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| UFFC.OB > SEC Filings for UFFC.OB > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in "Risk Factors" in our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008 and elsewhere in this report.
Overview
We were incorporated in the State of Nevada on February 8, 2006 as Axxent Media Corp. Prior to December 18, 2007, we were a development stage company as defined by Statement of Financial Accounting Standard (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. As Axxent Media Corp., our business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, we changed our name to UFood Franchise Company, Inc., and on September 25, 2007, we changed our name to UFood Restaurant Group, Inc. (UFood or the Company). Following the Merger described below, the Company abandoned its plans to obtain reproduction and distribution rights to foreign films within North America and to obtain the foreign rights to North American films for reproduction and distribution to foreign countries.
On December 18, 2007, a wholly-owned subsidiary of the Company merged (the Merger) with and into KnowFat Franchise Company, Inc. (KnowFat) with KnowFat surviving the Merger as our wholly-owned subsidiary. Following the Merger, we continued KnowFat's business operations as a franchisor and operator of fast-casual food service restaurants that capitalize on consumer demands for great tasting food with healthy attributes. KnowFat was founded in 2004 to capitalize on the popularity of a chain of fast-casual concept restaurants operating under the tradename "Lo Fat Know Fat" in the greater Boston area, as well as the growing trend in the United States towards healthier living and eating. After operating for three years as KnowFat! Lifestyle Grille, while continuously modifying and improving the concept, management arrived at the conclusion that the KnowFat! name sent the wrong marketing message and alienated some people within the mainstream customer set. As a result, we have decided that future locations will operate under the name UFood Grill. Management believes that the new brand will embrace the mainstream customer better and help extend the concept into a nation-wide chain.
At September 28, 2008, our operations consisted of four company-owned restaurants and four franchisee-owned locations including one franchisee-owned location operated by the Company pursuant to a management service agreement. The franchisee-owned restaurants are located in Boston, Chicago, Naples and Sacramento. All of our Company-owned restaurants are located in the greater Boston area. All of our locations operate under the name UFood Grill.
We view ourselves primarily as a franchisor and continually review our restaurant ownership mix (that is our mix among Company-owned, franchised, and joint venture) to deliver a great customer experience and drive profitability. In most cases, franchising is the best way to achieve both goals. In our company-owned stores, and in collaboration with our franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that we introduce system-wide only those that we believe are most beneficial.
We include in this discussion information on Company, franchisee, and/or system-wide comparable sales and total sales. System-wide sales are a non-GAAP financial measure that includes sales at all Company-owned and franchise-operated stores, as reported by franchisees. Management uses system-wide sales information internally in connection with store development decisions, planning and budgeting analysis. Management believes it is useful in assessing customer acceptance of our brand and facilitating an understanding of financial performance as our franchisees pay royalties and contribute to marketing funds based on a percentage of their sales.
We derive revenues from three sources: (i) store sales which include sales of hot and cold prepared food as well as sales of health and nutrition related products; (ii) franchise royalties and fees represent amounts earned under franchise and area development agreements; and (iii) other revenues derived primarily from the sale of marketing materials to franchisees. Store operating expenses include the cost of goods, food and paper products sold in company-owned stores as well as labor and other operating costs incurred to operate Company-owned stores. General and administrative expenses, advertising, marketing and promotion expenses and depreciation expense relate to all three revenue sources.
Critical Accounting Policies & Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements for the three and nine month periods ended September 28, 2008 and September 30, 2007 which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Variances in the estimates or assumptions used could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.
We have chosen accounting policies we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. As described in Item 6, "Management's Discussion and Analysis or Plan of Operations" and Item 7, "Financial Statements" of our Annual Report on Form 10-KSB for the fiscal year ended December 30, 2007 filed with the Securities and Exchange Commission on April 14, 2008, we consider our policies on accounting for revenue recognition, valuation of goodwill, income taxes, lease obligations and stock-based compensation to be the most critical in the preparation of the accompanying consolidated financial statements because they involve the most difficult, subjective, or complex judgments about the effect of matters that are inherently uncertain. There have been no material changes to our application of critical accounting policies and significant judgments and estimates since December 30, 2007.
