales
of debt and equity securities. While the Company plans to become profitable
during the second half of 2007 management intends to continue to be engaged
in
additional fund-raising activities to fund future capital expenditures,
potential acquisitions of businesses, and provide additional working
capital. The Company anticipates having sufficient working capital in
place for the next 12 months to continue operations. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that could result should the Company not continue
as a going concern.
Use
of
estimates in the preparation of financial statements
-
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. The more significant accounting estimates
inherent in the preparation of the Company's financial statements include
estimates as to the depreciable lives of property and equipment, valuation
of
inventories, recoverability of long-lived assets, valuation of intangible assets
and allocation of purchase price, valuation of equity related instruments
issued, and valuation allowance for deferred income tax
assets.
Interim
financial statements
- The
unaudited interim condensed consolidated financial statements and related notes
are presented in accordance with the rules and regulations of the Securities
and
Exchange Commission with regard to interim financial information. Accordingly,
the condensed consolidated financial statements do not include all of the
information and notes to financial statements required by accounting principles
generally accepted in the United States for complete financial statements.
In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation of the Company’s
financial position, results of operations and cash flows for the interim periods
presented have been included. Results of operations for the three months and
six
months ended June 30, 2007 are not necessarily indicative of the results to
be
expected for the entire fiscal year ending December 31, 2007 or for any other
future interim period. The accompanying unaudited interim condensed consolidated
financial statements should be read in conjunction with the audited annual
financial statements included in the Company’s December 31, 2006 Annual Report
on Form 10-KSB.
Contingencies
-
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the Company, but which will only be resolved
when
one or more future events occur or fail to occur. Company management and its
legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims
that
may result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought
therein. If the assessment of a contingency indicates that it is probable that
a
liability has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company's financial
statements. If the assessment indicates that a potentially material loss
contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together
with
an estimate of the range of possible loss if determinable would be
disclosed.
Concentrations
- All
of
the Company’s operations are currently located in Washington and California, and
as a result, is sensitive to negative occurrences in markets where the Company
is located, and particularly
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
susceptible
to adverse trends and economic conditions including labor markets. In
addition, given geographic concentration, negative publicity regarding any
of
our operations in Washington or California could
have a material adverse effect on the Company’s business and operations, as
could other regional occurrences such as local strikes, earthquakes or other
natural disasters.
Accounts
receivable
- The
Company extends credit to some of its customers. Accounts receivable are
customer obligations due under normal trade terms. The Company performs
continuing credit evaluations of its customers’ financial condition. Management
reviews accounts receivable on a regular basis on contracted terms and how
recently payments have been received in order to determine estimates of amounts
that could potentially be uncollectible. The Company includes an estimate of
the
amount that is more likely that not to be uncollectible in its allowance for
doubtful accounts. Accounts uncollected are ultimately written off after all
reasonable collection efforts have occurred.
Inventory
-
Inventory, which consists primarily of food, beverages and packaging products,
is stated at the lower of cost or market. Cost is determined by the first-in,
first-out method. In assessing the ultimate realization of inventories, Company
management makes judgments as to future demand requirements compared to current
inventory levels.
Identifiable
intangible assets
- In
connection with the acquisition in October 2006 of certain assets of a catering
business, the Company acquired certain identifiable intangible assets including
customer-based intangibles and a covenant not to compete received from the
sellers. This acquisition has been accounted for in accordance with Statement
of
Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No.
141”). Amounts allocated to intangible assets were identified by management and
have been valued on a number of factors based upon preliminary estimates. The
estimate of useful lives of each intangible asset was based on an analysis
by
management of all pertinent factors, and selected an estimated useful life
of
two years for each identifiable intangible asset. Customer based intangible
assets are amortized utilizing an accelerated method and non-compete intangible
assets are amortized on a straight-line basis. At June 30, 2007, identifiable
intangible assets were comprised of customer based of approximately $2.27
million, less accumulated amortization of $878,000, and non-compete of
approximately $150,000, less accumulated amortization of approximately $50,000.
Amortization expense for these intangible assets will approximate $1.59 million
in 2007 and $663,000 in 2008.
Goodwill -
In March 2007, the Company acquired certain assets of a catering business,
which
has been accounted for in accordance with SFAS No. 141, and in connection
therewith the Company has preliminarily recorded the excess of purchase price
over the fair value of identifiable assets acquired as goodwill. Statement
of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,”
(“SFAS No. 142”) provides that goodwill should not be amortized, but should
rather be reviewed at least annually to assess recoverability. This statement
requires that goodwill and long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net discounted cash
flows expected to be generated by the asset or other valuation methods. If
such
assets are considered to be impaired, impairment to be recognized is measured
by
the amount by which the carrying amount of the assets exceeds the asset’s fair
value.
In
accordance with SFAS No. 142, the Company will test goodwill for impairment
at
on an annual basis. SFAS No. 142 requires a two-step goodwill impairment test
whereby the first step, used to identify potential impairment, compares the
fair
value of a reporting unit with its carrying amount including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill is
considered not impaired, thus the second step of the goodwill impairment test
used to quantify impairment is unnecessary.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
Company
management has estimated that the fair values of the Company’s reporting units
to which goodwill has been allocated exceed their carrying amounts.
Deferred
debt issue costs
- The
Company capitalizes costs incurred in connection with borrowings. These costs
are amortized as an adjustment to interest expense over the life of the
borrowing.
Debt
discount
- The
Company records the fair value of warrants issued with debt securities as a
debt
discount, which is amortized as an adjustment to interest expense over the
life
of the borrowing.
Revenue
recognition
-
Revenues are recognized at the point of sale at retail locations or upon
delivery of the product for delivery and wholesale transactions.
Cost
of sales
- Cost
of sales includes the cost of food and paper products.
Income
taxes
- The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes,” which requires recognition of deferred tax assets and
liabilities for expected future tax consequences of events that have been
included in financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory
tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to amounts expected to be realized. The Company continues
to
provide a full valuation allowance to reduce its net deferred tax asset to
zero,
inasmuch as Company management has not determined that realization of deferred
tax assets is more likely than not. The provision for income taxes represents
the tax payable for the period and change during the period in net deferred
tax
assets and liabilities.
