Attached files
file | filename |
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EX-32.1 - EXH 32-1 CERTIFICATION - U-SWIRL, INC. | exh32-1_certification.htm |
EX-31.1 - EXH 31-1 CERTIFICATION - U-SWIRL, INC. | exh31-1_certification.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
[x] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from
to
Commission
file number 0-53130
HEALTHY
FAST FOOD, INC.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of
incorporation
or organization)
|
43-2092180
(IRS
Employer
Identification
No.)
|
1075
American Pacific, Suite C, Henderson, Nevada 89074
(Address
of principal executive
offices) (Zip
Code)
(702)
448-5301
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [x]Yes [ ]No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). [ ]Yes
[ ]No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
[ ]
|
Accelerated filer
[ ]
|
Non-accelerated filer
[ ]
|
Smaller reporting company
[x]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ]Yes [x]
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 2,538,350 shares of Common Stock,
$0.001 par value, as of November 6, 2009
HEALTHY
FAST FOOD, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
Unaudited
|
Audited
|
|||||||
September 30, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and equivalents
|
$ | 725,916 | $ | 3,335,740 | ||||
Tenant
improvement allowance receivable
|
10,335 | - | ||||||
Due
from U-Create Enterprises, Inc.
|
1,134 | - | ||||||
Inventory
|
74,492 | 15,100 | ||||||
Prepaid
expenses
|
32,269 | 23,495 | ||||||
Current
assets from discontinued operations
|
6,916 | 100,113 | ||||||
Total
current assets
|
851,062 | 3,474,448 | ||||||
Leasehold
improvements, property and equipment, net
|
1,900,834 | 64,586 | ||||||
Leasehold
improvements, property and equipment from
|
||||||||
discontinued
operations, net
|
- | 814,849 | ||||||
Other
assets
|
||||||||
Deposits
|
108,572 | 5,400 | ||||||
Other
assets from discontinued operations
|
85,350 | 159,839 | ||||||
Total
other assets
|
193,922 | 165,239 | ||||||
Total
assets
|
$ | 2,945,818 | $ | 4,519,122 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 75,308 | $ | 62,781 | ||||
Accounts
payable and accrued liabilities from discontinued
|
||||||||
operations
|
183,514 | 110,202 | ||||||
Current
portion of long-term debt
|
4,649 | 4,203 | ||||||
Total
current liabilities
|
263,471 | 177,186 | ||||||
Deferred
rent
|
220,021 | 20,059 | ||||||
Long-term
capital lease
|
11,406 | 14,951 | ||||||
Long-term
liabilities from discontinued operations
|
76,145 | 187,423 | ||||||
Total
liabilities
|
571,043 | 399,619 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity
|
||||||||
Preferred
stock; $0.001 par value; 25,000,000 shares authorized,
|
||||||||
no
shares issued and outstanding
|
- | - | ||||||
Common
stock; $0.001 par value; 100,000,000 shares authorized,
|
||||||||
2,523,350
shares issued and outstanding at 9/30/09 and 12/31/08
|
2,523 | 2,518 | ||||||
Additional
paid-in capital
|
6,835,653 | 6,794,179 | ||||||
Stock
subscriptions receivable
|
(150 | ) | (150 | ) | ||||
Compensation
payable in stock
|
21 | - | ||||||
Deficit
|
(4,463,272 | ) | (2,677,044 | ) | ||||
Total
stockholders' equity
|
2,374,775 | 4,119,503 | ||||||
Total
liabilities and stockholders' equity
|
$ | 2,945,818 | $ | 4,519,122 |
The
accompanying notes are an integral part of these financial
statements.
