Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-142220
Prospectus
Supplement No. 2 dated August 15, 2008
(To
Prospectus dated May 14, 2008 and filed on May 14, 2008 - File No.
333-142220)
ORGANIC
TO GO FOOD
CORPORATION
PROSPECTUS
13,864,343 shares
of Common Stock
This
Prospectus Supplement No. 2 (the “Prospectus Supplement”) supplements our
prospectus dated May 14, 2008, as previously supplemented by the prospectus
supplement dated May 16, 2008 (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, 2008.
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, 2008
|
A
|
ANNEX
A
Unaudited
Condensed Consolidated Financial Statements
Organic
To Go Food Corporation and its wholly-owned subsidiary, Organic To Go,
Inc.
Condensed
Consolidated Balance Sheets
(In
thousands, except per share amounts)
|
|
(audited)
December
31,
2007
|
|
(unaudited)
June
30,
2008
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
668
|
|
$
|
6,144
|
|
Accounts
receivable, net
|
|
|
1,099
|
|
|
1,513
|
|
Inventory
|
|
|
845
|
|
|
1,813
|
|
Prepaid
expenses and other current assets
|
|
|
489
|
|
|
1,127
|
|
Total
current assets
|
|
|
3,101
|
|
|
10,597
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,465
|
|
|
8,001
|
|
Identifiable
intangible assets, net
|
|
|
3,853
|
|
|
6,513
|
|
Deposits
and other assets
|
|
|
521
|
|
|
292
|
|
TOTAL
ASSETS
|
|
$
|
12,940
|
|
$
|
25,403
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,040
|
|
$
|
2,867
|
|
Accrued
liabilities
|
|
|
780
|
|
|
665
|
|
Current
portion of notes payable,
|
|
|
1,474
|
|
|
1,410
|
|
Current
portion of capital lease obligations
|
|
|
463
|
|
|
797
|
|
Total
current liabilities
|
|
|
4,757
|
|
|
5,739
|
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
52
|
|
|
151
|
|
Notes
payable, net of current portion
|
|
|
1,044
|
|
|
1,752
|
|
Capital
lease obligations, net of current portion
|
|
|
440
|
|
|
1,230
|
|
TOTAL
LIABILITIES
|
|
|
6,293
|
|
|
8,872
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (see Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
subscription
|
|
|
-
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
Preferred
Stock - $0.001 par value per share, 10,000,000 shares authorized,
no
shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock and additional paid-in capital - $0.001 par value per share,
500,000,000 shares authorized, 27,758,326 and 36,903,543 shares issued
and
outstanding
|
|
|
33,215
|
|
|
44,544
|
|
Accumulated
deficit
|
|
|
(26,568
|
)
|
|
(33,013
|
)
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
6,647
|
|
|
11,531
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
12,940
|
|
$
|
25,403
|
|
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
(Unaudited
and in thousands, except per share amounts)
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,854
|
|
$
|
6,020
|
|
$
|
7,472
|
|
$
|
11,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,799
|
|
|
2,378
|
|
|
3,641
|
|
|
4,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,055
|
|
|
3,642
|
|
|
3,831
|
|
|
6,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
3,915
|
|
|
5,133
|
|
|
7,384
|
|
|
9,338
|
|
Depreciation
and amortization
|
|
|
704
|
|
|
2,066
|
|
|
1,138
|
|
|
3,836
|
|
Total
operating expenses
|
|
|
4,619
|
|
|
7,199
|
|
|
8,522
|
|
|
13,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,564
|
)
|
|
(3,557
|
)
|
|
(4,691
|
)
|
|
(6,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(68
|
)
|
|
(42
|
)
|
|
(415
|
)
|
|
(107
|
)
|
Other
income (expense), net
|
|
|
(14
|
)
|
|
-
|
|
|
(14
|
)
|
|
-
|
|
Loss
before income taxes
|
|
|
(2,646
|
)
|
|
(3,599
|
)
|
|
(5,120
|
)
|
|
(6,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,646
|
)
|
$
|
(3,599
|
)
|
$
|
(5,120
|
)
|
$
|
(6,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.13
|
)
|
$
|
(0.10
|
)
|
$
|
(0.32
|
)
|
$
|
(0.19
|
)
|
Weighted
average shares outstanding
|
|
|
20,683
|
|
|
36,600
|
|
|
15,788
|
|
|
34,039
|
|
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
(Unaudited
and in thousands, except share amounts)
|
|
Common
Stock
|
|
|
|
Total
|
|
|
|
and
Additional
|
|
Accumulated
|
|
Stockholders’
|
|
|
|
Paid
In Capital
|
|
Deficit
|
|
Equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
27,758,326
|
|
$
|
33,215
|
|
$
|
(26,568
|
)
|
$
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares and warrants for cash
|
|
|
8,571,429
|
|
|
12,000
|
|
|
-
|
|
|
12,000
|
|
Stock
issued in connection with acquisition of assets
|
|
|
573,788
|
|
|
750
|
|
|
|
|
|
750
|
|
Stock
issuance costs
|
|
|
-
|
|
|
(1,386
|
)
|
|
-
|
|
|
(1,386
|
)
|
Stock
subscription issuance costs
|
|
|
-
|
|
|
(327
|
)
|
|
-
|
|
|
(327
|
)
|
Share
based compensation
|
|
|
-
|
|
|
292
|
|
|
-
|
|
|
292
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
(6,445
|
)
|
|
(6,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2008
|
|
|
36,903,543
|
|
$
|
44,544
|
|
$
|
(33,013
|
)
|
$
|
11,531
|
|
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
and in thousands)
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,120
|
)
|
$
|
(6,445
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,138
|
|
|
3,836
|
|
Share-based
compensation cost
|
|
|
96
|
|
|
292
|
|
Amortization
of debt issue costs and debt discount included in interest
expense
|
|
|
232
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(309
|
)
|
|
(414
|
)
|
Inventory
|
|
|
(53
|
)
|
|
(968
|
)
|
Prepaid
expenses and other current assets
|
|
|
(230
|
)
|
|
(638
|
)
|
Accounts
payable
|
|
|
45
|
|
|
672
|
|
Accrued
liabilities
|
|
|
(345
|
)
|
|
(115
|
)
|
Other
|
|
|
(131
|
)
|
|
33
|
|
Net
cash used by operating activities
|
|
|
(4,677
|
)
|
|
(3,747
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, equipment and other assets
|
|
|
(1,030
|
)
|
|
(1,393
|
)
|
Purchase
of intangible assets
|
|
|
(837
|