Stock-based
compensation
- Prior
to January 1, 2006, the Company accounted for employee stock option grants
in
accordance with APB No. 25, and adopted the disclosure-only provisions of SFAS
No. 123, “Accounting for Stock-Based Compensation,” amended by SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure.” In
December 2004, the FASB released a revision to SFAS No. 123, “Accounting for
Stock-Based Compensation” (“FAS 123R”). FAS 123R sets forth the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions using APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and generally requires instead that such transactions be accounted
for using a fair-value-based method, which requires recording an expense over
the requisite service period for the fair value of all options or warrants
granted to employees and consultants. The Company adopted FAS 123R effective
beginning January 1, 2006 using the modified prospective method.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Task Force Issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or Services.” Compensation
expense related to equity instruments issued to non-employees is recognized
as
the equity instruments vest.
Basic
and diluted net loss per share
- Basic
net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per common share is determined using the weighted-average number of
common shares outstanding during the period, adjusted for the dilutive effect
of
common stock equivalents, consisting of shares that might be
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
issued
upon exercise of common stock options, warrants or convertible promissory notes,
or conversion of preferred stock shares. In periods where losses are reported,
the weighted-average number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive. In connection
with
the merger with SP in February 2007, all shares of Organic preferred stock
automatically converted into an equal number of Organic common shares and all
Organic common shares automatically converted into SP common shares at the
Exchange Ratio adjusted number of shares equal to .69781 SP common shares for
every 1 Organic common share. All share and per share amounts have been Exchange
Ratio adjusted. Computations of net loss per share for the three months ended
June 30, 2007, exclude approximately 5,819,045 shares issuable upon exercise
of
outstanding and issuable warrants and approximately 2,814,554 shares of common
stock issuable upon exercise of outstanding stock options. These common stock
equivalents could have the effect of decreasing diluted net income per share
in
future periods.
For
purposes of determining the weighted average number of common shares outstanding
historical Organic shares outstanding have been multiplied by the Exchange
Ratio, which results in a fewer number of shares outstanding that historical
amounts.
Recent
accounting pronouncements
- In
July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN No. 48”),
which prescribes a recognition threshold and measurement process for recording
in the financial statements uncertain tax positions taken or expected to be
taken in a tax return. Additionally, FIN No. 48 provides guidance on
the recognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of
FIN No. 48 was effective for the Company beginning January 1,
2007, the adoption of which will not have a significant effect on its results
of
operations or financial position.
In
December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2 “Accounting
for Registration Payment Arrangements” (“FSP EITF 00-19-2”), which addresses an
issuer’s accounting and disclosures relating to registration payment
arrangements. In connection with issuance of Units in the private placement
in
February 2007, the Company has registered the shares underlying the Units.
In
accordance with FSP EITF 00-19-2, the registration payment arrangements are
accounted for as an instrument separate and apart from the related securities
and will be accounted for in accordance with Statement of Financial Accounting
Standards No. 5 “Accounting for Contingencies,” accruing a liability if payment
is probable and the amount can be reasonably estimated.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
Note
2. Notes payable
Notes
payable consist of the following (in thousands):
|
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
Notes
payable, interest at 6% to 8%, collateralized by vehicles and
equipment
|
|
$
|
323
|
|
$
|
189
|
|
Convertible
promissory note, interest at 8.25%, due September 2007, collateralized
by
substantially all assets
|
|
|
759
|
|
|
759
|
|
Promissory
notes, interest at 7.75% per annum, due April 2010, collateralized
by
certain assets
|
|
|
418
|
|
|
418
|
|
Convertible
promissory notes, interest at 8% per annum, due June 2007
|
|
|
5,275
|
|
|
-
|
|
Convertible
promissory notes, interest at 8% per annum, due June 2008
|
|
|
525
|
|
|
525
|
|
Promissory
note payable, interest at prime plus 1% per annum, due March
2009
|
|
|
-
|
|
|
133
|
|
Promissory
note payable, interest at 9% per annum, due December 2006
|
|
|
275
|
|
|
-
|
|
Promissory
note payable, interest at 8% per annum, due October 2010
|
|
|
|
|
|
68
|
|
Promissory
note payable, interest at 18% per annum, due May 2008
|
|
|
|
|
|
500
|
|
Total
notes payable
|
|
|
7,575
|
|
|
2,592
|
|
Less:
unamortized original discount
|
|
|
(
702
|
)
|
|
(
68
|
)
|
Less:
current portion of notes payable
|
|
|
(6.281
|
)
|
|
(
1,474
|
)
|
Notes
payable, net of current portion
|
|
$
|
592
|
|
$
|
1,050
|
|
The
Company has a borrowing agreement with a vendor providing for borrowings up
to
$500,000, potentially increasing up to $1 million based on the occurrence of
new
location openings, which borrowing amount was limited pursuant to terms of
the
agreement to amounts borrowed as of March 31, 2006, which was approximately
$759,000. The note payable requires monthly payments of interest at the prime
rate plus 1% (9.25% at December 31, 2006, March 31, 2007 and June 30, 2007),
with the principal due in September 2007, and is convertible at the note
holder’s option into shares of the Company’s common stock at an Exchange Ratio
adjusted conversion price of approximately $1.68 per share. If the note is
not
converted in full on or before the maturity date, the then outstanding principal
balance and accrued interest shall automatically convert into a term note,
which
shall provide for thirty-six equal monthly payments and a final maturity date
in
September 2010. The note is collateralized by a pledge of Company
assets.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
In
connection with an asset purchase agreement in 2005, the Company issued
promissory notes of approximately $600,000, which bear interest at 7.75% per
annum payable quarterly, with principal due in April 2010, and are
collateralized by a security interest in the acquired assets. In April 2006,
pursuant to a repurchase agreement, the Company repurchased two of the notes
having a total face value of approximately $182,000 for $130,000 cash and
recorded the resultant gain on extinguishment of debt in other
income.
