Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-158493
PROSPECTUS
SUPPLEMENT NO. 1
DATED MAY
18, 2009
TO
PROSPECTUS DATED APRIL 16, 2009
Spicy
Pickle Franchising, Inc.
21,442,981
Shares of Common Stock
This
prospectus supplement supplements the Prospectus dated April 16, 2009 of Spicy
Pickle Franchising, Inc. relating to the registration, distribution and sale of
21,442,981 shares of the common stock of Spicy Pickle Franchising,
Inc. You should read this prospectus supplement in conjunction with
the Prospectus, which is to be delivered with this prospectus
supplement. This prospectus supplement is qualified by reference to
the Prospectus, except to the extent that the information in this prospectus
supplement supersedes the information in that document.
RECENT
DEVELOPMENTS
On May
14, 2009, we filed with the Securities and Exchange Commission our Quarterly
Report on Form 10-Q for the period ended March 31, 2009, the text of which is
attached hereto.
AN INVESTMENT IN OUR COMMON STOCK
INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING AT PAGE
3 OF THE PROSPECTUS, FOR A DISCUSSION OF THESE RISKS.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THE PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT TO THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date
of this prospectus supplement is May 18, 2009.
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 March 31, 2009
[
] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ________________ to _______________
000-53000
(Commission
file number)
SPICY
PICKLE FRANCHISING, INC.
(Exact
name of registrant as specified in its charter)
|
Colorado
(State
or other jurisdiction
of
incorporation or organization)
|
38-3750924
(IRS
Employer Identification No.)
|
|
90
Madison Street, Suite 700, Denver, Colorado
(Address
of principal executive offices)
|
80206
(Zip
Code)
|
(303)
297-1902
(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.
Yes þ 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
¨ (Not
required)
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 ¨ (Do
not check if a smaller reporting company)
|
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of May 10, 2009 there were
54,387,347 shares of common stock outstanding.
|
Page
Number
|
||
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2009
(unaudited)
and December 31, 2008
|
3
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Loss (unaudited)
for
the three months ended March 31, 2009 and 2008
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows (unaudited)
for
the three months ended March 31, 2009 and 2008
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
Item
4T.
|
Controls
and Procedures
|
19
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
20
|
|
Item
1A.
|
Risk
Factors
|
20
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
20
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
20
|
|
Item
5.
|
Other
Information
|
20
|
|
Item
6.
|
Exhibits
|
20
|
|
SIGNATURES
|
22
|
|
2
|
Spicy
Pickle Franchising, Inc.
|
||||||||
|
Condensed
Consolidated Balance Sheets
|
||||||||
|
March
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 216,361 | $ | 287,482 | ||||
|
Current
portion of notes receivable
|
31,500 | 35,000 | ||||||
|
Accounts
receivable, trade, net
|
297,355 | 251,173 | ||||||
|
Inventory
|
35,313 | 34,180 | ||||||
|
Prepaid
expenses and other current assets
|
25,446 | 63,449 | ||||||
|
Total
current assets
|
605,975 | 671,284 | ||||||
|
Property
and equipment, net of accumulated depreciation
|
1,813,426 | 1,897,639 | ||||||
|
Other
assets:
|
||||||||
|
Deposits
and other assets
|
82,398 | 81,806 | ||||||
|
Goodwill
and other intangible assets
|
2,914,461 | 2,914,461 | ||||||
|
Total
other assets
|
2,996,859 | 2,996,267 | ||||||
|
Total
assets
|
$ | 5,416,260 | $ | 5,565,190 | ||||
|
Liabilities
and stockholders' equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 435,944 | $ | 440,190 | ||||
|
Accrued
expenses and compensation
|
149,817 | 247,340 | ||||||
|
Accrued
dividends
|
71,797 | 137,889 | ||||||
|
Deferred
franchise revenue
|
812,505 | 771,500 | ||||||
|
Total
current liabilities
|
1,470,063 | 1,596,919 | ||||||
|
Notes
payable to related parties
|
500,000 | 100,000 | ||||||
|
Long-term
debt
|
470,000 | 500,000 | ||||||
|
Deferred
rent expense
|
82,555 | 93,052 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, $.001 par value, 20,000,000 shares authorized,
|
||||||||
|
649
shares of Series A Variable Rate Convertible
|
||||||||
|
Preferred
Stock, stated value $8,500 per share,
|
||||||||
|
issued
and outstanding in 2009 and 2008
|
4,418,941 | 4,418,941 | ||||||
|
Common
stock, $.001 par value, 200,000,000 shares authorized,
|
||||||||
|
54,387,347
and 53,535,247 shares issued and outstanding
|
||||||||
|
in
2009 and 2008, respectively
|
54,388 | 53,535 | ||||||
|
Additional
paid in capital
|
9,672,538 | 9,548,678 | ||||||
|
Noncontrolling
interest in consolidated subsidiary
|
51,954 | 51,955 | ||||||
|
Fair
value of common stock warrants
|
873,825 | 873,825 | ||||||
|
Accumulated
(deficit)
|
(12,157,638 | ) | (11,658,300 | ) | ||||
|
Accumulated
comprehensive income (loss)
|
(20,366 | ) | (13,415 | ) | ||||
|
Total
stockholders' equity
|
2,893,642 | 3,275,219 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 5,416,260 | $ | 5,565,190 | ||||
See the
accompanying notes to the consolidated financial statements
3
|
Spicy
Pickle Franchising, Inc.