)
|
|
(4,054
|
)
|
Net
cash used in investing activities
|
|
|
(1,867
|
)
|
|
(5,447
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Principal
payments on notes payables
|
|
|
(397
|
)
|
|
(410
|
)
|
Principal
payments on capital lease obligations
|
|
|
(38
|
)
|
|
(537
|
)
|
Proceeds
from issuance of notes payable, net
|
|
|
500
|
|
|
50
|
|
Proceeds
from sale of common stock, net
|
|
|
-
|
|
|
10,894
|
|
Proceeds
from stock subscription, net
|
|
|
-
|
|
|
4,673
|
|
Redemption
of common stock
|
|
|
12,025
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
12,090
|
|
|
14,670
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
5,545
|
|
|
5,476
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
865
|
|
|
668
|
|
End
of period
|
|
$
|
6,410
|
|
$
|
6,144
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
340
|
|
$
|
176
|
|
Cash
paid for income taxes
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Assets
acquired through issuance of notes payable
|
|
$
|
160
|
|
$
|
1,140
|
|
Assets
purchased through issuance of common stock
|
|
$
|
400
|
|
$
|
750
|
|
Fixed
assets acquired though capital lease
|
|
$
|
227
|
|
$
|
1,524
|
|
Assets
purchased through accounts payable
|
|
|
-
|
|
|
150
|
|
Conversion
of debt into common stock
|
|
$
|
4,600
|
|
$
|
-
|
|
Conversion
of preferred stock into common stock
|
|
$
|
5,700
|
|
$
|
-
|
|
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, 2008
Organization
and Business
Organic
To Go Food Corporation, formerly SP Holding Corporation (“SP”) prior to May
2007, and its wholly owned subsidiary Organic To Go, Inc. (“Organic” and
together with Organic To Go Food Corporation, collectively, the “Company”),
which was acquired in a reverse merger on February 12, 2007, provides convenient
retail cafes and delivery and catering services, preparing and serving “grab and
go” breakfast, lunch and dinner 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. During 2007, the Company further expanded its
operations by acquiring the assets of three separate businesses, for a total
of
six additional locations in San Diego, California. During the second quarter
of
2008, the Company acquired the assets of a retail and catering operation in
Seattle, Washington, adding three additional retail locations in downtown
Seattle. Also during the second quarter of 2008, the Company gained its first
foothold on the East coast of the United States with the acquisition of the
assets of a business with catering and four retail locations in Washington,
D.C.
As of June 30, 2008, the Company operates nine stores in Washington, nineteen
stores in California, and four stores in the Washington, D.C. metropolitan
area,
for a total of 32 retail locations nationwide.
Basis
of Presentation
In
the
opinion of management, the accompanying Condensed Consolidated Balance Sheets
and related Condensed Consolidated Statements of Operations, Condensed
Consolidated Statement of Stockholders’ Equity and Statements of Cash Flows have
been prepared in accordance with accounting principles generally accepted in
the
United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements.
Management believes that all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have been included.
Interim results are not necessarily indicative of results for a full year.
The
information included in this Form 10-Q should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
The
presentation of financial statements prepared in conformity with GAAP
contemplates continuation of the Company as a going concern. The Company has
reported recurring losses and cash used by operating activities, and at
June 30,
2008
has an accumulated deficit 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. During the six months ended June
30,
2007, proceeds of approximately $6.9 million were received from the sale of
equity securities in connection with its reverse merger and private placement,
and approximately $5.3 million of notes payable were converted into common
shares. Additionally, during the three months ended June 30, 2007, proceeds
of
approximately $6.7 million were received from the sale of debt and equity
securities. In October 2007, the Company closed its private placement offering
and issued approximately 3.2 million shares of Company common stock and warrants
to purchase approximately 1.5 million shares of Company common stock. The
aggregate gross proceeds raised by the Company were approximately $5.7
million. In January 2008, the Company closed a private placement offering
and issued approximately 1.4 million shares of Company common stock and warrants
to purchase approximately 0.6 million shares of Company common stock. The
aggregate gross proceeds raised by the Company were approximately $2.0 million.
In February 2008, the Company closed a private placement offering and issued
approximately 7.1 million shares of Company common stock and a warrant to
purchase approximately 4.3 million shares of Company common stock and a
conditional warrant to purchase shares of Company common stock, which may only
be exercised under certain circumstances. The aggregate gross proceeds raised
by
the Company were approximately $10.0 million. In June 2008, the Company raised
an additional $5.0 million through the issuance of a subscription agreement
convertible into shares of the Company’s common stock at a future specified
date, and has another $5.0 million available under the same agreement for future
cash needs. Company 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
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
Preparation
of financial statements in conformity with GAAP 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, recoverability of receivables, valuation and recoverability 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.
