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| HFFI.OB > SEC Filings for HFFI.OB > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
The following discussion should be read in conjunction with the financial statements and the related notes included in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those projected in the forward-looking statements as a result of many factors.
History and Overview
We were incorporated under the laws of the state of Nevada on November 14, 2005 to own and operate EVOS fast food franchises.
We entered into a franchise agreement effective December 14, 2005 to operate an EVOS restaurant in Henderson, Nevada. Shortly after signing the franchise agreement, we found a location for the restaurant, obtained approval of the site from EVOS USA, Inc., and entered into a lease in January 2006. From January 2006 to September 2006, we sold 300,000 shares of common stock in a private placement, resulting in net proceeds of $544,878. These proceeds, together with loans from related parties, were used to build out, open and operate the restaurant. From February 2006 to October 2006, we redesigned the restaurant interior in cooperation with EVOS USA, Inc., obtained the necessary permits and licenses from government agencies and authorities, built out the improvements to the leasehold site, installed furniture and equipment, received training from EVOS USA, Inc., hired and trained restaurant staff, and launched a marketing and advertising campaign for the restaurant's opening in October 2006.
In December 2006, we entered into an area representative agreement that gives us the exclusive right to develop EVOS restaurants in a 12-state territory. To maintain our exclusivity in that territory, we were required to open a minimum number of restaurants within certain timeframes through 2016. These restaurants could be opened by us or by franchise owners that we identified and solicited. By December 1, 2008, we were required to have five restaurants opened and by May 31, 2009, we were required to have 12 additional restaurants opened. EVOS USA, Inc. extended the original deadline of May 31, 2008 to December 1, 2008 upon payment of an extension fee of $140,000. The December 1, 2008 deadline was further extended by EVOS USA, Inc. without any additional payment to March 1, 2009. We are in the process of terminating our relationship with EVOS USA, Inc.
From December 2006 to June 2007, we engaged in a second private placement of 389,450 shares of common stock, resulting in net proceeds of $1,552,127. These proceeds were used to repay related party loans, pay some of the expenses of our initial public offering, and fund our efforts to solicit franchise owners for our territory. A portion of these proceeds were also used to open another restaurant. During this period, we improved our operations at the Henderson restaurant and began to build the infrastructure necessary to support the operation of multiple restaurants. We hired a director of operations and a director of training in March 2007.
In March 2008, we completed an initial public offering of 1,000,000 units, each unit consisting of one share of common stock, one Class A warrant and two Class B warrants, resulting in gross proceeds of $5,100,000 and net proceeds of $4,002,840. The proceeds of the offering were intended to be used to open six company-owned restaurants in the Las Vegas area in the next 12 to 18 months, as well as for marketing expenses, franchise development and working capital. We opened our second restaurant in Las Vegas, Nevada in December 2008, and our franchisee in California opened its first store in November 2008.
After experiencing operating losses with our EVOS restaurants, we decided to diversify into another healthy fast food concept and acquired the worldwide rights to U-Swirl Frozen YogurtSM on September 30, 2008. We opened one U-Swirl location in the Las Vegas area in March 2009 and a second location in April 2009. We issued a Franchise Disclosure Document in November 2008 and filed it in certain states which require filing.
Results of Operations
Three Months Ended March 31, 2009. For the three months ended March 31, 2009, our restaurants generated $253,894 in sales, as compared to $183,298 for the three months ended March 31, 2008. The increase in revenues is due primarily to the fact that two EVOS restaurants were in operation during the 2009 quarter, as compared to only one restaurant during the 2008 quarter.
Our restaurant operating costs were $299,553, or 118% of net sales revenues, resulting in a restaurant operating loss of $45,659. During the comparable quarter in 2008, restaurant operating costs were 121% of net revenues and we lost $39,085 on our restaurant operations. Some of the restaurant operating costs are fixed, such as salaries for our director of operations and our director of training, as well as occupancy costs. These costs do not fluctuate with restaurant sales. Restaurant operating costs for the 2009 period reflect the increased royalty rate of 4.5% that went into effect beginning April 2008. After March 2009, the royalty rate is 5.5%. We were subject to a 3.5% royalty rate during the quarter ended March 31, 2008.
Franchise royalties and fees in 2009 decreased to $6,619 from $17,500 in 2008, as there were no franchises sold in our territory in 2009. The $17,500 represented 50% of the initial franchise fee for a new restaurant location purchased within our territory.
For the quarter ended March 31, 2009, general and administrative expense increased by $64,270 (99%) due to legal ($27,578), printing and postage ($12,658), directors and officers insurance ($9,913), and general administrative costs ($14,121) associated with increased U-Swirl International, Inc. operations. The largest components of general and administrative expenses for the 2008 period were accounting fees ($18,700), insurance costs ($10,905), and administrative salaries and payroll taxes ($6,687).