During
2006, the Company received approximately $4.3 million through the issuance
of
approximately $3.8 million of convertible promissory notes bearing interest
at
8% due June 2007 (the “Bridge Notes”) and $525,000 of convertible promissory
notes bearing interest at 8% due June 2008 (the “2 year Bridge Notes”) and
warrants to purchase shares of Company common stock (together with the notes,
the “Bridge Securities”). The estimated fair value of the warrants of
approximately $768,000 was recorded as an original issue discount to be
amortized to interest expense on a straight-line basis over the 7-month term
of
the notes. Additionally, in 2006, the Company received approximately $1.6
million through the issuance convertible promissory notes bearing interest
at
24%, approximately $1.5 million of which were converted at the holders’ option
into bridge notes and the remaining notes were repaid. Warrants were issued
in
connection with the short-term loans, the fair value of which was expensed
over
the debt term prior to conversion. Bridge Notes of approximately $5.8 million
were convertible at the note holders’ option, or in certain circumstances
automatically, into shares of the Company’s common stock at an Exchange Ratio
adjusted conversion price of approximately $1.68 per share. In February 2007,
in
connection with the closing of the merger with SP, the Bridge Notes of
approximately $5.3 million were automatically converted into common stock.
Portion of the bridge known as “Satellite Note” of $525,000 was not
converted.
During
2006, the Company borrowed $275,000 from one of the Company’s equity and bridge
note investors pursuant to a promissory note payable of $275,000, bearing
interest at 9% per annum, which was outstanding and due at December 31, 2006,
and which was repaid in full during the three months ended March 31, 2007.
During
2007, the Company borrowed $500,000 from three of the Company’s equity and
bridge note investors pursuant to a promissory note payable of $500,000, bearing
interest at 18% per annum, all of which are due on May 15, 2008. As part of
purchase agreements with Jackrabbits Inc. and Leonard Rosenaur, the Company
issued promissory notes of $150,000 and $75,000, bearing interests at 9.25%
and
8% per annum, and due on March 11, 2009 and October 10, 2010 respectively.
Future
minimum principal payments on notes payable at June 30, 2007 are as follows
(in
thousands):
2008
|
|
$
|
1,482
|
|
2009
|
|
|
678
|
|
2010
|
|
|
12
|
|
2011
|
|
|
420
|
|
|
|
$
|
2,592
|
|
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
Note
3. Reverse Merger with Public Shell Company, Private Placement and Stockholders’
Equity
Reverse
merger
- On
February 12, 2007, pursuant to an Agreement and Plan of Merger and
Reorganization by and among Organic and SP, Organic became a wholly owned
operating subsidiary of SP. Those persons holding shares of Organic capital
stock, warrants and options to purchase shares of Organic capital stock, and
certain promissory notes convertible into shares of Organic capital stock,
received shares of SP common stock, $.001 par value per share and warrants
and
options to purchase shares of SP common stock.
Under
the
terms of the merger, each share of Organic common stock and Organic preferred
stock (which included certain issued and outstanding convertible promissory
notes on an “as converted” basis) outstanding immediately prior to the closing
of the merger was converted into the right to receive 0.69781 shares of SP
common stock. Under the terms of the merger, each then convertible promissory
note whose holder had not previously elected to convert to Organic common stock,
became convertible for shares of SP common stock, provided that (i) the face
value of each such convertible note remained unchanged, (ii) each such
convertible note became convertible for such number of shares of SP common
stock
as was determined by multiplying the number of Organic shares underlying said
convertible note by the Exchange Ratio, with the resulting product rounded
down
to the nearest whole number of shares, and (ii) the per share conversion price
for each convertible note determined by dividing the conversion price per share
for said convertible note by the Exchange Ratio, with the resulting quotient
rounded down to the nearest whole cent.
Under
the
terms of the merger, each then outstanding option and warrant to purchase shares
of Organic common stock, whether or not exercisable, was converted into an
option or warrant to purchase shares of SP common stock upon the same terms
and
conditions as the corresponding Organic options and warrants, provided that
(i)
each such Organic option and warrant related to such number of shares of SP
common stock as was determined by multiplying the number of shares of Organic
common stock underlying such Organic option or warrant by the Exchange Ratio,
with the resulting product rounded down to the nearest whole number of shares,
and (ii) the per share exercise price for the newly-issued SP options or
warrants was determined by dividing the exercise price per share of such Organic
options or warrants by the Exchange Ratio, with the resulting quotient rounded
down to the nearest whole cent.
Private
placement
-
Consummation of the merger occurred concurrently with the completion of a
private placement of 138 Units for an aggregate of approximately $6.9 million,
issued by SP. Each Unit is comprised of (i) 40,000 shares of SP common stock,
and (ii) a detachable five-year warrant to purchase 8,000 shares of SP common
stock, at an exercise price of $2.50 per share (the “SP Warrants”). The purchase
price per Unit was $50,000. Pursuant thereto the Company issued to the investors
an aggregate of 5,522,992 shares of SP common stock and SP Warrants to purchase
1,104,598 shares of Company common stock.
Organic
engaged Burnham Hill Partners, a division of Pali Capital, Inc., as the
Placement Agent (the “Placement Agent”) in connection with the Private
Placement. Pursuant to the terms of the engagement with the Placement Agent,
the
Placement Agent, or its registered assignees or designees, received a cash
commission of 10% of the gross proceeds from the Units sold in the Private
Placement. In addition, the Company issued to the Placement Agent or its
registered assignees or designees, SP Warrants (the “Placement Agent Warrants”)
to purchase up to 888,899 shares of SP common stock.
The
Placement Agent Warrants are exercisable at any time at a price equal to 110%
of
the price paid by the investors in the private placement, on a net-issuance
or
cashless basis. The Placement Agent Warrants have registration rights similar
to
the registration rights afforded to the holders of SP Warrants. The Placement
Agent Warrants are fully vested and have a term of five years.