|
||||||||
|
Condensed
Consolidated Statements of Operations and Comprehensive
Loss
|
||||||||
|
For
The Three Months Ended March 31, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenue:
|
||||||||
|
Restaurant
and bakery sales
|
$ | 698,620 | $ | 407,165 | ||||
|
Franchise
fees and royalties
|
304,975 | 218,202 | ||||||
|
Total
revenues
|
1,003,595 | 625,367 | ||||||
|
Operating
costs and expenses:
|
||||||||
|
Restaurant
and bakery:
|
||||||||
|
Cost
of sales
|
230,201 | 165,294 | ||||||
|
Labor
|
299,961 | 196,262 | ||||||
|
Occupancy
|
104,012 | 52,208 | ||||||
|
Depreciation
|
72,058 | 27,595 | ||||||
|
Other
operating costs
|
77,980 | 108,745 | ||||||
|
Total
restaurant and bakery operating costs
|
784,212 | 550,104 | ||||||
|
Franchise
and general:
|
||||||||
|
General
and administrative
|
695,486 | 1,601,298 | ||||||
|
Depreciation
|
8,688 | 6,409 | ||||||
|
Total
franchise and general
|
704,174 | 1,607,707 | ||||||
|
Total
operating costs and expenses
|
1,488,386 | 2,157,811 | ||||||
|
(Loss)
from operations
|
(484,791 | ) | (1,532,444 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Net
interest income (expense)
|
(14,549 | ) | 37,970 | |||||
|
Other
(expense)
|
- | (2,777 | ) | |||||
|
Total
other income (expense):
|
(14,549 | ) | 35,193 | |||||
|
Net
(loss)
|
(499,340 | ) | (1,497,251 | ) | ||||
|
Dividend
on preferred stock
|
(68,944 | ) | (86,440 | ) | ||||
|
Net
(loss) attributable to common shareholders
|
$ | (568,284 | ) | $ | (1,583,691 | ) | ||
|
Other
comprehensive (loss):
|
||||||||
|
Foreign
currency exchange (loss)
|
(20,366 | ) | - | |||||
|
Comprehensive
(loss)
|
$ | (588,650 | ) | $ | (1,583,691 | ) | ||
|
Per
share information – basic and fully diluted:
|
||||||||
|
Weighted
average shares outstanding
|
54,369,497 | 47,819,053 | ||||||
|
Net
(loss) per share attributable to common shareholders
|
$ | (0.01 | ) | $ | (0.03 | ) | ||
See the
accompanying notes to the consolidated financial statements
4
|
Spicy
Pickle Franchising, Inc.
|
||||||||
|
Condensed
Consolidated Statements of Cash Flows
|
||||||||
|
Three
Months Ended March 31, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash (used in) operating activities
|
$ | (435,039 | ) | $ | (1,013,379 | ) | ||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
- | (188,465 | ) | |||||
|
Investment
in purchased subsidiaries
|
- | (621,600 | ) | |||||
|
Net
cash (used in) investing activities
|
- | (810,065 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from note payable to related parties
|
400,000 | - | ||||||
|
Repayment
of notes payable
|
(30,000 | ) | - | |||||
|
Proceeds
from exercise of common stock options
|
- | 13,500 | ||||||
|
Net
cash provided by financing activities
|
370,000 | 13,500 | ||||||
|
Effect
of foreign exchange rate change
|
(6,082 | ) | - | |||||
|
Net
(decrease) in cash and cash equivalents
|
(71,121 | ) | (1,809,944 | ) | ||||
|
Cash
and cash equivalents, beginning of period
|
287,482 | 5,405,069 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 216,361 | $ | 3,595,125 | ||||
See the
accompanying notes to the consolidated financial statements
5
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
|
1.
|
Basis
of Presentation of Interim Period
|
The
accompanying unaudited financial statements of Spicy Pickle Franchising, Inc.
(the “Company”) at March 31, 2009 and 2008 have been prepared in accordance with
generally accepted accounting principles (“GAAP”) for interim financial
statements, instructions to Form 10-Q, and Regulation
S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have
been condensed or omitted. These condensed financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2008. In
management's opinion, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation to make the Company’s
financial statements not misleading have been included. The results of
operations for the periods ended March 31, 2009 and 2008 presented are not
necessarily indicative of the results to be expected for the full year. The
December 31, 2008 balance sheet has been derived from the Company’s audited
financial statements included in the Company’s annual report on Form 10-K for
the year ended December 31, 2008.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Fair
Value Measurements
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which provides a
comprehensive framework for measuring fair value and expands disclosures which
are required about fair value measurements. Specifically, SFAS 157
sets forth a definition of fair value and establishes a hierarchy prioritizing
the inputs to valuation techniques, giving the highest priority to quoted prices
in active markets for identical assets and liabilities and the lowest priority
to unobservable value inputs. The adoption of this statement had no
impact on the Company’s financial statements. SFAS 157 defines the
hierarchy as follows:
Level 1 –
Quoted prices are available in active markets for identical assets or
liabilities as of the reported date. The types of assets and liabilities
included in Level 1 are highly liquid and actively traded instruments with
quoted prices, such as equities listed on the New York Stock
Exchange.
Level 2 –
Pricing inputs are other than quoted prices in active markets, but are either
directly or indirectly observable as of the reported date. The types
of assets and liabilities in Level 2 are typically either comparable to actively
traded securities or contracts, or priced with models using highly observable
inputs.
Level 3 –
Significant inputs to pricing that are unobservable as of the reporting
date. The types of assets and liabilities included in Level 3 are
those with inputs requiring significant management judgment or estimation, such
as complex and subjective models and forecasts used to determine the fair value
of financial transmission rights.
Business
Combinations
Effective
January 1, 2009 the Company adopted SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R change the accounting for business
combinations. Under SFAS 141R, an acquiring entity is required to recognize all
the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R changed the
accounting treatment and disclosure for certain specific items in a business
combination. SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company has had no business
combinations in this interim period in which SFAS 141R was adopted.