Summary
of Significant Accounting Policies
Cash
and cash equivalents
- The
Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents. The Company places its cash
balances on deposit with high credit, highly-rated financial institutions.
At
times, such balances may be in excess of the FDIC insurance limit. At
June 30, 2008, approximately $5.6 million was in excess of the FDIC limit.
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, California and
Washington, D.C. As a result, the Company is sensitive to negative occurrences
in markets where the Company is located, and particularly susceptible to adverse
trends and economic conditions including labor markets. In addition, given
geographic concentration, negative publicity regarding any of our operations
in
Washington, California or Washington D.C. 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.
Fair
value of financial instruments
- The
Company measures its financial assets and liabilities in accordance with GAAP.
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
the
carrying amounts approximate fair value due to their short maturities. Amounts
recorded for notes payable also approximate fair value because current interest
rates offered to the Company for debt of similar maturities are substantially
the same.
Accounts
receivable
- The
Company extends credit to certain of its customers. Accounts receivable are
customer obligations due under normal trade terms. The Company performs credit
evaluations of its customers’ financial condition. Management reviews accounts
receivable on a regular basis on contracted terms and how recent 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 than not to be uncollectible in its allowance for doubtful accounts.
Accounts uncollected are ultimately written off after all reasonable collection
efforts have been exhausted.
Inventory -
Inventory,
which consists primarily of food, beverages and packaging products, is stated at
the lower of cost or market. Cost is determined according to 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.
Property
and equipment
-
Property and equipment is stated at cost. Additions and improvements that
significantly add to the productive capacity or extend the life of an asset
are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation
is
computed using the straight-line method over five to seven years for furniture,
fixtures, equipment and vehicles, and over three years for computer software
and
hardware. Leasehold improvements are amortized over the shorter of the lease
term or ten years.
Identifiable
intangible assets
-
Through its acquisitions of other businesses, the Company has acquired certain
identifiable intangible assets including customer-based intangibles and a
covenant not to compete. All such intangible assets have been accounted for
in
accordance with Statement of Financial Accounting Standards No. 141, “Business
Combinations” (“SFAS 141”). The estimate of useful lives of each intangible
asset was based on an analysis by management of all pertinent factors, and
selection of an estimated useful life of up to two years has been identified
for
each intangible asset. Customer based intangible assets are amortized utilizing
an accelerated method and non-compete intangible assets are amortized on a
straight-line basis.
Statement
of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
Assets,” (“SFAS 142”) requires that 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.
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.
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.
Pre-operating
costs
- Costs
incurred in connection with start-up and promotion of new store openings are
expensed as incurred.
Income
taxes
- The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting
for Income Taxes”
(“SFAS
109”), 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.
Stock-based
compensation
- The
Company accounts for its share-based compensation under the provisions of
Financial
Accounting Standards Board (“FASB”) Statement
No. 123(R), Share-Based
Payment,
(“FAS
123R”).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 FAS 123R 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. 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.
Computations of net loss per share for the periods ending June 30, 2007 and
2008
exclude approximately 5.8 million and 13.0 million common shares, respectively,
issuable upon exercise of outstanding and issuable warrants, 2.8 million and
5.0
million shares, respectively, of common stock issuable upon exercise of
outstanding stock options, and 0 and 308,000 shares, respectively, of common
stock issuable upon conversion of convertible notes payable. These common stock
equivalents could have the effect of decreasing diluted net income per share
in
future periods when the Company generates net income.
Reclassifications
-
Certain reclassifications have been made to prior years’ financial statements to
conform to current year presentation. Such reclassifications had no effect
on
stockholders’ equity, net loss or net increase in cash and cash
equivalents.
Recent
accounting pronouncements
-
In
May
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”).
SFAS 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial
statements for nongovernmental entities that are presented in conformity with
GAAP. SFAS 162 will be effective 60 days following the SEC’s approval.
The Company does not expect that this statement will result in a change in
current practice.
In
April
2008, the FASB issued Staff Position No. 142-3, Determination
of the Useful Life of Intangible Assets (“FSP 142-3”).
FSP 142-3 amends the factors that should be considered in developing
assumptions about renewal or extension used in estimating the useful life of
a
recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets (“SFAS 142”).
This standard is intended to improve the consistency between the useful life
of
a recognized intangible asset under SFAS 142 and the period of expected
cash flows used to measure the fair value of the asset under
SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141(R)”)
and other GAAP. FSP 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The measurement provisions
of this standard will apply only to intangible assets acquired after the
effective date.
In
March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
("SFAS 161"). SFAS 161 requires enhanced disclosures about a
company's derivative and hedging activities. These enhanced disclosures will
discuss (a) how and why a company uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133 and its related interpretations and (c) how derivative
instruments and related hedged items affect a company's financial position,
results of operations and cash flows. SFAS No. 161 is effective for fiscal
years
beginning on or after November 15, 2008, with earlier adoption allowed. The
Company does not anticipate that the adoption of this accounting
pronouncement will have a material effect on its consolidated financial
statements.
In
February 2008, the FASB issued FASB Staff Position No. 157-2, Effective
Date of FASB Statement No. 157, which delays the effective date of SFAS 157
for nonfinancial assets and nonfinancial liabilities to fiscal years beginning
after November 15, 2008. Therefore, the Company will delay
application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities. The Company does not anticipate that the delayed
adoption of this accounting pronouncement will have a material effect
on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business
Combinations (“SFAS 141R”),
which revises current purchase accounting guidance in SFAS 141,
Business
Combinations.