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
The
issuance of SP common stock to the Organic stockholders and the investors is
intended to be exempt from registration under the Securities Act of 1933, as
amended (the “Securities Act”), pursuant to Section 4(2) thereof. As such, the
SP common stock received by the Organic stockholders pursuant to the merger
and
issued to the investors pursuant to the Private Placement may not be offered
or
sold in the United States unless they are registered under the Securities Act,
or an exemption from the registration requirements of the Securities Act is
available. In April 2007, the Company filed a registration statement covering
these securities with the Securities and Exchange Commission, which such
registration statement was declared effective in May 2007.
During
the three months ended June 30, 2007, the Company closed a private placement
with select accredited investors related to the sale and issuance of an
aggregate of 3,350,000 shares of common stock of the Company and warrants to
purchase an aggregate of 1,340,000 shares of common stock. The aggregate gross
proceeds raised by the Company was approximately $6.7 million. Each share was
sold to the investors at $2.00 per share. The warrants will expire five years
from the date of issue and may be exercised at $2.50 per share, subject to
adjustment in certain circumstances. In connection with the private placement,
the Company paid its placement agents an aggregate cash commission equal to
$84,000. In addition, the Company reimbursed the placement agents $40,000 for
costs and expenses incurred in connection with the private placement, and issued
to the placement agents five-year warrants to purchase an aggregate of 21,000
shares of common stock, at an exercise price of $2.50 per share, subject to
adjustment in certain circumstances. The
private placement was conducted pursuant to Section 4(2) of the Securities
Act ,
and Rule 506 promulgated thereunder.
Authorized
shares
- SP is
currently authorized under its Amended and Restated Certificate of Incorporation
to issue 500,000,000 shares of its common stock and 10,000,000 shares of its
preferred stock. Prior to closing of the merger and private placement, there
were 439,403 shares of SP common stock issued and outstanding and 60 shares
of
SP preferred stock issued and outstanding. At the closing of the merger and
private placement and after giving effect thereto, there were 19,595,671 shares
of SP common stock issued and outstanding and no shares of preferred stock
issued and outstanding (the 60 shares of SP preferred stock issued and
outstanding prior to the merger having automatically converted into 687,271
shares of SP common stock upon closing of the merger).
Warrants
- As of
March 31, 2007, in conjunction with various financing related agreements,
including issuances of debt and equity securities, the Company issued warrants
for a term of approximately 5 years to purchase shares of the Company’s common
stock at exercise prices ranging from $1.17 to $1.38 per share for approximately
4,165,000 shares and at $2.50 per share for approximately 1,105,000 shares.
As
of June 30, 2007, the Company issued warrants at exercise prices ranging from
$1.17 to $2.50 per share for approximately 1,371,000 shares and 822,270 shares
were redeemed .
Stock
options
- During
the three and six months ended June 30, 2006, the Company granted to certain
officers and directors no options and approximately 349,000 options,
respectively, to purchase Company common stock for a period of 10 years from
grant with an exercise price of $0.17 per share. During the three months ended
March 31, 2007, the Company granted to its Chief Executive Officer and certain
Company employees approximately 1.4 million options to purchase Company common
stock for a period of 10 years from grant with exercise prices of $1.38 for
1,246,674 shares and $3.60 per share for 150,000 shares. During the three months
ended June 30, 2007, the Company granted to certain officers approximately
776,000 options to purchase Company common stock for a period of 10 years from
grant with an exercise price of $2.23 per share. The Company determines the
fair
value of options granted using the Black-Scholes option-pricing model. The
determination of the fair value of stock-based awards on the date of grant
using
an option pricing model is affected by the stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables
include, among others, the expected life of the award, expected stock price
volatility over the term of the award and actual and projected
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
exercise
behaviors. Although the fair value of stock-based awards is determined in
accordance with SFAS 123R and SAB 107, the Black-Scholes option pricing model
requires the input of highly subjective assumptions, and other reasonable
assumptions could provide differing results. The weighted average fair value
of
stock options granted during the three months ended March 31, 2006 and 2007
was
approximately
$0.09
and
$0.50 per share, respectively, and the weighted average fair value of stock
options granted during the three months ended June 30, 2007 was approximately
$1.11 per share determined using the Black-Scholes option pricing model with
the
following assumptions: dividend yield of 0%; expected volatility of 50% (based
on the volatilities of common stock of comparable public companies); risk-free
interest rates of approximately 5%, and estimated lives of 5 years.
Compensation
expense recognized for stock options approximated $9,000 and $77,000 for the
three months ended June 30, 2006 and 2007, respectively, and $12,000 and $96,000
for the six months ended June 30, 2006
and
2007, respectively. As of June 30, 2007, there was approximately $1.4 million
of
unrecognized compensation cost related to unvested stock options granted, which
is expected to be recognized as expense over a period of approximately 3 years.
The intrinsic value of stock options outstanding and exercisable is based on
the
close/last price for the Company’s common stock as reported by OTCBB of $1.43
per share at December 31, 2006 and $2.24 June 30, 2007, and is calculated by
aggregating the difference between the close price and the exercise price of
vested and unvested stock options which have an exercise price less than the
close price. The following summarizes activity for stock options:
|
|
Outstanding
|
|
Weighted
average
exercise
price
|
|
Weighted
average remaining
contractual
life in years
|
|
Aggregate
intrinsic
value
(in
thousands)
|
|
Balance
at December 31, 2006
|
|
|
655,545
|
|
$
|
0.54
|
|
|
|
|
|
9.4
|
|
|
|
|
$
|
585
|
|
Granted
|
|
|
2,172,965
|
|
$
|
1.84
|
|
|
|
|
|
10.0
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/
Cancelled
|
|
|
(13,956
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2007
|
|
|
2,814,554
|
|
$
|
1.54
|
|
|
|
|
|
9.4
|
|
|
|
|
$
|
2,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2007
|
|
|
272,615
|
|
$
|
2.46
|
|
|
|
|
|
8.9
|
|
|
|
|
$
|
481
|
|
Additional
information regarding stock options outstanding as of June 30, 2007, is as
follows:
Exercise
prices
|
|
Shares
|
|
Weighted
average
remaining
life
|
$
0.17
|
|
349,254
|
|
8.7
years
|
0.34
|
|
118,628
|
|
9.0
years
|
1.38
|
|
1,246,674
|
|
9.6
years
|
1.43
|
|
173,707
|
|
9.3
years
|
2.23
|
|
776,291
|
|
9.8
years
|
3.60
|
|
150,000
|
|
9.7
years
|
Total
|
|
2,814,554
|
|
9.5
years
|
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
Note
4. Asset purchase agreements
In
October 2006, pursuant to terms of an asset purchase agreement, the Company
acquired for $1 million cash, among other things, all inventory, furniture,
fixtures, equipment, customer lists, leasehold improvements,
and owned vehicles used in connection with a catering business in California.