Noncontrolling
Interests in Consolidated Financial Statements
Effective
January 1, 2009 the Company adopted SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51” (“SFAS 160“).
SFAS 160 establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. The adoptions of SFAS 160 had no material impact on the
Company’s financial position or results of operations.
6
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Disclosures
about Derivative Instruments and Hedging Activities
Effective
January 1, 2009 the Company adopted SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies
with derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash
flows. The adoption of this statement had no material impact on the
Company's financial position or results of operations.
Accounting
for Financial Guarantee Insurance Contracts
Effective
January 1, 2009 the Company adopted SFAS No. 163, "Accounting for Financial
Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60"
("SFAS 163"). SFAS 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. The adoption
of this statement had no material impact on the Company's financial position or
results of operations.
Accounting
for Convertible Debt Instruments
Effective
January 1, 2009 the Company adopted FASB Staff Position (“FSP”) FSP APB 14-1,
”Accounting for Convertible Debt Instruments that may be Settled in Cash upon
Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1
applies to convertible debt securities that, upon conversion, may be settled by
the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods. The adoption of this statement had no material impact on the
Company's financial position or results of operations.
Instruments
Granted in Share-Based Payment Transactions
Effective
January 1, 2009 the Company adopted FSP EITF 03-6-1, ”Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities“ ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting, and therefore need to be included in the earnings allocation in
computing earnings per share under the two-class method as described in SFAS No.
128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings-per-share pursuant to the
two-class method. The adoption of this statement had no material
impact on the Company's financial position or results of
operations.
Instrument
Indexed to an Entity's Own Stock
Effective
January 1, 2009 the Company adopted EITF No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. The adoption of this statement had no
material impact on the Company's financial position or results of
operations.
Credit
Derivatives and Certain Guarantees
Effective
January 1, 2009 the Company adopted FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (“FSP FAS 133-1” and “FIN 45-4”). SP 133-1 and FIN 45-4
amends disclosure requirements for sellers of credit derivatives and financial
guarantees. It also clarifies the disclosure requirements of SFAS No. 161. The
adoption of these statements did not have a material impact on the Company’s
current financial position or results of operation.
Recent
Pronouncements
In April
2009, the FASB issued FSP No. FAS 157-4 (“FSP FAS 157-4”), “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability has
Significantly Decreased and Identifying Transactions That Are Not Orderly” and
FSP No. FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), “Recognition and Presentation
7
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
of
Other-Than-Temporary Impairments”. These two FSPs were issued to
provide additional guidance about (1) measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions, and (2) recording impairment charges on investments in
debt instruments. Additionally, the FASB issued FSP No. FAS 107-1 and
APB 28-1 (“FSP FAS 107-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” to require disclosures of fair value of certain financial
instruments in interim financial statements. These FSPs are effective
for financial statements issued for interim and annual reporting periods ending
after June 15, 2009. The Company does not anticipate the adoption of
these FSPs will have a material impact on the Company’s current financial
position or results of operation.
2. Per
Share Information
Earnings
per share are based on the weighted average number of shares outstanding during
the period after consideration of the dilutive effect, if any, for common stock
equivalents, including stock options, restricted stock, and other stock-based
compensation. Earnings per common share are computed in accordance with SFAS No.
128, "Earnings Per Share,'' which requires companies to present basic earnings
per share and diluted earnings per share. Basic earnings per share are computed
by dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share are computed by
dividing net income by the weighted average number of shares of common stock
outstanding and dilutive securities outstanding during the year. The
Company had a net loss for the three-month periods ended March 31, 2009 and
2008, and accordingly, any outstanding equivalents would be
anti-dilutive.
3. Long-term
Debt
Long-term
debt represents notes issued in connection with the acquisition of certain
assets during the year ended December 31, 2008. The notes bear
interest at the rate of 10% per annum payable monthly. The notes have
payment terms of $30,000 per year with the balance due and payable in March
2011.
4.
Stockholders’ Equity
During
the three months ended March 31, 2009, the Company issued 798,555 shares of its
$.001 par value common stock in lieu of a cash payment of $135,035 of the
accrued dividend at December 31, 2008.
In
addition, during the three months ended March 31, 2009, the Company issued
53,545 shares of its $.001 par value common stock in lieu of a cash payment of
accounts payable of $46,361 which existed at December 31, 2008.
During
the three-month period ended March 31, 2008, a holder of the Company’s Series A
Variable Rate Convertible Preferred Stock (“Series A Preferred”) converted 25
shares of the Series A Preferred stock into 250,000 shares of the Company’s
common stock.
In
addition during the three-month period ended March 31, 2008, holders of 52,500
common stock purchase options exercised their options, pursuant to which the
Company issued 52,500 shares of common stock resulting in $13,500 of proceeds to
the Company.
5.
Income Taxes
The
Company accounts for income taxes in interim periods as required by Accounting
Principles Board Opinion No. 28, “Interim Financial Reporting” and as
interpreted by FASB Interpretation No. 18, “Accounting for Income Taxes in
Interim Periods.” The Company has determined an estimated annual
effective tax rate. The rate will be revised, if necessary, as of the
end of each successive interim period during the Company’s fiscal year to the
Company’s best current estimate.
8
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
The
estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. This pronouncement also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not
have a material impact on the Company's financial statements.