2
HEALTHY
FAST FOOD, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
|
Unaudited
|
|||||||||||||||
For
the three months ended
|
For
the nine months ended
|
|||||||||||||||
September 30, 2009
|
September 30, 2008
|
September 30, 2009
|
September 30, 2008
|
|||||||||||||
Revenues
|
||||||||||||||||
Restaurant
sales, net of discounts
|
$ | 515,332 | $ | - | $ | 910,603 | $ | - | ||||||||
Franchise
royalties and fees
|
15,000 | - | 15,000 | - | ||||||||||||
Total
revenues
|
530,332 | - | 925,603 | - | ||||||||||||
Restaurant
operating costs
|
||||||||||||||||
Food,
beverage and packaging costs
|
152,574 | - | 267,523 | - | ||||||||||||
Labor
and related expenses
|
138,561 | - | 247,062 | - | ||||||||||||
Occupancy
and related expenses
|
99,656 | 2,394 | 156,758 | 6,742 | ||||||||||||
Marketing
and advertising
|
74,342 | 10,675 | 106,145 | 28,735 | ||||||||||||
General
and administrative
|
176,797 | 60,661 | 408,111 | 173,646 | ||||||||||||
Officer
compensation
|
50,726 | 43,331 | 294,775 | 122,678 | ||||||||||||
Investor
relations fees
|
- | 23,398 | - | 154,740 | ||||||||||||
Intellectual
property acquired from related parties
|
- | 180,000 | - | 180,000 | ||||||||||||
Depreciation
and amortization
|
44,673 | 201 | 82,039 | 603 | ||||||||||||
Total
costs and expenses
|
737,329 | 320,660 | 1,562,413 | 667,144 | ||||||||||||
Loss
from operations
|
(206,997 | ) | (320,660 | ) | (636,810 | ) | (667,144 | ) | ||||||||
Interest
expense
|
(570 | ) | (700 | ) | (1,810 | ) | (2,723 | ) | ||||||||
Interest
income
|
1,422 | 21,189 | 7,445 | 48,097 | ||||||||||||
Loss
from continuing operations before income taxes
|
(206,145 | ) | (300,171 | ) | (631,175 | ) | (621,770 | ) | ||||||||
Provision
for income taxes
|
- | - | - | - | ||||||||||||
Income
from continuing operations
|
(206,145 | ) | (300,171 | ) | (631,175 | ) | (621,770 | ) | ||||||||
Discontinued
operations:
|
||||||||||||||||
Loss
from operations of discontinued Fresh and
|
||||||||||||||||
Fast
restaurant component (including loss on
|
||||||||||||||||
disposal
of $814,849)
|
1,027,467 | 94,637 | 1,155,053 | 270,249 | ||||||||||||
Income
tax benefit
|
- | - | - | - | ||||||||||||
Loss
on discontinued operations
|
(1,027,467 | ) | (94,637 | ) | (1,155,053 | ) | (270,249 | ) | ||||||||
Net
loss
|
$ | (1,233,612 | ) | $ | (394,808 | ) | $ | (1,786,228 | ) | $ | (892,019 | ) | ||||
Earnings
per share - basic
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.08 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (0.28 | ) | ||||
Loss
from discontinued operations
|
(0.41 | ) | (0.04 | ) | (0.46 | ) | (0.12 | ) | ||||||||
Net
loss per common share - basic and fully diluted
|
$ | (0.49 | ) | $ | (0.18 | ) | $ | (0.71 | ) | $ | (0.40 | ) | ||||
Weighted
average common shares outstanding -
|
||||||||||||||||
basic
and diluted
|
2,518,350 | 2,211,246 | 2,518,350 | 2,211,246 |
The
accompanying notes are an integral part of these financial
statements.
3
HEALTHY
FAST FOOD, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
|
||||||||
For
the nine months ended
|
||||||||
September
30, 2009
|
September
30, 2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (1,786,228 | ) | $ | (892,019 | ) | ||
Adjustments
to reconcile net (loss) to net
|
||||||||
cash
(used) by operating activities:
|
||||||||
Depreciation
and amortization
|
82,039 | 56,583 | ||||||
Amortization
of franchise fees
|
- | 1,312 | ||||||
Share-based
compensation
|
41,500 | 101,342 | ||||||
Shares
issued to acquire U-Swirl intellectual property
|
- | 180,000 | ||||||
Loss
on disposal of Fresh and Fast festaurant assets
|
814,849 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Current
assets from discontinued operations
|
93,197 | (130 | ) | |||||
Interest
receivable
|
- | (88 | ) | |||||
Inventory
|
(59,392 | ) | (2,960 | ) | ||||
Prepaid
expenses
|
(8,774 | ) | (6,653 | ) | ||||
Other
assets from discontinued operations
|
74,489 | - | ||||||
Accounts
payable and accrued liabilities
|
12,527 | 6,086 | ||||||
Accrued
interest - related parties
|
- | (1,844 | ) | |||||
Royalties
payable
|
- | 1,688 | ||||||
Accounts
payable and accrued liabilities from discontinued
operations
|
(37,966 | ) | - | |||||
Deferred
rent
|
199,962 | (16,462 | ) | |||||
Net
cash (used) by operating activities
|
(573,797 | ) | (573,145 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Tenant
improvement allowance receivable
|
(10,335 | ) | - | |||||
Due
from U-Create Enterprises
|
(1,134 | ) | - | |||||
Deposits
|
(103,172 | ) | - | |||||
Prepaid
franchise fees
|
- | (140,000 | ) | |||||
Purchase
of fixed assets
|
(1,918,287 | ) | (239,980 | ) | ||||
Net
cash (used) by investing activities
|
(2,032,928 | ) | (379,980 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Net
proceeds from issuance of common stock
|
- | 4,002,840 | ||||||
Deferred
offering costs
|
- | 332,415 | ||||||
Payments
on capital lease obligation
|
(3,099 | ) | (3,817 | ) | ||||
Net
cash provided (used) by financing activities
|
(3,099 | ) | 4,331,438 | |||||
Net
change in cash
|
(2,609,824 | ) | 3,378,313 | |||||
Cash,
beginning of period
|
3,335,740 | 604,118 | ||||||
Cash,
end of period
|
$ | 725,916 | $ | 3,982,431 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid
|
$ | 1,810 | $ | 2,723 | ||||
Taxes
paid
|
$ | - | $ | - | ||||
Capital
lease obligations for property and equipment
|
$ | - | $ | 23,937 | ||||
Number
of shares issued for intellectual property
|
- | 100,000 | ||||||
Value
of shares issued for intellectual property
|
$ | - | $ | 180,000 |
The
accompanying notes are an integral part of these financial
statements.