Other than the notes payable on the vehicles, no liabilities were assumed by
the
buyer. The buyer also entered in to a one year lease agreement for the building
owed by the seller. The total purchase price of approximately $1.1 million,
including related acquisition costs, was allocated to assets acquired based
on
relative
estimated
fair values, which resulted in the majority being allocated to customer based
identifiable intangible assets, and which is summarized as follows (in
thousands):
Inventory
|
|
$
|
12
|
|
Furniture,
fixtures and equipment
|
|
|
29
|
|
Customer
based intangible assets
|
|
|
860
|
|
Covenant
not to compete intangible asset
|
|
|
150
|
|
Note
payable
|
|
|
(9
|
)
|
|
|
$
|
1,042
|
|
In
March
2007, pursuant to terms of an asset purchase agreement, the Company acquired
for
cash of approximately $612,000, a $150,000 promissory note and 400,000 shares
of
its common stock, among other things, all inventory, furniture, fixtures,
equipment, leasehold improvements, customer lists and other intangible assets
used in connection with Jackrabbit, LLC, a Seattle-based catering business.
Other than a facilities lease and equipment lease, no liabilities were assumed
by the Company. The total purchase price approximates $1.2 million, and because
information known to exist as it pertains to estimates of fair values of
intangible assets, has been preliminarily allocated to assets acquired based
on
relative estimated fair values, which resulted in the majority being allocated
to customer based intangibles, and which is summarized as follows (in
thousands):
Inventory
|
|
$
|
32
|
|
Furniture,
fixtures, equipment and vehicles
|
|
|
160
|
|
Customer
based intangible assetsl
|
|
|
1,084
|
|
Liabilities
assumed
|
|
|
(42
|
)
|
|
|
$
|
1,234
|
|
Operating
results for the acquired businesses are included in the Company’s operating
results from the dates of acquisitions. The following supplemental pro forma
information has been presented on the basis as if the asset acquisitions of
the
catering businesses had occurred at the beginning of the periods presented
(in
thousands):
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Notes
to condensed consolidated financial statements
June
30, 2007
|
|
Six
months ended
June
30
|
|
|
|
2006
|
|
2007
|
|
Sales
|
|
$
|
6,365
|
|
$
|
7,831
|
|
Net
loss
|
|
$
|
(3,364
|
)
|
$
|
(5,120
|
)
|
Net
loss per share
|
|
$
|
(1.17
|
)
|
$
|
(0.32
|
)
|
Note
5. Commitments and contingencies
The
Company leases its cafes, central kitchens and office facilities under
non-cancelable operating leases, some with renewal options. Rents are fixed
base
amounts, some with escalating rents and some with contingent rentals based
on
sales. Lease provisions also require additional payments for maintenance and
other expenses. Rent is expensed on a straight-line basis over the term of
the
lease. The difference between amounts paid and expensed is recorded as a
deferred credit. The Company also leases certain point-of-sale computer hardware
and software pursuant to capital leases. Subsequent to December 31, 2006, the
Company has entered into two new leases, one for the former Jackrabbit, LLC
central kitchen facility in Seattle, which provides for minimum future lease
payments over its five year term of approximately $602,000, and the other for
a
new store lease in Seattle, which provides for minimum future lease payments
over its five year term of approximately $209,000. During the three months
ending June 30, 2007, the Company has entered into two new store leases in
Los
Angeles, which provides for minimum future lease payments over their five year
term of approximately $687,000 and one new store lease in Los Angeles, which
provides for minimum future lease payments over their six year term of
approximately $221,000. The Company has also entered into three leases for
delivery vehicles pursuant to capital leases, which provides for additional
minimum future lease payments over their four and five year terms of
approximately $221,000.
From
time
to time, the Company is subject to various legal proceedings and claims that
may
arise in the ordinary course of business. Further, in the past, certain vendors
have taken legal action against the Company as a result of untimely payment
of
invoices. In some cases, the courts have stipulated judgment requiring the
Company to pay interest and comply with payment schedules. Company management
currently believes that resolution of such legal matters will not have a
material adverse impact on the Company’s financial statements.
On
October 18, 2006, Susana Chi, a former employee of the Company, brought suit
against the Company in the Superior Court of the State of California for the
County of Los Angeles claiming discrimination, wrongful termination and
infliction of emotional distress in connection with the termination of Ms.
Chi’s
employment. The Company filed an answer to Ms. Chi’s complaint and, subsequently
caused the suit to be transferred to U.S.
Federal District Court. On June 15, 2007, the parties reached a settlement
agreement with respect to this matter, which was immaterial to the Company's
financial results.
Effective
January 1, 2007, the Company entered into an employment agreement with a
three-year term with its founder and Chief Executive Officer, pursuant to which,
the executive officer shall receive a base salary at an annual rate of $225,000,
subject to annual increases as determined by the Company’s Board of Directors,
is also eligible for cash bonuses, and other typical employment benefits. In
addition, effective upon the closing of the merger, the executive officer
received 1,246,674 options to purchase shares of SP Common Stock at an exercise
price of $1.38 per share, with a term of 10 years from grant. Options
granted vest 25% after 12 months of employment, with the remainder vesting
over
the next 36 months, subject to accelerated vesting in the event of a “Change in
Control,” as defined in the employment agreement, or in certain other
circumstances. Under certain departure circumstances, the executive officer
could be eligible to receive payments of one year’s salary and
benefits.
|
Management’s
Discussion and Analysis or Plan of Operation
|
The
following discussion and analysis of the results of operations and financial
condition should be read in conjunction with our financial statements and the
notes to those financial statements that are included elsewhere in this
Quarterly Report on Form 10-QSB. This discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as plans, objectives, expectations and intentions. Actual results and
the
timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors. Words such as
“anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions are used to
identify forward-looking statements.