6. Stock-Based
Compensation
In
October 2006, the Company’s Board of Directors adopted the 2006 Stock Option
Plan (the “2006 Plan”), which was approved by the Company’s shareholders the
same month. The 2006 Plan provides for the granting of up to
7,500,000 shares of the Company’s common stock (subject to certain adjustments
in the event of stock splits or other similar events) as incentive stock
options. The Company’s Board of Directors has delegated authority to
grant awards under the 2006 Plan to the Company’s Compensation
Committee.
There
were no options granted during the three-month period ended March 31,
2009.
A summary
of stock option activity under the Company’s stock-based compensation plan is
set forth below:
|
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
January 1, 2009
|
6,146,250
|
$.67
|
4.02
|
$1,148,040
|
|
Granted
|
-
|
-
|
||
|
Exercised
|
-
|
-
|
||
|
Cancelled
|
(176,250)
|
$.77
|
3.34
|
|
|
Outstanding
March 31, 2009
|
5,970,000
|
$.67
|
3.84
|
$1,105,124
|
|
Exercisable
March 31, 2009
|
5,806,250
|
$.60
|
3.53
|
$1,026,094
|
Stock-based
compensation expense recognized under SFAS No. 123 (Revised 2004), “Share-Based
Payment” for the three-month periods ended March 31, 2009 and 2008 was $12,259
and $235,583 respectively, which consisted of stock-based compensation expense
related to employee stock options.
7.
Related Party Transactions
In
December 2008, two members of the Board of Directors granted the Company a line
of credit which expires January 31, 2010. The line of credit is for
an aggregate of $550,000 and bears interest at a rate of one percent above the
prime rate and is secured by certain assets of the Company. At March
31, 2009, the interest rate on the borrowings was 4.25% and balance outstanding
was $500,000.
8.
Business Segment information
The
Company operates in three business segments. The Company Restaurant Operations
segment is comprised of restaurants owned by the Company. The
company-owned restaurants conduct business under the Spicy Pickle name. These
restaurants specialize in fast casual dining featuring fresh, made-to-order,
premium submarine, deli and
9
Spicy
Pickle Franchising, Inc.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
panini
sandwiches, salads, soups and soft drinks. Information for this segment for the
three months ended March 31, 2009 includes the operating activities of seven
company-owned restaurants. Information for this segment for the three
months ended March 31, 2008 includes the operating activities of one
company-owned restaurant for the entire period and seven for part of the
period.
The
Bakery Operations segment is comprised of the operating activities of a bakery
located at one of the Company’s Denver restaurants, which supplies breads and
other bakery products for Company and franchisee-owned locations in
Colorado.
The
Franchise Operations segment is comprised of the operating activities of the
franchise business unit, which licenses qualified operators to conduct business
under the Spicy Pickle name or the Bread Garden name, and also of the costs to
monitor the operations of these restaurants. Under the terms of the agreements,
the licensed operators pay royalties and fees to the Company in return for the
use of the Spicy Pickle or the Bread Garden name, as the case may
be.
There
were no differences from the financial statements for the year ended December
31, 2008 in the basis of measurement of segment profit or
loss. Segment information related to the Company's three business
segments follows:
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
| Revenues: | ||||||||
|
Company
restaurants operations
|
$ | 617,138 | $ | 327,657 | ||||
|
Company
bakery operations
|
81,482 | 79,508 | ||||||
|
Franchise
operations
|
304,975 | 218,202 | ||||||
|
Total
Revenues
|
$ | 1,003,595 | $ | 625,367 | ||||
| Segment (loss): | ||||||||
|
Company
restaurants operations
|
$ | (90,785 | ) | $ | (104,491 | ) | ||
|
Company
bakery operations
|
5,193 | (38,448 | ) | |||||
|
Franchise
operations
|
(399,199 | ) | (1,389,505 | ) | ||||
|
Total
segment (loss)
|
(484,791 | ) | (1,532,444 | ) | ||||
|
Net
interest income (expense)
|
(14,549 | ) | 37,970 | |||||
|
Other
expense
|
- | (2,777 | ) | |||||
|
Net
loss
|
$ | (499,340 | ) | $ | (1,497,251 | ) | ||
Total
assets as of March 31, 2009 decreased by $55,878 from those disclosed in the
financial statements for the year ended December 31, 2008.
10
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results could differ materially from those anticipated in the
forward-looking statements.
Overview
Our
business is the franchise and operation of Spicy Pickle™ and Bread Garden
Urban Café restaurants. Spicy Pickle is a fast casual restaurant where
made-to-order panini, submarine-style sandwiches, pizzetti (Neapolitan thin
crust pizza), and salads created by our founders are served using fresh-baked
breads and high-quality ingredients. Spicy Pickle restaurants are
located in 12 states in the United States. Bread Garden Urban Café
restaurants also specialize in fast casual dining offering salads, soups,
sandwiches and dessert items. Bread Garden Urban Cafés are located in
metropolitan Vancouver, British Columbia, Canada.
We market
our menu primarily through targeted local store marketing efforts, mail drops,
media advertising, and print campaigns, as well as through other grass roots
efforts. The "Spicy Pickle" brand name has existed for eight
years. The “Bread Garden Urban Café” brand name has existed
since 1979. We are headquartered in Denver, Colorado.
The first
Spicy Pickle restaurant was launched in 1999 by founders Kevin Morrison and
Anthony Walker under the name Spicy Pickle, LLC. In late 2001, there were three
restaurants, two in Denver and one in Lakewood, a Denver suburb. By January
2003, we organized Spicy Pickle Franchising, LLC and launched the Spicy Pickle
brand as a national franchise and recruited Marc Geman, former president of the
PretzelMaker franchise, as our Chief Executive Officer.