Officer compensation for the quarter ended March 31, 2009 increased by $61,802 (96%), as we paid salaries to all of our officers during the 2009 quarter. Some of the officers were not paid salaries in 2008.
We discontinued the services of our investor relations firm in December 2008. We incurred $108,842 of investor relations fees in 2008, as we hired a financial public relations firm in conjunction with our becoming a public company. Of this amount, $101,342 was the value of warrants to purchase 60,000 units issued to the public relations firm as part of its compensation.
We incurred $19,803 of pre-opening costs in connection with our U-Swirl Frozen Yogurt location that opened in March 2009.
The increase in depreciation and amortization expense of $14,998 (75%) reflects our increased base of leasehold improvements, property and equipment.
As a result of the above, our net loss for the three months ended March 31, 2009 was $347,280, as compared to a loss of $277,503 for the comparable 2008 quarter.
Liquidity and Financial Condition
As of March 31, 2009. At March 31, 2009, we had working capital of $2,188,109 and cash of $2,198,548. Working capital and cash at December 31, 2008 were $3,297,262 and $3,335,740, respectively. The decrease in working capital was due to our loss for the quarter and the purchase of fixed assets for our two U-Swirl Frozen Yogurt locations that opened in March and April of 2009. Leasehold improvement, property and equipment increased from $879,435 at December 31, 2008 to $1,589,088 at March 31, 2009.
During the three months ended March 31, 2009, we collected $49,878 in tenant improvement allowance and used $744,759 for the purchase of fixed assets and $47,285 for deposits in connection with
the opening of two U-Swirl Frozen Yogurt locations. During the three months ended March 31, 2008, we used $162,470 for investing activities, of which $19,470 was used for the purchase of fixed assets, $3,000 was used for deposits in connection with the new restaurant facility, and $140,000 was paid to EVOS USA, Inc. As we had a net loss of $347,280 in 2009, operating activities used cash of $394,027 as compared to $139,584 in 2008.
Summary of Significant Accounting Policies
Inventories. Inventories consisting of food, beverages and supplies are stated at the lower of cost or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred.
Leasehold improvements, property and equipment. Leasehold improvements, property and equipment are stated at cost less accumulated depreciation. Expenditures for property acquisitions, development, construction, improvements and major renewals are capitalized. The cost of repairs and maintenance is expensed as incurred. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 5 to 10 years. Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected gain or loss from operations.
We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. We use an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Deposits. Deposits consist of the $198,902 in security deposits for multiple locations, of which $134,889 was paid and $64,013 (in connection with our Henderson restaurant property lease) was unpaid as of March 31, 2009. All deposits are carried at the lower of fair value or cost.
Franchise fees. Franchise fees paid to EVOS USA, Inc. are stated at cost. Amortization of the franchise fees is calculated based on the straight-line method over the ten-year useful life of the franchise agreement. In accordance with SFAS 142, paragraph 11, the useful life of an intangible asset is determined by the period over which the asset is expected to contribute either directly or indirectly to our future cash flows. Franchise renewal fees are also recorded at cost and amortized over the useful life of the renewal term. Upon closing or disposal of a restaurant, the accounts will be relieved of cost and accumulated amortization and the related gain or loss will be reflected in income from continued operations. As of March 31, 2009, franchise fees consisted of $13,184 net of $4,316 of accumulated amortization.
Revenue, discounts and expense recognition. Revenue from restaurant sales is recognized when food and beverage products are sold. We reduce revenue by sales returns and sales discounts.
Revenue earned as an area representative for EVOS USA, Inc. will be derived from restaurants in our 12-state territory and will include initial franchise fees, continuing service fees, and royalties. Continuing service fees and royalties will be recognized in the period in which they are earned. Franchise fee revenue is recognized and fully earned upon the completion of our commitment to train franchisees of each of the EVOS restaurants sold in our 12-state territory. SFAS 45, paragraph 5(a)-(c), stipulates that initial franchise fee revenue from a franchise sale should be recognized when the franchiser has substantially performed or satisfied all material services or conditions relating to the sale. Substantial performance has occurred when the franchiser has: (a) no remaining obligations or intent to refund any cash received or to forgive any unpaid notes or receivables; (b) performed substantially all of the initial services required by the franchise agreement (such as providing assistance in site selection, obtaining facilities, advertising, training, preparing operating manuals, bookkeeping, or quality control); and (c) met all other material conditions or obligations. We believe that completion of our training commitment
satisfies the "substantial performance" definition outlined above. We recognized $6,619 and $17,500 in franchise fee revenue during the three months ended March 31, 2009 and 2008, respectively.
Costs and expenses are recognized during the period in which they are incurred.
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