Overview
Organization
and Business
Organic
Holding Company, Inc., d/b/a Organic To Go, whose name was changed to Organic
To
Go, Inc. effective February 27, 2007, is a wholly-owned subsidiary of Organic
To
Go Food Corporation and was incorporated in the state of Delaware in February
2004. We provide convenient cafés which prepare and serve “grab and go” lunch,
dinner, and breakfast foods and beverages prepared using organic ingredients,
whenever possible. We also distribute our products through delivery, catering
and select wholesale accounts. In October 2006, we expanded our catering
operations in the California area by acquiring the assets of a catering
operation headquartered in Los Angeles, California, and in March 2007, we
expanded our catering operations by acquiring the assets of a catering operation
located in Seattle, Washington. In February, 2007 we completed a reverse merger
with a public shell company named SP Holding Corporation. At June 30, 2007,
we
operated five stores in Washington and seven stores in California, with central
kitchens in each market.
Management
believes we have the opportunity to capture increasing market share in all
three
of our businesses: Delivery/Catering, Retail and Wholesale “grab & go”
convenience foods, by providing customers with delicious, healthy, wholesome
and
organic food choices. Management is focused in the near and long term on the
challenges and risks that we face in expanding our business. These include
our
ability to obtain retail, catering and wholesale locations, building a
sufficient infrastructure to support our expansion, and obtaining a customer
base and margin improvement sufficient to achieve and sustain
profitability.
Basis
of Presentation and Liquidity
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate our continuation
as
a going concern. We have reported recurring losses and cash used by operating
activities, and at June 30, 2007 had a net working capital deficiency and
stockholders’ deficit that could raise doubt about our ability to continue as a
going concern. Since our inception, we have funded operations and business
development and growth through debt and equity financings. In this regard,
during 2006, we raised approximately $8.1 million pursuant to sales of debt
and
equity securities in connection with our private placement and subordinated
debt
offerings. Further, during the three months ended March 31, 2007, proceeds
of
approximately $6.9 million were received from the sale of equity securities
in
connection with the merger and private placement, and approximately $5.3 million
of notes payable has been converted into shares of common stock. Further, during
the three months ended June 30, 2007, proceeds of approximately $6.7 million
were received from the sale of equity securities in a private placement and
proceeds of $500,000 were received from the issuance of notes payable. While
we
plan to produce cash from operations during the second half of 2007, our
management intends to continue to be engaged in additional fund-raising
activities to fund future capital expenditures, potential acquisitions of
businesses and provide additional working capital. We anticipate having
sufficient working capital in place for the next 12 months to continue
operations. The accompanying financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that could result
should we not continue as a going concern.
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported net sales and expenses during the reporting
periods. On an ongoing basis, estimates and assumptions are evaluated. Estimates
are based on historical experience and on various other factors believed
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. A summary of significant
accounting policies is presented in Note 1 to our financial statements included
elsewhere in this Quarterly Report on Form 10-QSB. The following accounting
policies are considered the more critical to aid in understanding and evaluating
our results of operations and financial condition.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting years. Actual results could differ from those estimates. The more
significant accounting estimates inherent in the preparation of our financial
statements include estimates as to the depreciable lives of property and
equipment, recoverability of long-lived assets, valuation of inventories,
valuation of equity related instruments issued, and valuation allowance for
deferred income tax assets.
Inventory
Inventory,
which consists primarily of food, beverages and packaging products, is stated
at
the lower of cost or market. Cost is determined on a first-in, first-out basis.
In assessing the ultimate realization of inventories, our management makes
judgments as to future demand requirements compared to current inventory
levels.
Impairment
of Long-lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
Impairment of long-lived assets would be recognized in the event that the net
book values of such assets exceed the future undiscounted cash flows
attributable to such assets. No impairment of long-lived assets was recognized
for any of the periods presented.
Intangible
Assets
In
connection with acquisitions in October 2006 and March 2007, of certain assets
of catering businesses, we acquired certain identifiable intangible assets
including customer-based intangibles . These acquisitions have been accounted
for in accordance with SFAS No. 141. Amounts allocated to intangible assets
were
identified by management and have been valued on a number of factors. The
estimate of useful lives of each intangible asset was based on an analysis
by
management of all pertinent factors, and selected an estimated useful life
of
two years for each identifiable intangible asset.
Revenue
Recognition
Revenues
are recognized at the point of sale at retail locations or upon delivery of
products for delivery and wholesale transactions.
Cost
of Sales
Cost
of
sales includes the cost of food, beverages and paper products.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes,” which requires recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been included in financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between
the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable
to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to amounts expected to be realized. We continue to provide a full
valuation allowance in order to reduce our net deferred tax asset to zero,
inasmuch as our management has not determined that realization of deferred
tax
assets is more likely than not. The provision for income taxes represents the
tax payable for the period and change during the period in net deferred tax
assets and liabilities.
Stock-based
Compensation
In
December 2004, the FASB released SFAS 123R. SFAS 123R sets forth the accounting
for share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise, or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions using APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and generally requires instead that such transactions be accounted
for using a fair-value-based method, which requires recording an expense over
the requisite service period for the fair value of all options or warrants
granted to employees and consultants. We adopted SFAS 123R effective beginning
January 1, 2006.