4
HEALTHY
FAST FOOD, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
1.
|
DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Healthy
Fast Food, Inc. (the “Company”) was incorporated in the state of Nevada on
November 14, 2005.
The
accompanying unaudited financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited financial statements reflect all adjustments consisting
of normal recurring adjustments necessary for a fair presentation of its
financial position and results of operations. Interim results of operations are
not necessarily indicative of the results that may be achieved for the full
year. The financial statements and related notes do not include all information
and footnotes required by U.S. generally accepted accounting principles for
annual reports. This quarterly report should be read in conjunction with the
financial statements included in the Company’s annual statement on Form 10-K
filed on March 27, 2009 with the U.S. Securities and Exchange Commission (“SEC”)
for the year ended December 31, 2008.
U-Swirl
Concept
On
September 30, 2008, the Company acquired the worldwide rights to the U-Swirl
Frozen YogurtSM
concept through its wholly-owned subsidiary, U-Swirl International,
Inc. U-SWIRL allows guests the ultimate choice in frozen yogurt by
providing up to 20 non-fat flavors, including tart, traditional and no
sugar-added options and more than 40 toppings, including seasonal fresh fruit,
sauces, candy and granola. Guests serve themselves and pay by the ounce instead
of by the cup size. As of September 30, 2009, U-Swirl International,
Inc. owned and operated five U-Swirl Yogurt restaurants and had one licensed
restaurant in operation.
Discontinued
Operations - Fresh and Fast (formerly EVOS) Concept
For
purposes of determining discontinued operations, the Company has determined that
the “concept” level is a component of the entity within the context of FASB ASC
360, “Accounting for the Impairment or Disposal of Long-Lived Assets”. A
component of an entity comprises of operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes, from
the rest of the Company. The Company routinely evaluates its concept base to
identify relevant factors for success and determine appropriate actions
necessary to grow and operate a successful concept and similarly to identify
relevant factors and actions that need to be taken on an underperforming concept
including the closing of a non-performing concept. The Company evaluates the
results of operations of the concept both quantitatively and qualitatively to
determine if appropriate for reporting as discontinued operations.
The
Company owned and operated two fast food restaurants located in Henderson and
Las Vegas, Nevada under the “Fresh and Fast” Concept. The restaurants
were formerly operated under franchise rights and “EVOS” branding purchased from
EVOS USA, Inc. Effective March 1, 2009, the Company notified EVOS
USA, Inc. of its intent to terminate the franchise and area development
agreements. Effective July 1, 2009, the Company ceased conducting
business under the EVOS USA, Inc. franchise and area development agreements and
converted the restaurants to the “Fresh and Fast” Concept. Effective
August 1, 2009, the Company determined to cease conducting business under the
“Fresh and Fast” Concept altogether in order to focus on its U-Swirl Yogurt
Concept, and has accordingly accounted for the “Fresh and Fast” Concept
divestiture as “discontinued operations” (see Note 2 below).
Subsequent
Events
The
Company has evaluated subsequent events through November 16, 2009, the date
it filed its report on Form 10-Q for the quarter ended September 30, 2009
with the SEC.
5
HEALTHY
FAST FOOD, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Franchise
Revenue Recognition Policy
Revenue
earned as a U-Swirl Frozen Yogurt franchisor will be derived from restaurants in
U-Swirl International, Inc.’s worldwide 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
signing and acceptance of the franchise agreement and franchise fee by both
parties. FASB ASC 952-605-25 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
franchisor 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. The Company recorded U-Swirl franchise fee revenue of
$15,000 and $0 during the nine months ended September 30, 2009 and 2008,
respectively.
Costs and
expenses are recognized during the period in which they are
incurred.