The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our consolidated statements of operations for the periods indicated. Percentages may not add due to rounding:
Three Months Ended Nine Months Ended
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
2008 2007 2008 2007
Revenues:
Store sales 93.7 % 90.8 % 94.9 % 92.6 %
Franchise royalties and fees 6.3 8.4 5.0 6.6
Other revenue - 0.8 0.1 0.8
100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Store operating expenses (1):
Food and paper costs 35.0 % 34.0 % 34.3 % 35.6 %
Cost of nutritional products 8.7 18.8 10.2 20.0
Labor 32.2 29.7 30.7 30.6
Occupancy 12.7 11.1 12.0 9.1
Other store operating expenses 17.6 14.4 17.5 15.7
General and administrative
expenses 94.2 63.2 127.9 61.2
Advertising, marketing and
promotion expenses 11.6 4.9 17.1 12.1
Depreciation and amortization 8.6 8.7 8.2 8.3
Loss on disposal of assets - 16.2 0.1 17.6
Total costs and expenses 209.9 182.4 247.6 192.2
Operating loss (109.9 ) (82.4 ) (147.6 ) (92.2 )
Other income (expense):
Interest income 1.3 - 1.6 0.3
Interest expense (1.1 ) (7.6 ) (1.4 ) (6.7 )
Other income (expense) (12.5 ) - (2.8 ) -
Other income (expense), net (12.4 ) (7.6 ) (2.6 ) (6.4 )
Loss before income taxes (122.3 ) (90.0 ) (150.2 ) (98.6 )
Income taxes - - - -
Net loss (122.3 )% (90.0 )% (150.2 )% (98.6 )%
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(1) Food and paper costs are shown as a percentage of food sales. The cost of nutritional products, labor, occupancy and other store operating expenses are shown as a percentage of total store sales.
The following table sets forth certain data relating to the number of Company-owned, franchise-operated and system-wide store locations:
Three Months Ended Nine Months Ended
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
2008 2007 2008 2007
Company-owned locations:
Locations at the beginning of the year 4 5 4 5
Locations opened - - - -
Locations closed - (1 ) - (1 )
Locations sold - (1 ) - (1 )
Locations transferred - - - -
Locations at the end of the period 4 3 4 3
Franchise-owned locations:
Locations at the beginning of the year 4 4 4 4
Locations opened 1 1 1 1
Locations closed (1 ) - (1 ) -
Locations sold - - - -
Locations transferred - - - -
Locations at the end of the period(1) 4 5 4 5
System-wide locations
Locations at the beginning of the year 8 9 8 9
Locations opened 1 1 1 1
Locations closed (1 ) (1 ) (1 ) (1 )
Locations sold - (1 ) - (1 )
Locations transferred - - - -
Locations at the end of the period 8 8 8 8
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(1) At September 28, 2008, the Company operated two franchise-owned locations pursuant to the terms of management services agreements.
The following table shows, for each area development agreement and single-unit franchise agreement, as well as for Company-owned stores, the numbers of units that are covered by the agreement (if applicable), currently operating, under construction and in lease negotiations.
Restaurants Restaurants
Units Covered Restaurants Under In Lease
Location by Agreement Operating Construction Negotiations
Area Development Agreements
Chicago, Illinois 5 1 2 --
Five State Region (MT, ID, WY, UT, CO) 38 -- 1 2
Naples, FL 5 1 -- --
Sacramento, CA 10 1 1 --
San Jose, CA 7 -- 1 --
Texas airports 3 -- 1 --
68 3 6 2
Single Unit Franchise Agreements
Bedford, Massachusetts 1 1 -- --
Company-owned Restaurants
Boston, Massachusetts n/a 4 -- --
Total 69 8 6 2
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Three Months Ended September 28, 2008 Compared to Three Months Ended September 30, 2007
General
For the three months ended September 28, 2008, our comparable store sales for Company owned stores decreased by 9.4%. Two of our three Company-owned comparable stores were closed a total of five weeks during the quarter in connection with the conversion of the stores from KnowFat! locations to UFood Grill outlets. System-wide comparable store sales for the quarter decreased by 16.5%. One of the two franchisee-owned comparable store locations was closed for two weeks during the quarter in connection with the conversion of the store from a KnowFat! location to a UFood Grill outlet. All of the comparable store locations are located in the greater Boston area. As of September 28, 2008, the two franchisee-owned comparable store locations were operated by the Company pursuant to two separate management services agreements. Following the end of the quarter, we terminated one of the management services agreements and closed the store related to the agreement. Comparable store sales are based on sales for stores that have been in operation for the entire period of comparison. Franchisee-owned stores which we acquire are included in comparable store sales once they have been open for the entire period of comparison. Comparable store sales exclude closed locations.
Results of Operations
Revenues
Our total revenues for the three months ended September 28, 2008 increased by $320,197, or 26.1%, to $1,546,825 from $1,226,628 for the three months ended September 30, 2007. The increase in total revenues for the three months ended September 28, 2008, as compared to the prior year was primarily due to sales generated by a new Company-owned restaurant that opened at Boston's Logan International Airport in December 2007 partially offset by a decrease in sales attributable to a Company-owned restaurant in Shrewsbury, Massachusetts that was sold in September 2007 and the decrease in comparable store sales.