Results
of Operations
Three
months ended June 30, 2006 and 2007
Revenues
Sales
for
the three months ended June 30, 2007 increased approximately 69%, to $3.9
million, as compared with $ 2.3 million for the comparative prior year
period, and increased approximately 8% as compared to $3.6 million for the
immediately preceding three months ended March 31, 2007. On a pro forma basis,
giving effect to the acquisition of two catering businesses in October 2006
and
March 2007, sales for the three months ended June 30, 2007 increased
approximately 15% as compared to pro forma sales of approximately $3.3 million
for the three months ended June 30, 2006. Retail sales were $1.6 million during
the three months ended June 30, 2007, an increase of 14% over $1.4 million
during the comparative prior year period. Retail sales comprised 41% of total
sales in the 2007 period as compared with 59% in the comparative prior year
period. Delivery/Catering sales were $1.8 million during the three months ended
June 30, 2007, an increase of $ 1.1 million over the $.7 million for the
comparative prior year period. Delivery/Catering sales comprised 46% of total
sales in the 2007 period as compared with 31% for the comparative prior
year period Most of the increase was attributable to the acquisition of two
catering businesses, one in October 2006 and the other in March 2007. Wholesale
sales were $ 476,000 during the three months ended June 30, 2007, an increase
of
$249,000 over $ 227,000 during the comparative prior year period. Wholesale
sales comprised 12% of total sales in the 2007 period as compared with 10%
in 2006. The increases in retail and wholesale were due to increased business
volume. The increase in Delivery/Catering sales was primarily attributable
to
increased sales resulting from the acquisition of the businesses
of Vinaigrettes LLC and Jackrabbit, LLC.
Cost
of Sales
Cost
of
sales includes the cost of food and paper products. Cost of sales for the three
months ended June 30, 2007 increased approximately 50%, to $1.8 million, as
compared with $1.2 million for the comparative prior year period, and was
approximately the same as compared to $1.8 million for the immediately preceding
three months ended March 31, 2007. Cost of sales for the three months ended
June
30, 2007 approximated 48% as a percent of sales as compared with 49% during
the comparative prior year period and as compared to 51% for the immediately
preceding three months ended March 31, 2007.
Gross
Profit
Gross
profit increased approximately 75%, to $2.1 million for the three months ended
June 30, 2007 as compared with $1.2 million for the three months ended June
30,
2006, and increased 17% as compared with $1.8 million for the three months
ended March 31, 2007. Gross profit for the three months ended June 30, 2007
approximated 53% as a percent of sales as compared with 51% during the
comparative prior year period and as compared to 49% for the immediately
preceding three months ended March 31, 2007. On a pro forma basis, giving effect
to the acquisition of two catering businesses in October 2006 and March 2007,
gross profit for the three months ended June 30, 2007 increased approximately
15% as compared to pro forma gross profit of approximately $1.8 million for
the
three months ended June 30, 2006.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2007 increased approximately 77%,
to $3.9 million, as compared with $2.2 million for the three months ended
June 30, 2006, and increased 11% as compared with $3.5 million for the
three months ended March 31, 2007. Operating expenses are comprised primarily
of
labor, and, to a lesser extent, occupancy and utilities, and selling, general
and administrative expenses. Operating expenses increased during the three
months ended June 30, 2007, as compared with the three months ended June
30, 2006, primarily due to increased labor and related costs as a result of
continued growth since the prior year, including the acquisitions of two
catering businesses, and preparing for future growth. On a pro forma basis,
giving effect to the acquisition of two catering businesses in October 2006
and
March 2007, operating expenses for the three months ended June 30, 2007
increased approximately 40% as compared to pro forma operating expenses of
approximately $2.8 million for the three months ended June 30,
2006.
Depreciation
and Amortization
Depreciation
and amortization expense for the three months ended June 30, 2007 increased
to
$704,000, as compared with $170,000 for the three months ended June 30,
2006, due primarily to $508,000 amortization of identifiable intangible assets
acquired in the catering businesses acquisitions in October 2006, and March
2007, and to having more assets in service. Depreciation and amortization for
the three months ended June 30, 2007 approximated 18% as a percent of sales
as
compared with 7% during the comparative prior year period 2006.
Loss
from Operations
Loss
from
operations for the three months ended June 30, 2007, increased to approximately
$2.6 million as compared with $1.2 million for the three months ended June
30, 2006, and increased 23% as compared with $2.1 million for the three
months ended March 31, 2007. The increase in loss from operations over the
comparative period last year is the result of the increase in gross profit
of
$863,000 being offset by the $1.7 million increase in operating expenses and
a
$529,000 increase in depreciation and amortization.
Interest
Expense, Net
Interest
expense, net for the three months ended June 30, 2007, decreased from the prior
three months ended March 31, 2007 to approximately $81,000. The decrease was
primarily due to lower debt balances due primarily to the conversion to equity
of $5.3 million of debt in March 2007.
Net
Loss
Net
loss
for the three months ended June 30, 2007, increased to approximately $2.6
million as compared with $1.3 million for the three months ended June 30,
2006, and increased 4% as compared with $2.5 million for the three months
ended March 31, 2007.
Six
months ended June 30, 2006 and 2007
Revenues
Sales
for
the six months ended June 30, 2007 increased approximately 64%, to $7.4 million,
as compared with $ 4.5 million for the comparative prior year period.
On a pro forma basis, giving effect to the acquisition of two catering
businesses in October 2006 and March 2007, sales for the six months ended June
30, 2007 increased approximately 23% as compared to pro forma sales of
approximately $6.4 million for the six months ended June 30, 2006. Retail sales
were $3.2 million during the six months ended June 30, 2007, an increase of
14%
over $2.8 million during the comparative prior year period. Retail sales
comprised 43% of total sales in the 2007 period as compared with 62% in the
comparative prior year period. Delivery/Catering sales were $3.3 million during
the six months ended June 30, 2007, an increase of $2.0 million over the $1.3
million for the comparative prior year period. Delivery/Catering sales comprised
44% of total sales in the 2007 period as compared with 29% for the
comparative prior year period. Most of the increase was attributable to the
acquisition of two catering businesses, one in October 2006 and the other in
March 2007. Wholesale sales were $ 927,000 during the three months ended June
30, 2007, an increase of $ 497,000 over $ 430,000 during the comparative prior
year period. Wholesale sales comprised 12% of total sales in the 2007 period
as
compared with 10% in 2006. The increases in retail and wholesale were due
to increased business volume. The increase in Delivery/Catering sales was
primarily attributable to increased sales resulting from the acquisition of
the
businesses of Vinaigrettes LLC and Jackrabbit, LLC.
