---

---

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Critical Accounting Policies

 

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies.  We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

 

Item 3.  Quantitative Disclosures About Market Risks

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

Item4T.  Controls and Procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our president (also our principal executive officer, principal financial officer and principal accounting officer) to allow for timely decisions regarding required disclosure.

 

As of September 30, 2009, the end of our first quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our president (also our principal executive officer, principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president (also our principal executive officer, principal financial and accounting officer) concluded that our disclosure controls and procedures were not effective in providing reasonable assurance in the reliability of our financial reports as of the end of the period covered by this quarterly report.

 

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2009 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

 

22

---

 

 

PART II - OTHER INFORMATION

 

Item1.  Legal Proceedings.

 

Melt Franchising, LLC and Melt (California), Inc. (Melt) v. Steven A. Field, M.D., MMS Coconut Point, LLC, and MMS King of Prussia Court, LLC (Respondents).

 

On March 18, 2007, Melt (FA) and Melt (CA) filed a demand for arbitration against Steven A. Field, MD., MMS Coconut Point, LLC and MMS King of Prussia Court, LLC (collectively, “Field”) seeking a finding and/or declaration of entitlement to terminate Field’s four franchise agreements.  Melt (FA) & Melt (CA) is also seeking unpaid royalties and advertising contributions; rent and other charges due under a sublease; an amount equal to all unpaid construction invoices; an amount equal to all unpaid invoices for products purchased by Field; and costs and expenses of arbitration and attorneys’ fees.  As of September 30, 2009, the demand is still pending.

 

David Gold, Elena Gold, EAOA, Inc., Steven Field, MMS Management, LLC, MMS Coconut Point, LLC, Jong Han, Yon Ho Kim, Young Suk Kim, Kang Won Lee, Yoo & Lee Enterprises, Inc., Charindra Liyanage, Liyange Investments, LLC, PMI Enterprises, Inc. and John Flannery (Plaintiffs)  v. Melt, Inc., Melt (California), Inc., Melt Franchising, LLC, Clive V. Barwin, Brandon Barwin, Michael Zorehkey, Rick Zorehkey, Eddie Ollman, Scott Miller, and Alin Cruz.

 

On September 19, 2007, six of our franchisees and their affiliates filed a putative class action lawsuit against us, our affiliates, our officers and some of our employees in which the franchisees allege that we fraudulently induced the franchisees to enter into franchise agreements by misrepresenting facts about the franchise opportunity.  The lawsuit sought injunctive relief and damages, in an unspecified amount, under several state franchise acts, restitution and injunctive relief under various provisions of the California Unfair Business Practices Act, damages and injunctive relief under the “Cartwright” Act, and damages for fraud, interference with prospective economic advantage, and unjust enrichment and declaratory relief. On or about Sept 30, 2008, the Court dismissed the plaintiffs’ lawsuit. On or about August 26, 2008, the Plaintiffs filed a Notice of Appeal. Two of the six franchisees and their affiliates Kang Won Lee, You & Lee Enterprises Inc, Yon Ho Kim and Young Suk Kim have withdrawn their appeals.

 

Melt Franchising, LLC v. PMI Enterprises, Inc. and John Flannery.

 

On June 24, 2008, Melt (FA) filed an ex parte application for a temporary restraining order and preliminary injunction against PMI Enterprises, Inc. and John Flannery for significant violations of the franchise agreement.  On August 18, 2008, the Court granted our motion for a preliminary injunction and ordered the parties to allow us to assume management of the store, cease using our marks, assign the parties’ lease for the store to us, and required the parties to sell all or any portions of the assets.  On September 4, 2008, the parties filed counterclaims for injunctive relief, restitution, fraud, unjust enrichment, and declaratory relief.  Melt (FA) filed a Motion to dismiss the parties’ counterclaims and on January 9, 2009, the Court dismissed all of the parties’ California claims and asked the parties to amend their complaint. As of September 30, 2009, this case is   on hold as the defendants have declared bankruptcy.

 

Jong Han v. Melt, Inc., Melt (California), Inc., Melt Franchising, LLC, Clive V. Barwin, Brandon Barwin, Michael Zorehkey, Rick Zorehkey, Eddie Ollman, and Alin Cruz.