New
Pronouncements
In August
2009, the FASB issued Accounting Standards Update (ASU) 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) — Measuring Liabilities at Fair Value,” which
updates FASB ASC 820-10. The update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques:
•
|
A
valuation technique that uses a) the quoted price of an identical
liability when traded as an asset, or b) quoted prices for similar
liabilities or similar liabilities when traded as
assets.
|
|
•
|
Another
valuation technique that is consistent with the principles of FASB ASC
820, examples include an income approach, such as a present value
technique, or a market approach, such as a technique that is based on the
amount at measurement date that the reporting entity would pay to transfer
the identical liability or would receive to enter into the identical
liability.
|
This
standard is effective for financial statements issued for interim and annual
periods beginning after August 2009. ASC 820 does not have an impact on the
Company’s financial position or results of operations.
In
June 2009, the FASB issued ASC 105, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162. FASB ASC 105 establishes a single
source of authoritative, nongovernmental U.S. GAAP, except for rules and
interpretive releases of the SEC. The effective date of ASC 105 is for interim
and annual reporting periods ending after September 15, 2009. ASC 105 does
not have an impact on the Company’s financial position or results of operations
as it does not change authoritative guidance.
In
May 2009, the FASB issued ASC 855, Subsequent Events. FASB ASC 855 provides
guidance on the disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The date
through which any subsequent events have been evaluated and the basis for that
date must be disclosed. FASB ASC 855 requires that the Company disclose the
analysis of subsequent events through the date that its Financial Statements are
issued. FASB ASC 855 also defines the circumstances under which an entity should
recognize such events or transactions and the related disclosures of such events
or transactions that occur after the balance sheet date. The effective date of
FASB ASC 855 is the Company’s interim or annual financial periods ending after
September 15, 2009.
In
April 2009, the FASB issued ASC 825-10-65, Interim Disclosures about Fair
Value of Financial Instruments, which expands the fair value disclosures for all
financial instruments within the scope of
6
HEALTHY
FAST FOOD, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
FASB ASC
825-10-50 to interim reporting periods. The Company has adopted FASB ASC
825-10-65, and it is effective for interim reporting periods ending after
June 15, 2009. ASC 825-10-65 does not have an impact on the Company’s
financial position or results of operations as it focuses on additional
disclosures.
In
April 2009, the FASB issued ASC 820-10-65-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. FASB ASC
820-10-65-4 is an amendment of FASB ASC 820-10, Fair Value Measurements. FASB
ASC 820-10-65-4 applies to all assets and liabilities and provides guidance on
measuring fair value when the volume and level of activity has significantly
decreased and guidance on identifying transactions that are not orderly. FASB
ASC 820-10-65-4 requires interim and annual disclosures of the inputs and
valuation techniques used to measure fair value and a discussion of changes in
valuation techniques and related inputs, if any, which occurred during the
period. The Company has adopted FASB ASC 820-10-65-4, which is effective for
interim and annual reporting periods ending after June 15, 2009. ASC
820-10-65-4 does not have a material impact on the Company’s financial position
or results of operations.
2. DISCONTINUED OPERATIONS –
FRESH AND FAST (FORMERLY EVOS) CONCEPT
During
August 2009, the Company closed its two Fresh and Fast (formerly EVOS)
restaurants. As a result of the closures, activities of the Fresh and
Fast concept have been accounted for as discontinued
operations. These results are presented as net amounts in the
Condensed Consolidated Statements of Operations, with prior periods restated to
conform to the current presentation. Selected operating results for
these discontinued operations are presented in the following table for the nine
months ended September 30, 2009 and 2008:
2009
|
2008
|
|||||||
Revenues
|
$ | 468,483 | $ | 523,503 | ||||
Costs
and expenses
|
(808,687 | ) | (793,752 | ) | ||||
Loss
on disposal of fixed assets, net of liabilities
|
(814,849 | ) | - | |||||
Net
loss
|
$ | (1,155,053 | ) | $ | (270,249 | ) |
Net
assets of the Fresh and Fast concept operations, which are presented as a net
amount in the Condensed Consolidated Balance Sheets at September 30, 2009 and
December 31, 2008, were as follows:
2009
|
2008
|
|||||||
Assets
|
$ | 92,266 | $ | 1,074,801 | ||||
Liabilities
|
(259,659 | ) | (316,779 | ) | ||||
Net
assets
|
$ | (167,393 | ) | $ | 758,022 |
Abandoned
Facilities Lease Commitments
As of
September 30, 2009, the Company continues to be liable for the leases of the two
abandoned restaurants for a period of 20 months on one store and 47 months on
the other. Included in Liabilities from Discontinued Operations for
the nine months ending September 30, 2009 is the present value of discounted
future rent commitments for the two abandoned leased stores totaling
$217,368.