As of
March 31, 2009, we had 31 franchised Spicy Pickle restaurants and seven
company-owned Spicy Pickle restaurants opened. Co-located with one of
the restaurants is a bakery which provides fresh baked breads to the local area
Denver restaurants. This bakery has replaced the previous supplier of
our artisan breads and is expected to result in a food cost savings for the
franchisees in that market. Spicy Pickle restaurants outside this market are
equipped for bread baking at the store location.
Our
franchise agreements include build-out schedules for franchisee restaurants.
Through March 31, 2009, the Company has signed agreements with franchisees to
open 102 restaurants under the Spicy Pickle Brand. Based on current
franchise agreements and construction schedules, we believe there will be
approximately 40 Spicy Pickle, franchisee-owned and operated restaurants and at
least 7 company-operated restaurants open by the end of 2009. The
Company continues to interview prospective franchisees and relies on the cash
deposits from the franchise sales as well as royalty fees from the existing
stores to support the expenses of the business.
Our
locations and marketing efforts are directed principally to white collar
administrative, managerial, professional, and sales personnel, who are generally
found in and near downtown districts, technological centers, universities,
hospitals and government complexes.
We
currently derive our revenue from the sale of franchises, from royalties paid by
franchisees and from the sale of food and beverages at the company owned
restaurants. Our business is headquartered in Colorado, and we have a
high concentration of restaurants in the Rocky Mountain region. Additionally, we
have franchises opened and planned in a number of other regions in the United
States. Our Spicy Pickle restaurant locations (including both company-owned and
franchisee-owned), including those under construction and lease negotiation as
of March 31, 2009, are:
11
|
Location
|
Restaurants
Operating
|
Under
Construction
|
In
Lease Negotiation
|
|
Denver,
Colorado
|
5
|
||
|
Boulder,
Colorado
|
2
|
||
|
Ft.
Collins, Colorado
|
2
|
||
|
Aurora,
Colorado
|
2
|
||
|
Littleton,
Colorado
|
1
|
||
|
Centennial,
Colorado
|
1
|
||
|
Lone
Tree, Colorado
|
1
|
||
|
Greenwood
Village, Colorado
|
1
|
||
|
Federal
Heights, Colorado
|
1
|
||
|
Johnstown,
Colorado
|
1
|
||
|
Colorado
Springs, Colorado
|
1
|
||
|
Louisville,
Colorado
|
1
|
||
|
Englewood,
Colorado
|
1
|
||
|
Ashburn,
Virginia
|
1
|
||
|
Portland,
Oregon
|
2
|
||
|
Poway,
California
|
1
|
||
|
Henderson,
Nevada
|
1
|
||
|
Reno,
Nevada
|
2
|
||
|
Chicago,
Illinois
|
1
|
||
|
Cincinnati,
Ohio
|
1
|
||
|
Austin,
Texas
|
2
|
||
|
San
Diego, California
|
1
|
1
|
|
|
Chandler,
Arizona
|
1
|
||
|
Hattiesburg,
Mississippi
|
1
|
||
|
Edmond,
Oklahoma
|
1
|
||
|
Cedar
Park, Texas
|
1
|
||
|
Portage,
Michigan
|
1
|
||
|
Kalamazoo,
Michigan
|
1
|
||
|
Houston,
Texas (1)
|
1
|
1
|
|
|
San
Antonio, Texas
|
2
|
||
|
Las
Vegas, Nevada
|
1
|
||
|
Naperville,
Illinois
|
1
|
||
|
Temecula,
California
|
1
|
||
|
Los
Angles, California
|
1
|
||
|
38
|
2
|
7
|
|
(1)
|
Restaurant
under construction opened subsequent to March 31,
2009.
|
Our Bread
Garden Urban Café locations, including those under construction and in lease
negotiation as of March 31, 2009, are:
|
Location
|
Restaurants
Operating
|
Under
Construction
|
In
Lease Negotiation
|
|
Vancouver,
British Columbia
|
6
|
2
|
1
|
|
Richmond,
British Columbia
|
1
|
1
|
|
|
Cloverdale,
British Columbia
|
1
|
||
|
Surrey,
British Columbia
|
1
|
||
|
Burnaby,
British Columbia
|
1
|
||
|
Coquitlam,
British Columbia
|
2
|
||
|
Kamloops,
British Columbia
|
1
|
||
|
Brisbane,
Australia
|
1
|
||
|
Whistler
Resort, British Columbia
|
1
|
||
|
12
|
6
|
2
|
12
We intend
to increase our revenues by adding new company-owned stores, selling new
franchises and expanding consumption of our food products at all restaurants.
General economic and industry conditions may affect our ability to do so and our
revenue performance.
We have
been developing our franchise network through the sale of franchises and through
acquisition. We have relied on fund raising and the sales of new
franchises to augment the cash we receive from continuing royalty payments for
our cash flow. The unanticipated economic conditions that surfaced in
2008 and continued into 2009 resulted in a significant reduction in the sales of
new franchises which has resulted in a significant decrease in our cash
position. As soon as it became apparent that the economic downturn
would not correct itself in the short term, we significantly reduced our
corporate overhead, mostly in the area of personnel cost.
Our
ability to fund our operations will depend on the length of time of the current
economic downturn, our future performance and our ability to successfully
implement our business and growth strategies. In the event that we
need additional capital and are unable to obtain it, we could be left without
sufficient liquidity. The nature of our business is that a portion of
our revenue is a continuing stream from franchisees. We will
continually monitor our expenses and reduce those expenses as best we can to
match the revenue flow. We may elect to raise money during the
current year to meet any shortfalls from operations. However,
realization of a significant portion of the assets on the balance sheet is
dependent on our continued operations, which in turn is dependent on the
increase in sales of new franchises, the number of operating franchise
restaurants, or the additional capital raised through a placement of our
securities.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from those estimates. A summary
of accounting policies that have been applied to the historical financial
statements presented in this report can be found in the footnotes
thereto. We consider certain of these accounting policies to be
critical as they are important to the portrayal of our financial condition and
results of operations and may require judgments on the part of management about
matters that are uncertain. We have identified the following accounting policies
that are important to the presentation of financial information in this
report.