 

On August 22, 2008, Jong Han filed a Complaint against us similar to the purported class action suit that was dismissed by the Court.  On or about December 8, 2008, the Court granted our motion to compel arbitration. As of September 30, 2009 no arbitration has been filed.

 

Mayflower Emerald Square LLC v. Melt Inc and Melt (California), Inc.

 

In October 2008, Mayflower Emerald Square LLC filed a complaint against both Melt (CA) and Melt Inc for early termination of a lease in North Attleboro, MA. The lease was signed by Melt (CA) only, however, the plaintiff claims Melt (CA) was acting as an agent of Melt Inc and thus has named Melt Inc. as a defendant. Melt Inc has filed a motion to dismiss, which was not granted by the court, and the discovery phase has commenced.

 

23

---

 

 

Braintree Property Associates LP v. Melt Inc, Melt Franchising LLC, Clive Barwin (Melt)

 

On April 2, 2009 plaintiff (landlord) filed suit against defendants which alleges that Melt  made a verbal representation to landlord that Melt would be assuming obligations of a lease made between landlord and  a former Melt (FA) franchisee. Melt will be vigorously defending these allegations. Melt Inc has filed a motion to dismiss, which was not granted by the court, and the discovery phase has commenced.

 

Item 1A.  Risk Factors

 

Much of the information included in this annual report includes or is based upon estimates, projections or other "forward looking statements".  Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

 

Such estimates, projections or other "forward looking statements" involve various risks and uncertainties as outlined below.  We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward looking statements".

 

Our common shares are considered speculative as our business is still in an early growth stage of its development.  Prospective investors should consider carefully the risk factors set out below.

 

Risks Related to our Business

 

We commenced our business operations in July, 2003 and opened our first retail store in November, 2003 and thus have a limited operating history.  If we cannot successfully manage the risks normally faced by early stage companies, our business may fail.

 

We have a limited operating history.  Our future is subject to the risks and expenses encountered by early stage companies, such as uncertainty regarding level of future revenue and inability to budget expenses and manage growth accordingly, uncertainty regarding acceptance of our products and retail operations and inability to access sources of financing when required and at rates favourable to us.  Our limited operating history and the highly competitive nature of the retail food industry make it difficult to predict future results of our operations.  We may not establish a customer following that will make us profitable, which might result in the loss of some or all of your investment in our common stock.

 

If we are unable to protect our trade name, our efforts to increase public recognition of our ”Melt” brand may be impaired and we may be required to incur substantial costs to protect our trade name.

 

Our service/trademarks “M Melt®” "Melt-gelato italiano®", “Melt – café & gelato bar®”, and “Melt – gelato and crepe café®” have been registered with the US Patent & Trade Mark Office.  However, these measures may not be adequate to prevent the unauthorized use of our trade names.  We may be unable to prevent third parties from acquiring and using names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.  We may need to bring legal claims to enforce or protect such intellectual property rights.  Any litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources.  Any claims, by or against us, could be time consuming and costly to defend or litigate, divert our attention and resources and result in the loss of goodwill associated with our trade names.  An adverse outcome in litigation or similar proceedings could subject us to significant liabilities to third parties; require expenditure of significant resources to develop non-infringing trade name and trademarks, any of which could have a material adverse effect on our business, operating results and financial condition.

 

The franchising industry is a highly litigious industry and almost all franchisors have one or many lawsuits filed against it.  If we have many lawsuits filed against us, we may be required to incur substantial costs to defend them, which might result in the loss of some or all of your investment in our common stock.

 

Although we engage in ethical business practices at all times and adhere to all the rules and regulations governed by the franchise act, due to the litigious nature of our industry we could have more lawsuits filed against us. Any litigation, by or against us, could be time consuming and costly to instuite or defend, and divert our attention and

 

24

---

 

 

resources. An adverse outcome in litigation could have a material adverse effect on our business, operating results and financial condition.

 

The establishment and maintenance of the brand identity “Melt” is critical to our future success.  If we are unable to promote and maintain our “Melt” brand, our business could fail.

 

Since we expect that substantially all of our revenues will be generated from purchases by the consumer of our gelato and related products at franchise owned and operated retail outlets, market acceptance of our products is critical to our future success.  Factors such as market positioning, retail locations, the availability and price of competing products (in particular, frozen desserts), and the introductions of new products will affect the market acceptance of our business.