EVOS
Severance Agreement
As of
September 30, 2009, the Company was under continued negotiations to sever its
franchisee relationship with EVOS USA, Inc. A formal severance
agreement has yet to be accepted by both parties. The Company
continues to record royalty fee payable and area developer’s royalty fee
receivable as of September 30, 2009, until such time as both parties have
accepted a formal agreement which officially terminates the franchise and area
development agreements.
7
HEALTHY
FAST FOOD, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
3. CASH AND
EQUIVALENTS
Concentration of Credit Risk for
Cash
Held at Banks
The
Company maintains cash balances at several banks. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to
$250,000. Some amounts were in excess of the Federally insured
program, however, management does not consider these amounts to pose a
significant credit risk to the Company.
During
the third quarter ended September 30, 2008, the Company invested $3,000,000 in
13-week maturity US Government Treasury Bills. The T-Bills matured
and were redeemed in full on January 9, 2009.
4. TENANT IMPROVEMENT ALLOWANCE
RECEIVABLE
During
June 2009, the Company entered into a lease agreement for a new U-Swirl Yogurt
restaurant. According to the terms of the agreement, the lessor owed
the Company $26,675 in cash for tenant improvements. The lessor was
unable to pay the amount due. The Company and the lessor agreed to
amortize the amount against future monthly rents over a 5-month
period. As of September 30, 2009, the amount receivable on the
Company’s Balance Sheet to be amortized against future rents was
$10,335.
5. FRANCHISE FEE INCOME AND
DEFERRED REVENUE
The
Company recognized $15,000 and $-0- in franchise fee income for the nine months
ended September 30, 2009 and 2008, respectively.
6. LEASEHOLD IMPROVEMENTS,
PROPERTY AND EQUIPMENT
Leasehold
improvements, property and equipment consist of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
Restaurant
equipment
|
$ | 706,588 | $ | - | ||||
Signage
|
74,712 | 32,219 | ||||||
Furniture
and fixtures
|
103,317 | - | ||||||
Computer
equipment
|
86,840 | 4,076 | ||||||
Vehicles
|
23,937 | - | ||||||
Leasehold
improvements
|
988,621 | 29,433 | ||||||
1,984,015 | 65,728 | |||||||
Less:
accumulated depreciation
|
(83,181 | ) | (1,142 | ) | ||||
Leasehold
improvements, property and equipment, net
|
$ | 1,900,834 | $ | 64,586 |
Depreciation
and amortization expense for the nine months ended September 30, 2009 and 2008
totaled $82,039 and $603, respectively.
7.
|
INTEREST INCOME AND
EXPENSE
|
Interest
income for the nine months ended September 30, 2009 and 2008 totaled $7,445 and
$48,097, respectively.
Interest
expense for the nine months ended September 30, 2009 and 2008 totaled $1,810 and
$2,723, respectively.
8
HEALTHY
FAST FOOD, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
8.
|
SHAREHOLDERS
EQUITY
|
As of
September 30, 2009, the Company granted 26,000 shares of its $0.001 par value
common stock to officers and directors as share-based
compensation. The fair market value of the shares on the date of
grant totaled $41,500. Of these shares, 21,000 were unissued as of
September 30, 2009, and are therefore recorded as “Compensation Payable in
Stock” on the Company’s Balance Sheet.
9. RELATED PARTY
TRANSACTIONS
A Company
officer/shareholder has donated 100 square feet of office space for Company
use. The estimated fair market value of the space is
$70/month. The annualized donated rent of $840 is considered
immaterial to the financial statements and consequently not recorded on the
Company’s financial statements.
The
Company paid $11,000 in rent for inventory storage for the nine months ended
September 30, 2009 to a company which is wholly owned by the Company’s
officers/shareholders.
The
Company was owed $1,134 from U-Create Enterprises, a company which is a U-Swirl
franchisee and is owned and operated by the grandchildren of the Company’s Chief
Executive Officer. The corporate secretary/treasurer of U-Create
Enterprises is also the Company’s corporate secretary.
The
Company paid $24,000 in rent to a real estate holding company held jointly by
the Company’s former Chief Financial Officer and his spouse as compensation for
the nine months ended September 30, 2009 pursuant to the Company’s employment
agreement with the former officer.
10. OCCUPANCY AND RELATED
EXPENSES
Occupancy
and related expenses consists of the following for the nine months ended
September 30, 2009 and 2008:
2009
|
2008
|
|||||||
Rent
and CAM fees
|
$ | 138,632 | $ | 6,742 | ||||
Utilities
|
18,126 | - | ||||||
Occupancy
and related expenses
|
$ | 156,758 | 6,742 |
9
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
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
Healthy Fast Food, Inc. (the “Company”)
was 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.