SFAS 141R requires most assets acquired and liabilities assumed in a
business combination to be measured at their fair values as of the date of
acquisition. SFAS 141R also modifies the initial measurement and subsequent
remeasurement of contingent consideration and acquired contingencies, and
requires that acquisition related costs be recognized as expense as incurred
rather than capitalized as part of the cost of the acquisition. SFAS 141R
is effective for fiscal years beginning after December 15,
2008
(the Company’s fiscal 2009) and is to be applied prospectively to business
combinations occurring after adoption. The impact of SFAS 141R on the
Company’s consolidated financial statements will depend on the nature and extent
of the Company’s future acquisition activities.
In
December 2007, the FASB issued SFAS 160, Accounting and Reporting of
Noncontrolling Interests in Consolidated Financial Statements
- an
amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests, of
which the Company currently has none. All other requirements of SFAS
160 shall be applied prospectively. SFAS 160 is effective for fiscal
years beginning after December 15, 2008.
Note
2. Inventories
Inventories
consist of the following (in thousands):
|
|
December
31,
2007
|
|
June
30,
2008
|
|
Food
and beverages
|
|
$
|
820
|
|
$
|
1,689
|
|
Paper
products
|
|
|
25
|
|
|
124
|
|
Total
inventories
|
|
$
|
845
|
|
$
|
1,813
|
|
Note
3. Property and Equipment
Property
and equipment consists of the following (in thousands):
|
|
December
31,
2007
|
|
June
30,
2008
|
|
Leasehold
improvements
|
|
$
|
2,389
|
|
$
|
3,120
|
|
Furniture,
fixtures and equipment
|
|
|
3,878
|
|
|
5,226
|
|
Vehicles
|
|
|
1,156
|
|
|
1,373
|
|
Leased
equipment
|
|
|
686
|
|
|
1,927
|
|
|
|
|
8,109
|
|
|
11,646
|
|
Less
accumulated depreciation and amortization
|
|
|
2,644
|
|
|
3,645
|
|
Total
property and equipment, net
|
|
$
|
5,465
|
|
$
|
8,001
|
|
Amortization
of leased equipment is included in depreciation and amortization
expense.
Note
4. Identifiable Intangible Assets
Identifiable
intangible assets consist of the following (in thousands):
|
|
December
31,
2007
|
|
June
30,
2008
|
|
Customer
based intangible assets
|
|
$
|
6,303
|
|
$
|
11,754
|
|
Non-compete
intangible assets
|
|
|
589
|
|
|
589
|
|
Other
identifiable intangible assets
|
|
|
-
|
|
|
28
|
|
|
|
|
6,892
|
|
|
12,371
|
|
Less
accumulated amortization
|
|
|
(3,039
|
)
|
|
(5,858
|
)
|
Total
identifiable intangible assets, net
|
|
$
|
3,853
|
|
$
|
6,513
|
|
The
Company recorded amortization expense on intangible assets of $508,000 and
$1.5
million, respectively, for the quarterly periods ended June 30, 2007 and 2008,
and $718,000 and $2.8 million, respectively, for the six month periods ended
June 30, 2007 and 2008.
Note
5. Notes Payable
Notes
payable consist of the following (in thousands):
|
|
December
31,
2007
|
|
March
31,
2008
|
|
Notes
payable, 6% to 25% interest collateralized by vehicles and
equipment
|
|
|
141
|
|
|
-
|
|
Convertible
note payable, 8.25% interest, collateralized by substantially
all
assets
|
|
|
759
|
|
|
567
|
|
Notes
payable, 7.75% interest, collateralized by certain assets, due
April
2010
|
|
|
418
|
|
|
418
|
|
Note
payable, 9.25% interest, due March 2009
|
|
|
97
|
|
|
60
|
|
Note
payable, 8.0% interest, due October 2009
|
|
|
54
|
|
|
39
|
|
Notes
payable, 18% interest, due May 2009
|
|
|
500
|
|
|
400
|
|
Notes
payable, 10.5% interest, due December 2009
|
|
|
549
|
|
|
550
|
|
Notes
payable, no interest, monthly straight-line payment
|
|
|
-
|
|
|
178
|
|
Note
payable, 5% (prime rate) interest, due November 2009
|
|
|
-
|
|
|
950
|
|
Total
notes payable
|
|
|
2,518
|
|
|
3,162
|
|
Less:
current portion of notes payable
|
|
|
(1,474
|
)
|
|
(1,410
|
)
|
Notes
payable, net of current portion
|
|
$
|
1,044
|
|
$
|
1,752
|
|
The
Company has a borrowing agreement with a vendor pursuant to which the Company
has outstanding borrowings of approximately $567,000 as of June 30, 2008. This
term loan requires monthly payments of interest at prime rate plus 1% (8.25%
at
December 31, 2007 and 6.00% at June 30, 2008), and provides for thirty-six
equal
monthly payments and a final maturity date in September 2010. The note is
collateralized by a pledge of Company assets.
In
December 2007, the proceeds from the issuance of two separate promissory notes
payable in the amounts of $258,500 and $291,500 were used to pay off a prior
note payable in the amount of $550,000. Each bears interest at 10.5% per annum
and both are due in December, 2009. The holder of each note can elect to require
payment in full in December, 2008.
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 were due in May, 2008. Two of the
promissory notes totaling $350,000 were replaced pursuant to promissory notes
payable of $200,000 each bearing interest at 12% per annum, both of which are
due in May 2009. The third promissory note in the amount of $150,000 was paid
off in May 2008.
Also
during 2007, as part of asset purchase agreements, the Company issued to the
sellers promissory notes of $150,000 and $75,000, bearing interest at 9.25%
and
8% per annum, payable monthly and due in March, 2009 and October, 2010,
respectively.