Revenue
Recognition
Initial
Franchise Fees - We enter into franchise agreements, which grant franchisees the
exclusive right to develop and operate businesses at certain locations. Initial
franchise fees are recognized as revenue when all material services and
conditions required to be performed by us have been substantially completed,
which is generally when the restaurant opens. Initial franchise fees for
Spicy Pickle restaurants is $45,000 and the fee for Bread Garden Urban Café
restaurants is Canadian dollars (“CN$”) 50,000. In certain instances
we charge a transfer fee when an existing restaurant is transferred to a new
franchisee. These fees are less than the full fee charged. Franchise
fees recognized were $26,033 for the three months ended March 31, 2009 and none
for the three months ended March 31, 2008.
Royalty
Fees - Pursuant to the franchise agreements of both our Spicy Pickle and Bread
Garden Urban Café brands, franchisees are required to pay royalties to us based
on 5% of weekly gross sales as reported to us through the franchisees’ point of
sales systems. The royalties are recognized as revenue in the period
corresponding to the sales reporting period. Royalty fees were $212,246 and
$194,472 for the three months ended March 31, 2009 and 2008,
respectively.
With
regard to royalty fees, our franchisees grant us the right to extract data from
their point of sale systems in each restaurant they operate. We receive weekly
reports on sales at each franchise location and calculate our revenue directly
from those reports. This allows for extremely accurate accounting of our revenue
stream from royalty fees. We do not anticipate any future change in the method
of reporting.
13
Rebates -
We receive rebates from certain purveyors that supply products to our
franchisees, these rebates are included in Franchise Fees and Royalties on the
statement of operations. The rebates are recorded when earned. Rebates that
relate to company-owned restaurants are offset against restaurant cost of sales.
Rebates related to franchisees were $66,696 and $33,000 for the three months
ended March 31, 2009 and 2008, respectively.
Restaurant
and Bakery Sales - We record revenue from company-owned restaurant sales upon
delivery of the related food and other products to customers. Our restaurant
sales are either cash or credit card (which are pre-approved) sales and,
therefore, no estimate for allowance for doubtful accounts is
necessary. We record revenue from bakery sales when sold to the
bakery customers, which are our franchisees.
Advertising
Costs
Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales. In our discretion, we may spend more or less than
our actual advertising receipts from the franchisees. Advertising fees collected
were $92,548 and $82,072 for the three months ended March 31, 2009 and 2008,
respectively. These fees are offset against actual advertising
expenses, which are recognized when incurred. We incurred advertising expenses
of $53,336 and $86,578 for the three months ended March 31, 2009 and 2008,
respectively. We anticipate that for the year ending December 31,
2009 we will spend at least as much as we collect. To the extent we
do not spend all that we have collected we are allowed to utilize the funds to
offset amounts spent in previous periods. There were no net amounts
reflected as advertising costs in the financial statements for the three months
ended March 31, 2009 and the net amounts reflected as advertising cost for the
three months ended March 31, 2008 was $4,686.
Rent
Expense
We
recognize rent expense on a straight-line basis over the reasonably assured
lease term as defined in the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards (“SFAS”) No. 98, “Accounting for
Leases”. In addition, certain of our lease agreements provide for
scheduled rent increases during the lease term or for rental payments commencing
on a date other than the date of initial occupancy. We include any rent
escalations and construction period and other rent holidays in our determination
of straight-line rent expense. Therefore, rent expense for new locations is
charged to expense beginning with the start of the construction
period.
Equity-Based
Compensation
On
January 1, 2006, we adopted FASB SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair values. SFAS
123(R) supersedes our previous accounting under Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees”. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) and in
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”) both
relating to SFAS 123(R). We have applied the provisions of SAB 107 and SAB 110
in our adoption of SFAS 123(R).
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our statement of operations. Prior
to the adoption of SFAS 123(R), we had no stock-based compensation awarded to
employees and directors.
Recent
Pronouncements
In April
2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-4 (“FSP FAS
157-4”), “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability has Significantly Decreased and Identifying Transactions That
Are Not Orderly” and FSP No. FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”),
“Recognition and Presentation of Other-Than-Temporary
Impairments”. These two FSPs were issued to provide additional
guidance about (1) measuring the fair value of financial instruments when the
markets become inactive and quoted prices may reflect distressed transactions,
and (2) recording impairment charges on investments in debt
instruments. Additionally, the FASB issued FSP No. FAS 107-1 and APB
28-1 (“FSP FAS 107-1”), “Interim
14
Disclosures
about Fair Value of Financial Instruments,” to require disclosures of fair value
of certain financial instruments in interim financial
statements. These FSPs are effective for financial statements issued
for interim and annual reporting periods ending after June 15,
2009. The Company does not anticipate the adoption of these FSPs will
have a material impact on the Company’s current financial position or results of
operation.