(EVOS USA”), 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. The restaurant opened 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 the 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. 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 EVOS restaurants in
the Las Vegas metropolitan statistical area (the “Las Vegas MSA”) during the
following 12 to 18 months, as well as for marketing expenses, franchise
development and working capital. We opened our second restaurant in
the Las Vegas MSA in December 2008, and our EVOS sub-franchisee in California
opened its first store in November 2008.
After experiencing continued 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
(“U-Swirl”) on September 30, 2008. Our intent with the acquisition of
the rights to U-Swirl is to build and operate stores to be owned and operated by
the Company (“Company-owned”) and to franchise to others the right to own and
operate U-Swirl stores pursuant to either a (a) license agreement as a U-Swirl
licensee, (b) a franchise and area development agreement as a U-Swirl
franchisee, or (c) a joint venture agreement as a U-Swirl joint-venture
partner.
We opened
our first Company-owned U-Swirl location in the Las Vegas MSA in March 2009, and
the Company has since developed five more Company-owned locations in the Las
Vegas MSA. In addition, the original U-Swirl store continues to
operate as a licensee.
We issued
a Franchise Disclosure Document (the “FDD”) in November 2008 and filed it in
certain states which require filing. In July 2009, we entered into a
franchise agreement with Galena Frozen Yogurt Company, which over the next 12
months plans to open three U-Swirl Frozen Yogurt stores in
10
Reno,
Nevada, and at least one U-Swirl store in Northern California. The
first store in Reno opened in October 2009.
Results
of Operations
Three Months
Ended September 30, 2009. For the three months ended September
30, 2009, our U-Swirl restaurants generated $515,332 in sales. As we
did not have any U-Swirl locations in operation in 2008, there is no comparable
period information available. Franchise royalties and fees were
derived from the sale of a new U-Swirl Yogurt franchise store and franchise area
development agreement in Reno, Nevada.
Our restaurant operating costs,
including pre-opening expenses attributable to training, supplies and various
grand-opening promotions including product giveaways, were $390,791, or 76% of
net sales revenues, resulting in a restaurant operating profit of
$124,541.
Marketing and advertising expenses were
$74,342 for the 2009 quarter as compared to $10,675 for 2008, as we opened four
Company-owned U-Swirl locations during the period.
For the quarter ended September
30, 2009, general and administrative expense increased by $116,136 (191%) due
primarily to increased U-Swirl operations. The largest components of
general and administrative expenses for the 2009 period were accounting fees
($8,005), administrative salaries and payroll taxes ($6,712), consulting fees
($55,000), insurance ($11,324), licenses, permits and fees ($10,192), legal fees
($19,574), office and postage expense ($6,822) and supplies
($27,352).
Officer compensation for the quarter
ended September 30, 2009 increased by $7,395 (17%), as we paid salaries to all
of our officers during the 2009 quarter. We hired a chief operating
officer in August 2009 and increased the salaries of some of our
officers.
We discontinued the services of our
investor relations firm in December 2008. We incurred $23,398 of
investor relations fees in 2008, as we hired a financial public relations firm
in conjunction with our becoming a public company.
The increase in depreciation and
amortization expense of $44,472 reflects our increased base of leasehold
improvements, property and equipment.
We owned and operated two fast food
restaurants located in Henderson and Las Vegas, Nevada under the “Fresh and
Fast” Concept. The restaurants were formerly operated under franchise
rights and “EVOS” branding purchased from EVOS USA, Inc. Effective
March 1, 2009, we notified EVOS USA, Inc. of our intent to terminate the
franchise and area development agreements. Effective July 1, 2009, we
ceased conducting business under the EVOS USA, Inc. franchise and area
development agreements and converted the restaurants to the “Fresh and Fast”
Concept. Effective August 1, 2009, we determined to cease conducting
business under the “Fresh and Fast” Concept altogether in order to focus on our
U-Swirl Yogurt Concept, and have accordingly accounted for the “Fresh and Fast”
Concept divestiture as “discontinued operations”. We wrote off all of
our assets related to the EVOS restaurant concept, resulting in a loss of
$1,027,467, as compared to a loss of $94,637 for the 2008 quarter.
As a result of the above, our net loss
for the three months ended September 30, 2009 was $1,233,612, as compared to a
loss of $394,808 for the comparable 2008 quarter.
Nine Months Ended
September 30, 2009. For the nine months ended September 30,
2009, our U-Swirl restaurants generated $910,603 in sales.