Cost
of Sales
Cost
of
sales includes the cost of food and paper products. Cost of sales for the six
months ended June 30, 2007 increased approximately 64%, to $3.6 million, as
compared with $2.2 million for the comparative prior year period. Cost of
sales for the six months ended June 30, 2007 approximated 49% as a percent
of
sales as compared with 50% during the comparative prior year period.
Gross
Profit
Gross
profit increased approximately 72%, to $3.8 million for the six months ended
June 30, 2007 as compared with $2.2 million for the six months ended June 30,
2006. Gross profit for the six months ended June 30, 2007 approximated 51%
as a
percent of sales as compared with 50% during the comparative prior year
period. On a pro forma basis, giving effect to the acquisition of two catering
businesses in October 2006 and March 2007, gross profit for the six months
ended
June 30, 2007 increased approximately 18% as compared to pro forma gross profit
of approximately $3.4 million for the six months ended June 30,
2006.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2007 increased approximately 72%,
to
$7.4 million, as compared with $4.3 million for the six months ended June
30, 2006. Operating expenses are comprised primarily of labor, and, to a lesser
extent, occupancy, utilities, and selling, general and administrative expenses.
Operating expenses increased during the six months ended June 30, 2007, as
compared with the six months ended June 30, 2006, primarily due to
increased labor and related costs as a result of continued growth since the
prior year, including the acquisition of two catering businesses, a store
closing accrual of $237,000 in March, 2007 and preparing for future growth.
On a
pro forma basis, giving effect to the acquisition of two catering businesses
in
October 2006 and March 2007, operating expenses for the six months ended June
30, 2007 increased approximately 40% as compared to pro forma operating expenses
of approximately $5.4 million for the six months ended June 30,
2006.
Depreciation
and Amortization
Depreciation
and amortization expense for the six months ended June 30, 2007 increased to
$1,138,000 as compared with $340,000 for the six months ended June 30,
2006, due primarily to amortization of identifiable intangible assets acquired
in the catering businesses acquisitions in October 2006, and March 2007, and
to
having more assets in service. Depreciation and amortization for the six months
ended June 30, 2007 approximated 15% as a percent of sales as compared with
8% during the comparative prior year period 2006.
Loss
from Operations
Loss
from
operations for the six months ended June 30, 2007, increased to approximately
$3.6 million as compared with $2.1 million for the six months ended June
30, 2006. The increase in loss from operations over the comparative period
last
year is the result of the increase in gross profit of $1.6 million being offset
by the $3.1 million increase in operating expenses.
Interest
Expense, Net
Interest
expense, net for the six months ended June 30, 2007, increased to $415,000
as
compared with $15,000 for the six months ended June 30, 2006. The increase
was
primarily due to the increase in debt from July, 2006 through March 2007 prior
to the $5.3 million of debt converted to equity in March, 2007.
Net
Loss
Net
loss
for the six months ended June 30, 2007, increased to approximately $5.1 million
as compared with $2.4 million for the six months ended June 30, 2006.
Liquidity
and Capital Resources
Since
our
inception, we have funded operations through financing activities consisting
primarily of private placements of debt and equity securities. Our management
intends to raise additional debt and equity financing to fund future expansion
and capital expenditures, operations and to provide additional working capital,
and in this regard, during 2006, we raised approximately $8.1 million pursuant
to sales of debt and equity securities in connection with our 2006 private
placement and subordinated debt offerings. Further, during the three months
ended March 31, 2007, we received aggregate proceeds of approximately $6.9
million from the sale of equity securities in connection with the merger and
private placement, and $5.3 million of notes payable have been converted into
shares of our common stock. Further, during the three months ended June 30,
2007, proceeds of approximately $6.7 million were received from the sale of
equity securities in a private placement and proceeds of $500,000 were received
from the issuance of debt in the form of notes payable.
While
we
continue to be engaged in additional fund-raising activities, we intend to
produce cash from operations during the second half of 2007. Management expects
to achieve increased sales and improved margins that will result in positive
cash from operations at some point in the second half of 2007. We anticipate
having sufficient working capital in place for the next 12 months to continue
operations due to increased cash flow from operations and our ability to raise
additional capital. There is no assurance that such increased sales and improved
margins will occur or that financing will be obtained in sufficient amounts
necessary to meet our needs. In light of these matters, continuation as a going
concern is dependent upon our ability to meet our operational goals, our
financing requirements, raise additional capital, and the success of our future
operations or completion of a successful business combination.
Net
cash
used by operating activities was approximately $4.7 million in the six
months ended June 30, 2007 and $2.4 million in the six months ended June
30, 2006. The $2.3 million increase in cash used by operating activities was
due
primarily to the increase in net loss as adjusted for depreciation and
amortization expense.
Net
cash
used in investing activities was approximately $1.9 million and $60,000 for
the six months ended June 30, 2007 and 2006, respectively. Uses of cash
flow for investing activities in 2007 primarily relate to the capital
expenditures associated with business expansion for the acquisition of store
and
kitchen fixtures, equipment and leasehold improvements.
Net
cash
provided by financing activities was approximately $12.1 million and $2.6
million for the six months ended June 30, 2007 and 2006, respectively. The
increase of net cash provided in 2007 was due to an increase in proceeds, net
of
issuance costs, from the issuance of common stock in March and June, 2007
private placements.
Item 3.
|
Controls
and Procedures
|
(a)
Evaluation
of Disclosure Controls and Procedures.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in the rules and regulations of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended)
as of
the end of the period covered by this report (the “Evaluation Date”). Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of
the
Evaluation Date.
(b)
Changes
in Internal Control Over Financial Reporting.
During
the fiscal quarter ended June 30, 2007, there were no changes to our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.