 

We believe that establishing and maintaining the brand identity of our products will increase the appeal of our products to prospective customers.  Consumer recognition and a preference of our "Melt" brand products over similar products offered by our competition will be critical to our future success.  Promotion and enhancement of our gelato and related products will depend largely on our success in continuing to provide high quality products and service.  In order to attract and retain customers and to promote and maintain our "Melt" brand in response to competitive pressures, we may increase our financial commitment to creating and maintaining a distinct brand loyalty among our customers.  Currently, given the large number of factors and variables in achieving and maintaining consumer recognition and brand loyalty, we cannot anticipate or estimate how much we may be required to spend to establish such loyalty.  If we are unable to provide high quality products, or otherwise fail to promote and maintain our "Melt" brand, incur excessive expenses in an attempt to improve, or promote and maintain our brand, we may not be able to successfully implement our business plan and achieve a profitable level of operations.

 

Due to the nature of our products, we will be subject to specific risks unique to the retail frozen desert industry.

 

Specialty retail food businesses such as ours are often affected by changes in consumer and competitive conditions, including changes in consumer tastes; national, regional, and local economic conditions and demographic trends; and the type, number, and location of competing businesses.  Adverse publicity resulting from food quality, illness, injury, or other health concerns or operating issues stemming from one of our products may adversely affect our retail operations.  We, as well as our competitors, are subject to the foregoing risks, the occurrence of any of which would impair or prevent our efforts to establish and expand our frozen dessert operations.  The occurrence of such risks may result in an investor losing some or all of their investment in our common stock.

 

Because we face intense competition, an investment in our company is highly speculative.

 

The retail frozen dessert industry is characterized by intense and substantial competition.  We believe that our business competes with large and established ice cream retailers such as Ben & Jerry's, Haagen-Dazs, Dreyer’s, Baskin-Robbins, Dairy Queen and Cold Stone Creamery Company, as well as other small to medium sized ice cream and gelato business entities that provide similar products, including stores that sell frozen yogurt.

 

A number of our competitors are well established, substantially larger, and have substantially greater market recognition, greater resources and broader distribution capabilities than we have.  These existing and future competitors may be able to respond more quickly than us to new or changing opportunities,  product and customer requirements, and may be able to undertake more extensive promotional activities, offer more retail locations to customers and adopt more aggressive pricing policies than we do.  Increased competition by these existing and future competitors could materially and adversely affect our ability to commence, maintain, or expand our operations.

 

Our operations are subject to governmental regulation associated with the food service industry, the operation and enforcement of which may restrict our ability to carry on our business.

 

We are in the perishable food industry.  The development, manufacture and marketing of products sold by us will be subject to extensive regulation by various government agencies, including the U.S. Food and Drug Administration and the U.S. Federal Trade Commission, as well as various state and local agencies.  These agencies regulate production processes, product attributes, packaging, labelling, advertising, storage and distribution.  These agencies establish and enforce standards for safety, purity and labelling.  In addition, other governmental agencies (including the U.S. Occupational Safety and Health Administration), establish and enforce health and safety standards and regulations in the workplace, including those in our retail locations.  Our retail locations will be subject to inspection

 

25

---

 

 

by federal, state, and local authorities.  We will seek to comply at all times with all such laws and regulations.  We will obtain and maintain all necessary permits and licenses relating to our operations, and will ensure that our facilities and practices comply with applicable governmental laws and regulations.  Nevertheless, there is no guarantee that we will be able to comply with any future laws and regulations.  Our failure to comply with applicable laws and regulations could subject us to civil remedies including fines, injunctions, recalls or seizures as well as potential criminal sanctions.

 

As a result of such regulations we may encounter a variety of difficulties or extensive costs, which could delay or preclude us from marketing our products or continuing or expanding our operations.  We cannot predict if all necessary approvals will be granted or that if granted, any approval will be received on a timely basis.  If approvals are not obtained or are delayed, this may also preclude us from marketing our products or continuing or expanding our operations.

 

Because our officers, directors and principal shareholders control a substantial portion of our common stock, investors will have little or no control over our management or other matters requiring shareholder approval.