Our restaurant operating costs,
including pre-opening expenses attributable to training, supplies and various
grand-opening promotions including product giveaways, were $671,343, or 74% of
net sales revenues, resulting in a restaurant operating profit of
$239,260.
11
Marketing and advertising expenses were
$106,145 for the 2009 period as compared to $28,735 for the 2008 period, as we
opened six Company-owned U-Swirl locations during that time.
For the nine months ended September 30,
2009, general and administrative expense increased by $234,465 (135%) due to
increased U-Swirl operations. The largest components of general and
administrative expenses for the nine months ended September 30, 2009 were
accounting fees ($25,295), administrative salaries and payroll taxes ($24,921),
consulting fees ($55,666), insurance ($24,348), licenses, permits and fees
($20,016), legal fees ($84,650), office and postage expenses ($19,042) and
supplies ($63,802).
Officer compensation for the nine
months ended September 30, 2009 increased by $172,097 (140%), as we paid
salaries to all of our officers during the nine months ended September 30,
2009.
We discontinued the services of our
investor relations firm in December 2008. We incurred $154,740 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.
The increase in depreciation and
amortization expense of $81,436 reflects our increased base of leasehold
improvements, property and equipment due to the operation of the new
stores.
We reported a loss from operations of
our discontinued EVOS restaurants of $1,155,053, as compared to a loss of
$270,249 for the 2008 period.
As a result of the above, our net loss
for the nine months ended September 30, 2009 was $1,786,228, as compared to a
loss of $892,019 for the comparable 2008 period.
Liquidity
and Financial Condition
As of September 30, 2009.
At
September 30, 2009, we had working capital of $587,591 and cash of
$725,916. 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 nine-month period and the purchase of fixed
assets for our six U-Swirl restaurants. Leasehold improvements,
property and equipment increased from $879,435 at December 31, 2008, to
$1,900,834 at September 30, 2009.
During
the nine months ended September 30, 2009, we used $1,918,287 for the purchase of
fixed assets and $103,172 for deposits in connection with the opening of U-Swirl
restaurants. During the nine months ended September 30, 2008, we used
$379,980 for investing activities, of which $239,980 was used for the purchase
of fixed assets and $140,000 was paid to EVOS USA. As we had a net loss of
$1,786,228 in 2009, operating activities used cash of $573,797 as compared to
$573,145 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,
12
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 $108,572 in security deposits for multiple
locations. All deposits are carried at the lower of fair value or
cost.
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 a U-Swirl Frozen
Yogurt franchisor will be derived from restaurants in U-Swirl International,
Inc.’s worldwide 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 signing and acceptance of
the franchise agreement and franchise fee by both parties. FASB ASC
952-605-25 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 franchisor 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 recorded U-Swirl franchisee fee revenue
of $15,000 and $0 during the nine months ended September 30, 2009 and 2008,
respectively.
Costs and expenses are recognized
during the period in which they are incurred.
Discontinued
Operations – Fresh and Fast (formerly EVOS) Concept. For purposes of
determining discontinued operations, we have determined that the “concept” level
is a component of the entity within the context of FASB ASC 360, “Accounting for
the Impairment or Disposal of Long-Lived Assets”. A component of an
entity comprises of operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the
Company. We routinely evaluate our concept base to identify relevant
factors for success and determine appropriate actions necessary to grow and
operate a successful concept and similarly to identify relevant factors and
actions that need to be taken on an underperforming concept including the
closing of a non-performing concept. We evaluate the results of
operations of the concept both quantitatively and qualitatively to determine if
appropriate for reporting as discontinued operations.
We owned and operated two fast food
restaurants located in Henderson and Las Vegas, Nevada under the “Fresh and
Fast” Concept. The restaurants were formerly operated under franchise
rights and “EVOS” branding purchased from EVOS USA, Inc. Effective
March 1, 2009, we notified EVOS USA, Inc. of our intent to terminate the
franchise and area development agreements. Effective July 1, 2009, we
ceased conducting business under the EVOS USA, Inc. franchise and area
development agreements and converted the restaurants to the “Fresh and Fast”
Concept. Effective August 1, 2009, we determined to cease conducting
business under the “Fresh and Fast” Concept altogether in order to focus on our
U-Swirl Yogurt Concept, and have accordingly accounted for the “Fresh and Fast”
Concept divestiture as “discontinued operations”.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required for smaller reporting companies.