Operating
Statistics
The
following analysis shows operating statistics for the three months ended March
31, 2009 and 2008:
|
2009
|
2008
|
|||||||||||||||
|
Revenues:
|
Amount
|
As a Percentage
of Total Revenue
|
Amount
|
As
a Percentage of
Total
Revenue
|
||||||||||||
|
Restaurant
and Bakery sales
|
$ | 698,620 | 69.61 | % | $ | 407,165 | 65.11 | % | ||||||||
|
Franchise
fees and royalties
|
304,975 | 30.39 | % | 218,202 | 34.89 | % | ||||||||||
|
Total
revenue
|
$ | 1,003,595 | 100.00 | % | $ | 625,367 | 100.00 | % | ||||||||
|
Operating
costs and expenses:
|
||||||||||||||||
|
Restaurant:
|
As
a Percentage of Restaurant Sales
|
As
a Percentage of Restaurant Sales
|
||||||||||||||
|
Cost
of sales
|
$ | 230,201 | 32.95 | % | $ | 165,294 | 40.60 | % | ||||||||
|
Labor
|
299,961 | 42.94 | % | 196,262 | 48.20 | % | ||||||||||
|
Occupancy
|
104,012 | 14.89 | % | 52,208 | 12.82 | % | ||||||||||
|
Depreciation
|
72,058 | 10.31 | % | 27,595 | 6.78 | % | ||||||||||
|
Other
operating cost
|
77,980 | 11.16 | % | 108,745 | 26.71 | % | ||||||||||
|
Total
restaurant operating expenses
|
$ | 784,212 | 112.25 | % | $ | 550,104 | 135.11 | % | ||||||||
|
Franchise
and general:
|
As
a Percentage of Franchise Fees and Royalties
|
As
a Percentage of Franchise Fees and Royalties
|
||||||||||||||
|
General
and administrative
|
$ | 695,486 | 228.05 | % | $ | 1,601,298 | 733.86 | % | ||||||||
|
Depreciation
|
8,688 | 2.85 | % | 6,409 | 2.94 | % | ||||||||||
|
Total
franchise and general expenses
|
$ | 704,174 | 230.90 | % | $ | 1,607,707 | 736.80 | % | ||||||||
15
|
As
a Percentage of Total Revenue
|
As
a Percentage of Total Revenue
|
|||||||||||||||
|
Total
operating costs and expenses
|
$ | 1,488,386 | 148.31 | % | $ | 2,157,811 | 345.05 | % | ||||||||
|
(Loss)
from operations
|
(484,791 | ) | (48.31 | )% | (1,532,444 | ) | (245.05 | )% | ||||||||
|
Other
income and (expense):
|
||||||||||||||||
|
Net
interest income (expense)
|
(14,549 | ) | 1.45 | % | 37,970 | 6.07 | % | |||||||||
|
Other
(income) expense
|
- | - | (2,777 | ) | (0.44 | )% | ||||||||||
|
Total
other income and (expense)
|
(14,549 | ) | 1.45 | % | 35,193 | 5.63 | % | |||||||||
|
Net
income (loss)
|
$ | (499,340 | ) | (49.76 | )% | $ | (1,497,251 | ) | (239.42 | )% | ||||||
The
components of revenue are restaurant sales for company-owned restaurants, bakery
sales for the company-owned bakery and royalties and franchise fees for our
franchise operations.
For the
three months ended March 31, 2009, total revenue increased $378,228 (60.48%)
from $625,367 for the three months ended March 31, 2008 to $1,003,595 for the
same period in 2009. For the three months ended March 31, 2009
restaurant and bakery sales increased by $291,455 (71.58%) from $407,165 in 2008
to $698,620 in 2009. Our bakery was operating for the both
three-month periods in 2009 and 2008. The bakery sales were
relatively consistent in the two periods. In 2009 we had one
restaurant operating for the entire three months, one restaurant operating for
about two months, one restaurant operating for slightly over one month, and
three restaurants operating for one month. In 2008 we only had one
restaurant operating for the three months ended March 31, 2008.
Franchise
fees and royalty revenue increased $86,773 (39.77%) from $218,202 for the three
months ended March 31, 2008 to $304,975 in 2009. Initial franchise
fee are collected when a franchisee enters into a franchise
agreement. At that point in time these fees are recorded as deferred
revenue and are recognized as revenue on the statement of operations when the
franchised restaurant is opened. One restaurant was opened during the
three- month period ending March 31, 2009 and we recognized a fee of
$20,000. No restaurants were opened during the three months ended
March 31, 2008. We also collect a transfer fee when a franchisee
transfers its franchise agreement to a third party. We collected a
fee of $6,033 during the three months ended March 31, 2009 for the transfer of
one of the Bread Garden Urban Café restaurants. Deferred franchise
fees collected but not recognized as revenue during the three-month period ended
March 31, 2009 was $61,005 as compared to $299,000 for the three months ended
March 31, 2008. Royalty fees increased $17,774 (9.14%) from $194,472
for the three-month period ended March 31, 2008 to $212,246 for the three months
ended March 31, 2009. The increase is due primarily to the addition
of the Bread Garden Urban Cafés restaurants. Although the total
number of Spicy Pickle restaurants was comparable during the three-month periods
ending March 31, 2009 and 2008, five of the restaurants were purchased by us and
operated as company owned. Company owned restaurants do not pay a
royalty fee. This slightly offsets the increase due to Bread Garden
Urban Cafés.
In
general during the year ended December 31, 2008 we were in the process of
growing the infrastructure related to our franchise operations. The
growth was to meet expected needs as new franchise restaurants were anticipated
to be opened. In the first quarter of 2008 we entered into agreements
for 23 new franchises. Although we continued to have inquires and
visits from potential franchisees in the second and third quarters of 2008 we
did not sell any new franchises. We believe that the lack of sales of
new franchises is directly related to the economic downturn in
2008. Towards the end of the third quarter of 2008, we began to scale
back in the infrastructure we had in place. Our most significant
expense is personnel and related costs. We reduced the number of
employees from a high of 28 during the year ended 2008 to 18 by March 31,
2009. We also reduced overhead expenses that have a direct bearing on
the number of personnel employed as well as other areas such as travel and
entertainment and communication. The first quarter of 2009 showed a
reduction in expenses from the fourth quarter of 2008 of approximately $536,000
(43.5%).