Total store sales at Company-owned stores for the three months ended September 28, 2008 increased by $335,923, or 30.2%, to $1,449,086 from $1,113,163 for the three months ended September 30, 2007. As a percentage of total revenues, sales at Company-owned stores increased to 93.7% of total revenues for the three months ended September 28, 2008 from 90.8% of total revenues for the three months ended September 30, 2007. The increase in sales at Company-owned stores for the three months ended September 28, 2008 was primarily due to sales generated by the Logan Airport location, partially offset by a decrease in sales due to the sale of a Company-owned restaurant in September 2007.
During the three months ended September 28, 2008, franchise royalties and fees decreased by $4,908, or 4.8% to $97,739 from $102,647 for the three months ended September 30, 2007 primarily due to a decrease in initial franchise fees offset by an increase in royalties. The Company recognized $35,000 of revenue from initial franchise fees during the three months ended September 28, 2008 compared with $70,000 for the three months ended September 30, 2007.
As of September 28, 2008, our operations consisted of eight restaurants in the Boston area, Naples, FL, Chicago, IL and Sacramento, CA, comprising four Company-owned restaurants and four franchise-owned locations (including one operated by us pursuant to a management services agreement). As of September 28, 2008, we had entered into a total of six area development agreements covering 68 franchise units in nine states (California, Colorado, Florida, Illinois, Idaho, Montana, Texas, Utah and Wyoming), including three of the four franchise locations that were open and operating, and requiring the construction by franchisees of 65 future UFood Grill outlets. In addition, we had entered into one individual franchise agreement in Massachusetts, which was open and operating at September 28, 2008. The six area development agreements covering 68 franchise units do not include an area development agreement covering five units in Houston, Texas. We have determined that the area developer for Houston would not be able to construct or open the five units specified in his area development agreement because the developer has not complied with the agreed development schedule and, to our knowledge, has taken no steps to identify potential store locations or otherwise develop his territory. During the three months ended September 28, 2008, one franchisee-owned location in Waltham, Massachusetts closed and one franchisee-owned location in Chicago opened.
Costs and Expenses
Food and paper costs for the three months ended September 28, 2008 increased by $172,338, or 63.2%, to $444,977 from $272,639 for the three months ended September 30, 2007. The increase was primarily attributable to food and paper costs incurred at a new Company-owned restaurant that opened at Boston's Logan International Airport in December 2007 and food and paper costs at two franchise-owned locations that the Company began operating pursuant to two management services agreements in 2008. As a percentage of food sales, food and paper costs increased to 35.0% of food sales for the three months ended September 28, 2008 from 34.0% of food sales for the three months ended September 30, 2007. The increase in food and paper costs as a percentage of food sales was primarily attributable to the new Company-owned restaurant at Logan Airport which has a higher percentage of take-out orders and, consequently, higher paper costs compared with other Company-owned locations.
The cost of nutritional products for the three months ended September 28, 2008 decreased by $83,951, or 40.0%, to $125,753 from $209,704 for the three months ended September 30, 2007. As a percentage of store sales, the cost of nutritional products decreased to 8.7% of store sales for the three months ended September 28, 2008 from 18.8% of store sales for the three months ended September 30, 2007. The decrease in the cost of nutritional products as a percentage of store sales was primarily attributable to a change in our mix of restaurant (i.e., food) sales and retail sales (i.e., nutritional products). Nutritional products represented a smaller proportion of our total store sales in during the three months ended September 28, 2008 compared with the three months ended September 30, 2007. In conjunction with the conversion of three of our Company-owned stores from KnowFat! locations to UFood Grill outlets during the third quarter of 2008, we converted the space formerly devoted to the sale of nutritional products in two of the stores to the sale of smoothie drinks.
Store labor expense for the three months ended September 28, 2008 increased by $135,979, or 41.1%, to $466,772 from $330,793 for the three months ended September 30, 2007. The increase in labor expense was primarily attributable to labor costs incurred at our newest restaurant that opened at Logan International Airport in December 2007, labor costs at two franchise-owned locations that the Company began operating pursuant to two management services agreements in 2008 and salary increases partially offset by efficiencies associated with the streamlined UFood Grill menu at our Logan Airport location. As a percentage of store sales, labor expense increased to 32.2% of store sales for the three months ended September 28, 2008 from 29.7% of store sales for the three months ended September 30, 2007.