 

Our officers and directors, in the aggregate, beneficially own 29.93% of the issued and outstanding shares of our common stock.  In addition, Glynis Sive, the spouse of Clive Barwin, beneficially owns 9.34% of the issued and outstanding shares of our common stock.  As a result, these individuals have the ability to exert significant influence over matters affecting minority shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because our officers, directors and Glynis Sive can exercise such influence over our company, investors may not be able to replace our management if they disagree with the way our business is being run.  Because control by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.

 

Because we might not have sufficient insurance to cover any losses that may arise, we might have uninsured losses, increasing the possibility that you would lose your investment.

 

We may incur uninsured liabilities and losses as a result of the conduct of our business.  At the moment, we do not carry directors and officers insurance nor do we cover insurance for lawsuits brought against our company or our directors.  Should uninsured losses occur, purchasers of our common stock could lose their entire investment.

 

Because we can issue additional common shares, purchasers of our common stock may incur immediate dilution and may experience further dilution.

 

We are authorized to issue up to 100,000,000 common shares, of which 21,290,000 are issued and outstanding.  Our board of directors has the authority to cause our company to issue additional shares of common stock or issue warrants or options to purchase shares of common stock without the consent of any of our shareholders.  Consequently, our shareholders may experience more dilution in their ownership of our company in the future.

 

Risks Associated with our common stock

 

Trading on the OTC Bulletin Board may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.

 

Our common stock is quoted on the OTC Bulletin Board service of the Financial Industry Regulatory Authority.  Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our company’s operations or business prospects.  This volatility could depress the market price of our common stock for reasons unrelated to operating performance.  Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like Amex.  Accordingly, shareholders may have difficulty reselling any of the shares.

 

Our stock is a penny stock.  Trading of our stock may be restricted by the SEC’s penny stock regulations and the FINRA’s sales practice requirements, which may limit a stockholder’s ability to buy and sell our stock.

 

Our stock is a penny stock.  The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our securities are covered by the penny

 

26

---

 

 

stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”.  The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.  We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

 

In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.  Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities.

During the period ended September 30, 2009, the Company failed to make the required quarterly interest payment on its outstanding long-term convertible note payable in the amount of $400,000.  As such, the convertible note and accrued interest are now due upon demand and the principal amount has been reclassified to a current liability as of September 30, 2009.

 

Item 4.  Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits.

 

Exhibits required by Item 601 of Regulation S-K

 

Exhibit Number	Description
(3)	(i) Articles of Incorporation; and (ii) Bylaws
3.1	Articles of Incorporation (incorporated by reference from our Form SB-2 Registration Statement, filed on October 2, 2003).

 

27

---

 

Exhibit Number	Description
3.2	Bylaws (incorporated by reference from our Form SB-2 Registration Statement, filed on October 2, 2003).
(10)	Material Contracts
10.1	Operating Agreement between Melt Inc. and Dolce Dolci, LLC dated July 21, 2004 (incorporated by reference from our Form 10-KSB, filed on Sept 30, 2005).
10.2	Operating Agreement between Melt Inc. and Melt Franchising LLC dated February 25, 2005 (incorporated by reference from our Form 10-KSB, filed on Sept 30, 2005).
10.3	Form of loan agreement entered into with each of: Clive Barwin Errol Brome Lance Rosenberg Cecil Hofman (incorporated by reference from our Form 8-K, filed on June 12, 2005).
10.4	Franchise Offering Circular (incorporated by reference from our Form 10-QSB, filed on November 14, 2005).
(14)	Code of Ethics
14.1	Code of Business Conduct and Ethics. (incorporated by reference from our Form 10-KSB, filed on March 30, 2004).
(21)	Subsidiaries of the small business issuer
	Melt (California) Inc. Melt Franchising LLC
(31)	Rule 13a-14(a)/15d-14(a) Certifications
31.1*	Certification under Sarbanes-Oxley Act of 2002
(32)	Section 1350 Certifications
32.1*	Certification under Sarbanes-Oxley Act of 2002

 

* Filed herewith

 

 

28

---

 

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

		MELT INC.
		(Registrant)
Dated:  October 28, 2009		/s/ Clive Barwin
		Clive Barwin
		President, CEO, Chief Financial Officer, Secretary and Director
		(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

 

29

---