In
May
2008, as part of an asset purchase agreement, the Company issued the seller
a
promissory note in the amount of $950,000, bearing interest at prime rate (5.00%
at June 30, 2008), payable quarterly and due in November 2009.
Future
minimum principal payments on notes payable at June 30, 2008 are as follows
(in
thousands):
One
year (7/2008 - 6/2009)
|
|
$
|
1,410
|
|
Two
years (7/2009 - 6/2010)
|
|
|
1,689
|
|
Three
years (7/2010 - 6/2011)
|
|
|
63
|
|
Total
|
|
$
|
3,162
|
|
Note
6. Stockholders’ Equity
Authorized
shares
- The
Company 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. During
the period ended June 30, 2008, the Company issued a convertible instrument
in
exchange for $5.0 million which allows its holder to receive shares of the
Company’s common stock, the number of which will be determined according to a
formula specified in such instrument, to occur on or before March 2010. See
Note
9, “Subscription Ageement” for more details.
Warrants
- During
the six months ended June 30, 2008, in conjunction with various debt and equity
financing related agreements and related issuance 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 an exercise price of $2.50 and $3.00 per
share for approximately 4.9 million and 625,000 shares, respectively. As of
June
30, 2008, there were a total of 13.0 million warrants outstanding as
follows:
Exercise
Price
|
|
Number
of warrants
|
|
$
1.38
|
|
|
66,629
|
|
1.68
|
|
|
2,151,986
|
|
2.10
|
|
|
2,229,430
|
|
2.50
|
|
|
7,938,563
|
|
3.00
|
|
|
625,000
|
|
Total
|
|
|
13,011,608
|
|
Stock
options
- From
time to time, the Company grants to its directors, officers, employees and
consultants options to purchase shares of the Company’s common stock. The
Company accounts for its share-based compensation under the provisions of FAS
123R. Options have a term of 10 years from the date of grant, with exercise
prices at no less than the price of a share of the Company’s common stock on the
date of grant. The Company uses the Black-Scholes option pricing model to
estimate the fair value of its stock options on the date of grant. Fair value
determination using this model is affected by the Company’s stock price on the
date of grant as well as the expected life of the award, expected stock price
volatility over the term of the award and actual and projected exercise
behaviors. FAS 123R requires that the Company recognize compensation expense
for
only the portion of options that are expected to vest. Therefore, management
applies an estimated forfeiture rate for projected future employee turnover
rates. The estimated forfeiture rate is approximately 12%. If the actual number
of forfeitures differs from those estimated by management, additional
adjustments to compensation expense may be required in future periods. The
Company’s stock price volatility, option lives and expected forfeiture rates
involve management’s best estimates at the time of such determination, all of
which impact the fair value of the option calculated under the Black-Scholes
methodology and, ultimately, the expense that will be recognized over the life
of the option. The Company typically issues stock options with a four-year
vesting period (defined by FAS 123R as the requisite service period). The
Company amortizes stock compensation cost ratably over the requisite service
period.
Although
the fair value of share-based awards is determined in accordance with FAS 123R
and SAB 107, the Black-Scholes option pricing model requires the input of highly
subjective assumptions, and other reasonable assumptions could provide different
results. The weighted average fair value of stock options granted during the
quarters ended June 30, 2007 and 2008 was approximately $1.11 and $0.63 per
share, respectively, 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 5.0% and 3.1 %, respectively; and
estimated lives of 5 years.
Compensation
expense recognized for stock options and restricted stock approximated $77,000
and $177,000, respectively, for the three months ended June 30, 2007 and 2008,
and $96,000 and $292,000 for the six months ended June 30, 2007 and 2008,
respectively. As of June 30, 2008, there was approximately $2.2 million of
unrecognized compensation cost related to unvested stock options and restricted
stock, which is expected to be recognized as expense over a period of
approximately 3 years. The following table summarizes activity for stock options
over the first six months of 2008:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2007
|
|
|
3,050,938
|
|
$
|
1.50
|
|
|
|
|
|
|
|
Grants
|
|
|
2,439,730
|
|
|
1.38
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(457,369
|
)
|
|
2.10
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
5,033,299
|
|
$
|
1.39
|
|
|
9.1
years
|
|
$
|
376,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2008
|
|
|
1,121,775
|
|
$
|
1.14
|
|
|
8.5
years
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for grant at June 30, 2008
|
|
|
2,269,794
|
|
|
|
|
|
|
|
|
|
|
Additional
information regarding stock options outstanding as of June 30, 2008, is as
follows:
|
|
Outstanding
Options
|
|
Exercisable
Options
|
|
Range
of
Exercise
Prices
Per
Share
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$
0.17
|
|
|
307,385
|
|
|
7.7
|
|
$
|
0.17
|
|
|
274,239
|
|
$
|
0.17
|
|
$
0.34
|
|
|
118,628
|
|
|
8.0
|
|
$
|
0.34
|
|
|
59,314
|
|
$
|
0.34
|
|
$
1.30 - $ 1.38
|
|
|
2,805,674
|
|
|
9.2
|
|
$
|
1.38
|
|
|
442,530
|
|
$
|
1.38
|
|
$
1.40 - $ 1.48
|
|
|
1,090,511
|
|
|
9.5
|
|
$
|
1.43
|
|
|
211,058
|
|
$
|
1.41
|
|
$
1.60 - $ 1.92
|
|
|
249,500
|
|
|
9.2
|
|
$
|
1.82
|
|
|
-
|
|
$
|
-
|
|
$
2.23
|
|
|
461,601
|
|
|
8.9
|
|
$
|
2.23
|
|
|
134,634
|
|
$
|
2.23
|
|
$
0.17 - $ 2.23
|
|
|
5,033,299
|
|
|
9.1
|
|
$
|
1.38
|
|
|
1,121,775
|
|
$
|
1.14
|
|
Note
7. Business Acquisitions
On
May
14, 2008, pursuant to terms an asset purchase agreement, the Company acquired
for $250,000
cash, shares of Company’s common stock having a fair value of $500,000 and
another $950,000 due in six quarterly installments beginning August 14, 2008,
all furniture, fixtures, equipment, customer lists, trade names and leasehold
improvements used in connection with a retail business operating three stores
in
Seattle, Washington. The Company also entered into a consulting agreement with
the seller wherein that individual will provide consulting services to the
Company for a one year period, pursuant to which, among other things, the
Company will pay monthly fees totaling $100,000 over the course of a year.
