Summary of ORGANIC TO GO FOOD CORP

Item 2. 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 September 30, 2008, we operated nine stores in Washington, eighteen stores in California, and six stores in Washington, D.C., with central kitchens in Seattle, Los Angeles, San Diego and Washington, D.C. In addition to the 33 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. In addition, the Company has reviewed its business in light of the current economic downturn and has been making changes in its operations to focus on operational efficiencies. Changes include a reduction in its workforce and operating costs in addition to delaying further expansion.

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, and increased this subscription in September 2008 for another $2.0 million under the same agreement. 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 third quarter of 2008 increased approximately 70%, to $6.3 million, as compared with $3.7 million in the third quarter of 2007. Our third quarter sales in the past have always been our slowest quarter due to summer holidays for people at work and universities in summer session. Sales for the nine months ended September 30, 2008 increased approximately 57% to $17.5 million, compared to $11.2 million for the nine months ended September 30, 2007. Retail café sales were $3.3 million during the quarter ended September 30, 2008, an increase of approximately 83% over $1.6 million during the comparable prior year period. Café sales comprised 51% of total sales in the 2008 quarter compared to 44% of total sales in the third quarter of 2007. Café sales for the nine months ended September 30, 2008 and 2007 were 8.3 million and $4.6 million, respectively, and comprised 47% and 41% of total sales. The increases in year-over-year retail sales for both the quarter and nine month periods is primarily a result of the addition of all San Diego and Washington, DC Retail Cafés, in addition to four new locations in Seattle and two in Los Angeles that were opened or acquired subsequent to September 30, 2007. We ended the third quarter of 2008 with 33 Retail Cafés as compared with 13 at the end of the same period in 2007.

Delivery and Catering sales were $2.3 million for the third quarter of 2008, an increase of over $800,000, or approximately 75%, over $1.5 million during the third quarter of 2007. Delivery and Catering sales comprised 36% of total sales in the third quarter of 2008 as compared with 41% for the same period of the prior year. Delivery and catering sales for the nine months ended September 30, 2008 and 2007 were $6.9 million and $5.1 million, respectively, and comprised 39% 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 $794,000 in the quarter ending September 30, 2008, an increase of 37%, as compared with $548,000 in the comparable quarter of 2007. Wholesale sales comprised 14% of total sales in the 2008 period as compared with 15% in the comparable 2007 period. Wholesale sales for the nine months ended September 30, 2008 and 2007 were $2.4 million and $1.5 million, respectively, and comprised 14% and 13% 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, growth in sales to universities and hospital and our entrance in the Washington, DC marketplace.

Cost of Sales - Cost of sales includes the cost of food and paper products. Cost of sales for the third quarter of 2008 increased 69%, to nearly $3.0 million, as compared with $1.8 million for the third quarter of 2007. Cost of sales for the quarter ended September 30, 2008 was approximately 47% as a percent of sales as compared with 47% during the comparable prior year period. For the nine month period ending September 30, 2008, cost of sales were $7.3 million, or 42% of sales, as compared to $5.4 million, or 48% of sales, for the comparable 2007 period. During the third quarter of 2008, cost of sales increased due to our entrance into the Washington, DC market, which had higher food costs and initially higher waste associated with the start-up in a new market. In addition, we realized price increases on food products and packaging in all of our markets which was partially offset by select retail price increases.

Gross Profit - Gross profit increased approximately 71%, to $3.4 million for the third quarter in 2008, as compared with $2.0 million for the third quarter in 2007. Gross profit for our 2008 period was approximately 53% of sales as compared with 53% during the comparable 2007 period. Gross profit for the nine months ended September 30, 2008, was $10.2 million, or 58% of sales, and $5.8 million, or 52% of sales, for the comparable period in 2007. During the third quarter of 2008, gross profit decreased due to our entrance in the Washington, DC market, which had higher food costs and initially higher waste associated with the start-up in a new market. In addition, we realized price increases on food products and packaging in all of our markets which was partially offset by select retail price increases.

Operating Expenses - Operating expenses for the third quarter of 2008 were $7.6 million, as compared with $4.8 million for the comparable 2007 period. For the nine month period ended September 30, 2008, operating expenses were $16.9 million, or 97% of sales, as compared to $12.2 million, or 109% 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 September 30, 2007 to 33 as of September 30, 2008, and preparing for future growth, both in facilities leases and with the hiring of members to the executive management team. Included in the third quarter 2008 operating expenses are approximately $707,000 of nonrecurring expenses associated with the opening in a new region (Washington, DC).

Depreciation and Amortization - Depreciation and amortization expense for the third quarter and first nine months of 2008 increased to $2.7 million and $6.6 million, respectively, as compared with $871,000 and $2.0 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 first nine months of 2008. Depreciation and amortization for the nine month periods ended September 30, 2007 and 2008 were approximately 18% and 38% 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 third quarter of 2008 increased to approximately $7.0 million as compared with $3.7 million during the third quarter of 2008. For the nine months ended September 30, 2008, the loss from operations was $13.4 million as compared with a loss of $8.4 million for the first nine months of 2007. The increase in loss from operations over the prior year period is the result of an increase in gross profit of $1.4 million for the quarter and $4.4 million for the nine month period, being offset by a $4.7 million and $9.3 million increase in total operating, depreciation and amortization expenses for the quarterly and nine month periods, respectively.

Interest and Other Expense, Net - Net interest and other expense for the quarter ended September 30, 2008 increased to $75,000 as compared with $45,000 for the quarter ended September 30, 2007. The increase is primarily due to the increase in capital lease obligations since the end of the third quarter 2007. For the nine months ended September 30, 2007 and 2008, net interest and other expense was $460,000 and $182,000, respectively. The increase was primarily due to the increase in capital lease obligations since the end of the third quarter 2007.

Net Loss - Net loss in the third quarter of 2008 increased to $7.1 million, or $(0.19) basic and diluted net loss per share, as compared with $3.7 million, or $(0.15) basic and diluted net loss per share in the third quarter of 2007. Net loss for the nine months ended September 30, 2008 was $13.6 million or $(0.39) basic and diluted net loss per share, as compared with $8.9 million or $(0.47) basic and diluted net loss per share in the nine months ended September 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 and September 2008 we received $5.0 million and $2.0 million, respectively, 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 $7.3 million during the first nine months of 2007 and $6.6 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, as well as an increase in accounts payable offset by an increase in inventory during the first nine months of 2008.

Net cash used in investing activities was approximately $4.4 million and $8.8 million for the nine month periods ended September 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. Additionally, intangible assets were added during both year-to-date periods as we acquired existing businesses to support our expansion plans.

Net cash provided by financing activities was approximately $11.7 million and $16.1 million for the nine months ended September 30, 2007 and 2008, respectively. The increase of net cash provided during the first nine 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 and third quarters of 2008.