13
ITEM
4. CONTROLS AND PROCEDURES
As
required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the end of the period
covered by this report. This evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and interim principal financial
officer. Based on this evaluation, this officer has concluded that
the design and operation of our disclosure controls and procedures are
effective. There were no changes in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive officer and interim principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
We are
not a party to any pending legal proceedings.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
The
registrant’s registration statement on Form S-1 (File No. 333-145360) was
declared effective on March 18, 2008. Paulson Investment Company,
Inc. acted as the underwriter. 1,000,000 Units, each Unit consisting
of one share of common stock, one redeemable Class A Warrant and two
non-redeemable Class B Warrants, were offered for gross proceeds of
$5,100,000. The registrant registered a total of 1,150,000 Units, as
well as 100,000 Units sold to the underwriter, and the securities underlying the
exercise of all the Warrants.
On March
25, 2008, the registrant completed its initial public offering for net proceeds
of $4,002,840. All of the expenses of the offering, totaling
$1,097,160, were direct or indirect payments to persons other than officers,
directors, affiliates or more than 10% shareholders.
Through
September 30, 2009, $3,579,000 of the net proceeds had been used as
follows: $460,000 for the buildout of the new EVOS restaurant
located in Las Vegas, NV; $1,977,000 for five U-Swirl restaurants (purchase
and installation of equipment); $250,000 to fund U-Swirl International,
Inc.; and $892,000 towards corporate overhead and operating loss of
the restaurants (working capital).
Item
3.
|
Defaults
Upon Senior Securities
|
None.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
Item
5. Other
Information
None.
14
Item
6.
|
Exhibits
|
Regulation
S-K Number
|
Exhibit
|
3.1
|
Amended
and Restated Articles of Incorporation (1)
|
3.2
|
Amended
Bylaws (1)
|
4.1
|
Form
of common stock certificate (2)
|
4.2
|
Form
of Class A warrant (included in Exhibit 4.5)
|
4.3
|
Form
of Class B warrant (included in Exhibit 4.5)
|
4.4
|
Form
of unit certificate (3)
|
4.5
|
Form
of Warrant Agreement between the Registrant and Computershare Trust
Company, N.A. (4)
|
4.6
|
Form
of Representative’s Purchase Warrants (3)
|
10.1
|
EVOS
Restaurant Franchise Agreement dated December 14, 2005
(1)
|
10.2
|
Conditional
Assignment of Telephone Numbers and Listings to EVOS USA, Inc. dated
December 14, 2005 (1)
|
10.3
|
Collateral
Assignment and Assumption of Lease to EVOS USA, Inc. dated December 14,
2005 (1)
|
10.4
|
Addendum
to Franchise Agreement dated February 6, 2006 (1)
|
10.5
|
2007
Stock Option Plan, as amended (1)
|
10.6
|
Promissory
Note dated October 24, 2006 to Henry E. Cartwright and Ira J. Miller as
Trustee of the Miller Family Trust dated July 18, 2000
(1)
|
10.7
|
Warrant
to purchase common stock issued to Ira J. Miller dated November 20, 2006
(1)
|
10.8
|
Area
Representative Agreement between EVOS USA, Inc. and Healthy Fast Food,
Inc. dated December 1, 2006 (1)
|
10.9
|
Territory
and Development Schedule Addendum to the Area Representative Agreement
effective February 26, 2007 (1)
|
10.10
|
Letter
agreement with EVOS USA, Inc. dated July 10, 2007 (1)
|
10.11
|
Contract
of Employment with Brad Beckstead dated July 25, 2007
(1)
|
10.12
|
Letter
agreement with EVOS USA, Inc. dated July 30, 2007 (1)
|
10.13
|
Letter
agreement with EVOS USA, Inc. dated February 7, 2008
(4)
|
10.14
|
Asset
Purchase Agreement with U-Swirl Yogurt, Inc. Dated September 19, 2008
(5)
|
31.1
|
Rule
13a-14(a) Certification of Principal Executive Officer and Interim
Principal Financial Officer
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 of Principal Executive Officer and Interim
Principal Financial Officer
|
___________________________
(1)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-1, file number 333-145360, filed August 13,
2007.
|
(2)
|
Incorporated
by reference to the exhibits to the registrant’s amended registration
statement on Form S-1, file number 333-145360, filed March 11,
2008.
|
(3)
|
Incorporated
by reference to the exhibits to the registrant’s amended registration
statement on Form S-1, file number 333-145360, filed March 25,
2008.
|
(4)
|
Incorporated
by reference to the exhibits to the registrant’s amended registration
statement on Form S-1, file number 333-145360, filed February 8,
2008.
|
(5)
|
Incorporated
by reference to the exhibit to the registrant’s current report on Form
8-K, file number 0-53130, filed September 22,
2008.
|
15
SIGNATURES
Pursuant to the requirements 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.
HEALTHY FAST FOOD, INC. | |||
November
16, 2009
|
By:
|
/s/ Henry E. Cartwright | |
Henry E. Cartwright, President | |||
(Interim Principal Financial Officer) | |||
16