The
Company assumed operating leases for the three locations, as well as various
equipment leases and financing agreements. The total purchase price of
approximately $1.8 million has been allocated to assets acquired based on
estimated fair values, which will result in the majority being allocated to
customer based identifiable intangible assets, which will be amortized using
an
accelerated amortization method over a 16-month period and is summarized as
follows (in thousands):
Furniture,
fixtures, equipment and vehicles
|
|
$
|
105
|
|
Customer
based intangible assets
|
|
|
1,731
|
|
Total
|
|
$
|
1,836
|
|
On
May
29, 2008, the Company entered into a purchase and sale of assets agreement
whereby it purchased substantially all of the assets of High Noon Holdings,
which owned and operated four cafés in the Washington D.C. metropolitan area.
Under the terms of the agreement, the total purchase price was $3.9 million,
of
which $3.5 million was paid in cash at closing and $250,000 was satisfied by
the
issuance of 198,413 shares of the Company’s common stock. The Company
assumed operating leases for the four locations, as well as various equipment
leases and financing agreements. The total purchase price has been allocated
to
assets acquired based on estimated fair values, which resulted in the majority
being allocated to trade names and customer-based intangible assets, which
will
be amortized using an accelerated amortization method over a 16-month period
and
is summarized as follows (in thousands):
Furniture,
fixtures and equipment
|
|
$
|
186
|
|
Customer
based intangible assets
|
|
|
3,721
|
|
Total
|
|
$
|
3,907
|
|
Note
8. 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 rent credit. The Company also leases certain point-of-sale computer
hardware and software pursuant to capital leases. At June 30, 2008, minimum
future annual lease obligations are as follows (in thousands):
|
|
Operating
Leases
|
|
Capital
Leases
|
|
Total
|
|
1
year (July 2008 - June 2009)
|
|
$
|
1,761
|
|
$
|
980
|
|
$
|
2,741
|
|
2
years (July 2009 - June 2010)
|
|
|
1,519
|
|
|
634
|
|
|
2,153
|
|
3
years (July 2010 - June 2011)
|
|
|
1,306
|
|
|
507
|
|
|
1,813
|
|
4
years (July 2011 - June 2012)
|
|
|
980
|
|
|
198
|
|
|
1,178
|
|
5
years and thereafter (July 2012 and beyond)
|
|
|
2,181
|
|
|
65
|
|
|
2,246
|
|
|
|
|
7,747
|
|
|
2,384
|
|
|
10,131
|
|
Less
amounts representing interest
|
|
|
-
|
|
|
(357
|
)
|
|
(357
|
)
|
Total
lease obligations
|
|
$
|
7,747
|
|
$
|
2,027
|
|
$
|
9,774
|
|
On
January 8, 2008, Esther Sanchez, a former employee of Organic To Go, Inc.,
the
Company’s wholly owned subsidiary, brought suit against the Company, seeking
damages in the Superior Court of the State of California for the County of
Los
Angeles, claiming wrongful termination, sexual harassment and related causes
of
action in connection with the termination of Ms. Sanchez’s employment. The
Company’s employment practices liability insurer has agreed to provide a defense
on its behalf, subject to a reservation of rights letter and the terms and
conditions of its insurance policy.
The
Company is currently in mediation pursuant to the Standard Form of Agreement
with Wheelihan Construction, Inc. This matter arose out of tenant improvements
made by Wheelihan Construction, Inc. and its subcontractors at one of the
Company’s retail locations in San Diego, California. In connection with the
matter, four subcontractors/suppliers have commenced actions against the
Company, Wheelihan Construction, Inc. and other defendants.
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. The Company is
not a party to any other material legal proceedings other than those disclosed
above, nor is it aware of any circumstance that may reasonably lead a third
party to initiate material legal proceedings against it at this
time.
Note
9. Subscription Agreement
On
June
1, 2008, the Company entered into an agreement with W. Health L.P., relating
to
the sale of a $5.0 million convertible instrument and a warrant to purchase
625,000 shares of the Company’s common stock. The instrument is convertible into
shares of the Company’s common stock at the earlier of the maturity date, which
is March 2010, or the date at which the Company’s stock has traded for a period
of 60 consecutive days at a price equal to or greater than $3.00 per share.
The
agreement provides the Company the option to sell an additional $5.0 million
in
convertible instruments and warrants to W. Health L.P. for a period of nine
months following the closing. For accounting purposes, this $5.0 million has
been recorded as a stock subscription.