Store occupancy costs for the three months ended September 28, 2008 increased by $60,397, or 49.0%, to $183,680 from $123,283 for the three months ended September 30, 2007. The increase in occupancy costs was primarily attributable to occupancy costs at our Logan Airport store that opened in December 2007 and occupancy costs of two franchise-owned locations that the Company began operating pursuant to two management services agreements in 2008. As a percentage of store sales, occupancy costs increased to 12.7% of store sales for the three months ended September 28, 2008 from 11.1% of store sales for the three months ended September 30, 2007 primarily due to higher rent expense at our Logan International Airport location compared with our other restaurant locations.
Other store operating expenses for the three months ended September 28, 2008 increased by $94,904, or 59.0%, to $255,684 from $160,780 for the three months ended September 30, 2007. The increase was primarily due to higher utility costs and other store operating costs at our Logan Airport restaurant partially offset by savings due to improved cost control. As a percentage of store sales, other store operating expenses increased to 17.6% of store sales for the three months ended September 28, 2008 from 14.4% of store sales during the three months ended September 30, 2007.
General and administrative expenses for the three months ended September 28, 2008 increased by $682,602, or 88.1%, to $1,457,673 from $775,071 for the three months ended September 30, 2007. The increase in general and administrative expenses was primarily due to investor relations and public relations expenses incurred in connection with the corporate awareness campaign announced by the Company in May 2008, non-cash, stock-based compensation expense resulting from equity awards to employees, costs of operating as a public company and higher legal costs. During the three months ended September 28, 2008, the Company recognized $108,516 of non-cash, stock-based compensation expense attributable to equity awards to employees. The Company did not recognize any stock-based compensation expense resulting from equity awards to employees during the three months ended September 30, 2007. As a result of the foregoing, general and administrative expenses increased to 94.2% of total revenues during the three months ended September 28, 2008 from 63.2% of total revenues for the three months ended September 30, 2007.
Advertising, marketing and promotion expenses for the three months ended September 28, 2008 increased by $118,820, or 197.1%, to $179,096 from $60,276 for the three months ended September 30, 2007. The increase in advertising, marketing and promotion expenses was primarily due to an increase in expenses related to the services agreement with George Foreman Ventures, LLC (GFV Services Agreement) that became effective June 12, 2007, and expenses incurred in connection with the conversion of franchise-owned and company-operated stores operating under the KnowFat! tradename to stores operating under the UFood Grill tradename. Advertising, marketing and promotion expenses for the three months ended September 28, 2008 and September 30, 2007 include $25,519 and $-0-, respectively, of non-cash, stock-based compensation expense attributable to the GFV Services Agreement. As a percentage of total revenues, advertising, marketing and promotion expenses increased to 11.6% of total revenues in the three months ended September 28, 2008 from 4.9% of total revenues in the three months ended September 30, 2007.
Depreciation and amortization expense for the three months ended September 28, 2008 increased by $26,802, or 25.2%, to $133,036 from $106,234 for the three months ended September 30, 2007 primarily due to the depreciation of assets at our Logan Airport store. As a percentage of total revenues, depreciation and amortization expense decreased slightly to 8.6% of total revenues for the three months ended September 28, 2008 from 8.7% of total revenues for the three months ended September 30, 2007.
Other expense for the three months ended September 28, 2008 increased by $97,963, or 105.0%, to $191,293 from $93,330 primarily due to the financial penalty resulting from the registration statement which has not been declared effective (see Note 3).
Our net loss for the three months ended September 28, 2008 increased by $786,851, or 71.3%, to $1,891,139, from $1,104,288 for the three months ended September 30, 2007. Our net loss increased primarily due to the increase in general and administrative expenses, advertising, marketing and promotion expenses and other expenses. As a percentage of total revenues, our net loss increased to 122.3% of total revenues for the three months ended September 28, 2008 from 90.0% of total revenues for the three months ended September 30, 2007.
Nine Months Ended September 28, 2008 Compared to Nine Months Ended September 30, 2007
General
For the nine months ended September 28, 2008, our comparable store sales for Company owned stores decreased by 8.5%. Two of our three Company-owned comparable stores were closed a total of five weeks during the nine months ended September 28, 2008 in connection with the conversion of the stores from KnowFat! locations to UFood Grill outlets. System-wide comparable store sales decreased by 13.0% during the nine months ended September 28, 2008. One of the two franchisee-owned comparable store locations was closed for two weeks during the nine months ended September 28, 2008 in connection with the conversion of the store from a KnowFat! location to a UFood Grill outlet. All of the comparable store locations are located in the greater Boston area. As of September 28, 2008, the two franchisee-owned comparable store locations were operated by the Company pursuant to two separate management services agreements. Comparable store sales are based on sales for stores that have been in operation for the entire period of comparison. Franchisee-owned stores which we acquire are . . .
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