Management’s
Discussion and Analysis or Plan of Operation
The
following discussion and analysis of the results of operations and financial
condition of Organic To Go Food Corporation for the periods ended June 30,
2007
and 2008 should be read in conjunction with our financial statements and the
notes to those financial statements that are included elsewhere in this Form
10-Q. 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 are the nation’s first fast casual café chain to be certified as an
organic retailer, with our food available in more than 170 locations. We provide
convenient cafés which prepare and serve fresh custom-made and “grab and go”
breakfast, lunch and dinner foods and beverages prepared using organic
ingredients, whenever possible. We also distribute our products through
delivery, catering and wholesale accounts. Our company has grown through both
organic expansion and acquisitions. 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. In March 2007, we expanded
our catering operations by acquiring the assets of a catering operation located
in Seattle, Washington, and in July, September and October 2007, we further
expanded our operations by acquiring the assets of six retail and catering
stores in San Diego, California. During the second quarter of 2008, we acquired
the assets of a retail and catering operation in Seattle, Washington, adding
three additional retail locations in downtown Seattle. Also during the second
quarter of 2008, we gained our first foothold on the East coast of the United
States with the acquisition of the assets of a business with four catering
and
retail locations in Washington, D.C. As of June 30, 2008, we operated nine
stores in Washington, nineteen stores in California, and four stores in
Washington, D.C., with central kitchens in Seattle, Los Angeles, San Diego
and
Washington, D.C. In addition to the thirty-two cafés, our food is available in
more than 120 wholesale locations, 14 universities and 11 locations at Los
Angeles International Airport.
Management
believes we have the opportunity to capture increasing market share in all
three
of our business channels: Retail Cafes, Delivery and Catering, and Wholesale
of
our “grab & go” sandwiches, wraps and salads, 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 cafés, catering customers
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 - Since
our
inception, we have funded operations, business development and growth through
debt and equity financings. In this regard, during the first six months of
2008,
we closed two private placement offerings, raising a total of approximately
$12.0 million. The proceeds are intended to be used for the expansion of the
Company and working capital needs. In January 2008, we closed a private
placement offering and issued approximately 1.4 million shares of Company common
stock and warrants to purchase approximately 0.6 million shares of common stock.
The aggregate gross proceeds raised by the Company in this transaction were
approximately $2.0 million. Additionally, in February 2008, we closed a private
placement offering and issued approximately 7.1 million shares of common stock,
a warrant to purchase approximately 4.3 million shares of common stock and
a
conditional warrant to purchase shares of common stock, which may be exercised
only under certain circumstances. In June 2008, we issued a stock subscription
in exchange for $5.0 million which is convertible into shares of the Company’s
common stock on or before March 2010. 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.
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
GAAP. 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 Form 10-Q. 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 GAAP, 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.
Intangible
Assets - In
connection with our 2006, 2007 and 2008 asset acquisitions, 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 based 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. Management estimated a useful life of nearly 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.
Stock-based
Compensation - We
account for share-based compensation under the provisions of FAS 123R, which
we
adopted effective beginning January 1, 2006 using the modified prospective
method.
Results
of Operations
Sales
- Sales
for
the second quarter of 2008 increased approximately 56%, to $6.0 million, as
compared with $3.9 million in the first quarter of 2007. Sales for the six
months ended June 30, 2008 increased approximately 50% to $11.2 million,
compared to $7.5 million for the six months ended June 30, 2007. Retail café
sales were $2.7 million during the quarter ended June 30, 2008, an increase
of
approximately 84% over $1.5 million during the comparable prior year period.
Café sales comprised 45% of total sales in the 2008 quarter compared to 38% of
total sales in the second quarter of 2007. Café sales for the six months ended
June 30, 2008 and 2007 were $5.0 million and $3.0 million, respectively, and
comprised 45% and 40% of total sales. The increases in year-over-year retail
sales for both the quarter and six month periods is primarily a result of the
addition of eleven Retail Cafés that were opened or acquired from July through
October in 2007, three more that were opened during the first quarter of 2008
and seven that were opened during the second quarter of 2008. We ended the
second quarter of 2008 with thirty-two Retail Cafés as compared with thirteen at
the end of the same period in 2007.
Delivery
and Catering sales were $2.6 million for the second quarter of 2008, an increase
of over $713,000, or approximately 37%, over $1.9 million during the second
quarter of 2007. Delivery and Catering sales comprised 44% of total sales in
the
second quarter of 2008 as compared with 50% for the same period of the prior
year. Delivery and catering sales for the six months ended June 30, 2008 and
2007 were $4.6 million and $3.6 million, respectively, and comprised 40% and
45%
of total sales. In addition to increased business volume in all delivery and
catering operations, the increase in delivery and catering sales in 2008 is
attributable to the mid- to late-2007 fiscal year and second quarter 2008
acquisitions of catering businesses in Seattle, San Diego and Washington,
D.C.
Wholesale
sales were $692,000 in the quarter ending June 30, 2008, an increase of 46%,
as
compared with $476,000 in the comparable quarter of 2007. Wholesale sales
comprised 12% of total sales in the 2008 period as compared with 12% in the
comparable 2007 period. Wholesale sales for the six months ended June 30, 2008
and 2007 were $1.6 million and $927,000, respectively, and comprised 12% and
14%
of total sales. In addition to increased sales efforts in all markets, the
increase in wholesale sales is due to our entrance into the San Diego market
in
mid-2007. At the end of June 2008, we had just entered the Washington, D.C.
market and had not realized any wholesale sales during the quarter. We
anticipate launching wholesale sales in Washington, D.C. by the end of the
third
quarter of 2008.
Cost
of Sales - Cost
of
sales includes the cost of food and paper products. Cost of sales for the second
quarter of 2008 increased 32% as compared to a 56% increase in sales, to nearly
$2.4 million, as compared with $1.8 million for the second quarter of 2007.
Cost of sales for the quarter ended June 30, 2008 was approximately 40% as
a
percent of sales as compared with 47% during the comparable prior year
period. For the six month period ending June 30, 2008, cost of sales were $4.3
million, or 39% of sales, as compared to $3.6 million, or 49% of sales, for
the
comparable 2007 period. In the second half of 2007, we were able to negotiate
lower costs on our food and paper products and reduce the amount of food waste
and spoilage, which has brought positive changes to our cost of sales in 2008
when compared to the prior year period. In addition, our increased volume with
our vendors has resulted in more favorable pricing in 2008.
Gross
Profit - Gross
profit increased approximately 77%, to $3.6 million for the second quarter
in
2008, as compared with $2.1 million for the second quarter in 2007. Gross profit
for our 2008 period was approximately 61% of sales as compared with 53%
during the comparable 2007 period. Gross profit for the six months ended June
30, 2008, was $6.8 million, or 61% of sales, and $3.8 million, or 51% of sales,
for the comparable period in 2007. In addition to negotiating lower costs on
our
food and paper products and reducing the amount of food waste and spoilage,
we
also increased retail and wholesale prices during 2007, which has improved
our
gross margin. Our increased volume with our vendors that resulted in more
favorable product pricing in 2008 also contributed to the improved gross
margin.
Operating
Expenses - Operating
expenses for the second quarter of 2008 were $5.1 million, as compared with
$3.9 million for the comparable 2007 period. For the six month period ended
June
30, 2008, operating expenses were $9.3 million, or 83% of sales, as compared
to
$7.4 million, or 99% of sales, for the comparable 2007 period. Operating
expenses are comprised primarily of labor, and, to a lesser extent, occupancy,
utilities, and selling, general and administrative expenses. Operating expenses
increased in 2008 as compared with 2007, primarily due to increased labor
and related costs as a result of continued growth since the prior year periods,
including the acquisition of four catering businesses, increasing the number
of
Retail Cafés from thirteen as of June 30, 2007 to thirty-two as of June 30,
2008, and preparing for future growth, both in facilities leases and with the
hiring of members to the executive management team.
Depreciation
and Amortization - Depreciation
and amortization expense for the second quarter and first six months of 2008
increased to $2.1 million and $3.8 million, respectively, as compared with
$700,000 and $1.1 million during the comparable 2007 periods. This increase
was
due primarily to amortization of identifiable intangible assets acquired in
the
catering and retail business in the latter part of 2006, throughout 2007 and
the
second quarter of 2008. Depreciation and amortization for the six month periods
ended June 30, 2007 and 2008 were approximately 15% and 34% of sales,
respectively. We amortize identifiable intangibles over a relatively short
period, generally no more than two years.
Loss
from Operations - Loss
from
operations during the second quarter of 2008 increased to approximately $3.6
million as compared with $2.6 million during the second quarter of 2007.
For the six months ended June 30, 2008, the loss from operations was $6.3
million as compared with a loss of $4.7 million for the first six months of
2007. The increase in loss from operations over the prior year period is the
result of an increase in gross profit of $1.6 million for the quarter and $3.0
million for the six month period, being offset by a $2.6 million and $4.7
million increase in total operating, depreciation and amortization expenses
for
the quarterly and six month periods, respectively.
Interest
and Other Expense, Net - Net
interest and other expense for the quarter ended June 30, 2008 decreased to
$42,000 as compared with $82,000 for the quarter ended June 30, 2007. The
decrease is primarily due to the interest income generated during the second
quarter of 2008. For the six months ended June 30, 2007 and 2008, net interest
and other expense was $429,000 and $107,000, respectively. The decrease was
primarily due to an increase in total debt from July 2006 through March 2007,
prior to $5.3 million of debt being converted into equity in March 2007.
Net
Loss - Net
loss
in the second quarter of 2008 increased to $3.6 million, or $(0.10) basic and
diluted net loss per share, as compared with $2.6 million, or $(0.13) basic
and diluted net loss per share in the second quarter of 2007. Net loss for
the
six months ended June 30, 2008 was $6.4 million or $(0.19) basic and diluted
net
loss per share, as compared with $5.1 million or $(0.32) basic and diluted
net
loss per share in the six months ended June 30, 2007.
Liquidity
and Capital Resources
As
planned, we have funded operations through financing activities consisting
primarily of private placements of debt and equity securities. In January and
February 2008, gross proceeds of approximately $12.0 million were received
from
the sales of equity securities, and in June 2008 we received $5.0 million from
the sale of convertible instruments. We intend to continue to engage in
additional fund-raising activities to fund future capital expenditures,
potential acquisitions of businesses, and provide additional working capital.
Net
cash
used by operating activities was approximately $4.7 million during the first
six
months of 2007 and $3.7 million in the comparable 2008 period. The decrease
in
cash used by operating activities was due primarily to an increase in net loss
offset by an adjustment for depreciation and amortization expense, most of
which
represented amortization of identifiable intangible assets.
Net
cash
used in investing activities was approximately $1.9 million and $5.5 million
for
the six month periods ended June 30, 2007 and 2008, respectively. Uses of cash
flow for investing activities in both periods was primarily related to capital
expenditures associated with business expansion, the acquisition of store,
kitchen fixtures and equipment, and leasehold improvements to existing locations
and locations obtained through acquisitions.
Net
cash
provided by financing activities was approximately $12.1 million and $14.7
million for the six months ended June, 2007 and 2008, respectively. The increase
of net cash provided during the first six months of 2008 was due to an increase
in proceeds, net of issuance costs, from the issuance of common stock in private
placements and proceeds from the issuance of a subscription agreement during
the
second quarter of 2008.
Quantitative
and Qualitative Disclosures About Market Risk
Not
applicable.
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, 2008, 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.