16
We will
continue to review our general and administrative costs and respond to the
effects of the general economy as timely as possible.
The
following sets forth details of the costs that make up general and
administrative expenses and the difference for the three-month period ended
March 31, 2009 and compared to the three-month period ended March 31,
2008.
|
2009
|
2008
|
Difference
|
||||||||||
|
Personnel
cost
|
$ | 407,063 | $ | 648,426 | $ | (241,363 | ) | |||||
|
Professional
fees
|
78,532 | 84,897 | (6,365 | ) | ||||||||
|
Rent
|
49,897 | 31,941 | 17,956 | |||||||||
|
Travel
and entertainment
|
42,494 | 112,189 | (69,695 | ) | ||||||||
|
MIS
|
31,719 | 56,512 | (24,793 | ) | ||||||||
|
Communication
|
13,584 | 18,343 | (4,759 | ) | ||||||||
|
Stock
options
|
12,259 | 235,583 | (223,324 | ) | ||||||||
|
Investor
relations
|
5,287 | 294,470 | (289,183 | ) | ||||||||
|
Marketing,
advertising, promotion
|
- | 4,686 | (4,686 | ) | ||||||||
|
Other
general and administrative expenses
|
54,650 | 114,251 | (59,601 | ) | ||||||||
|
Total
general and administrative expenses
|
$ | 695,485 | $ | 1,601,298 | $ | (905,813 | ) | |||||
General
and administrative expenses decreased $905,813 (56.57%) from $1,601,298 for the
three-month period ended March 31, 2008 to $695,485 for the three-month period
ended March 31, 2009. Our most significant expense continues to be
personnel costs. We reduced the number of employees from 25 at March
31, 2008 to 18 at March 31, 2009. We also reduced the salary levels
of remaining employees. The two reductions resulted in a decrease in
personnel cost of $241,363 (37.22%) from $648,426 for the three-month period
ended March 31, 2008 to $407,063 for the three-month period ended March 31,
2009.
Professional
fees decreased $6,365 (7.50%) from $84,897 for the three-month period ended
March 31, 2008 to $78,532 for the three-month period ended March 31,
2009. The reduction was a result of bringing a portion of our legal
work in house. We expect to see further reduction to legal
fees.
Rent
expense increased $17,956 (56.22%) from $31,941 for the three months ended March
31, 2008 to $49,897 for the three months ended March 31, 2009. The
increase was due to the additional space rented to accommodate the increase in
personnel during 2008 as well as added space for our Bread Garden operations in
Vancouver Canada. We are currently attempting to reduce the amount of
space we rent by subleasing a portion of our headquarters
office. Given the current economic climate we cannot be assured of
subleasing any space and may not see any reduction. We have
negotiated with our landlord for a deferral of a portion the monthly rental
payments. Effective April 2009, we are deferring $3,000 per
month. The amount will be due and payable in the future.
Travel
and entertainment decreased $69,695 (62.12%) from $112,189 for the three months
ended March 31, 2008 to $42,494 for the three months ended March 31,
2009. The decrease was due to less travel related to our operations
department in visiting franchised location to perform on site
evaluations. We have temporarily reduced the number of visits made
each year and combine multiple locations on each trip.
MIS
decreased $24,793 (43.87%) from $56,512 for the three months ended March 31,
2008 to $31,719 for the three months ended March 31, 2009. The
decrease was due primarily as a result of mature systems, and reducing the third
party support of our systems.
Communications
decreased $4,759 (25.94%) from $18,343 for the three months ended March 31, 2008
to $13,584 for the three months ended March 31, 2009. The decrease
results from the reduced number of personnel and changes made to our existing
communication services.
Stock
option expense is a non-cash expense. We estimate the fair value of
share-based payment awards on the date of grant using the Black-Scholes
option-pricing model. Stock option expense decreased $223,324
(94.80%) from $235,583 for the three months ended March 31, 2008 to $12,259 for
the three months ended March 31, 2009. We did
17
not grant
any options during the three months ended March 31, 2009 and granted 1,410,000
stock options during the three months ended March 31, 2008.
Investor
relations decreased $289,183 (98.20%) from $294,470 for the three months ended
March 31, 2008 to $5,287 for the three months ended March 31,
2009. In the past we engaged a number of investor relation firms to
assist in attracting new shareholders for our company. We have
minimized the cost by not engaging these firms on a regular basis.
Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales. In our discretion, we may spend more or less than
our actual advertising receipts from the franchisees. Advertising fees collected
were $92,548 and $82,072 for the three months ended March 31, 2009 and 2008,
respectively. These fees are offset against actual advertising
expenses, which are recognized when incurred. We incurred advertising expenses
of $53,336 and $86,578 for the three months ended March 31, 2009 and 2008,
respectively. We anticipate that for the year ending December 31,
2009 we will spend at least as much as we collect.
Other
general and administrative expenses decreased $59,601 (52.17%) from $114,251 for
the three months ended March 31, 2008 to $54,650 for the three months ended
March 31, 2009. The decrease results for the reduced number of
personnel, reductions in contributions, automobile expenses and other
miscellaneous items. These reductions were planned
The net
loss for the three months ended March 31, 2009 was $499,340 compared to a net
loss of $1,497,251 for the three months ended March 31, 2008, a decreased loss
of $997,911 (66.65%). The loss from operations was $484,791 for the three months
ended March 31, 2009 as compared to $1,532,444 for the three months ended March
31, 2008. The decrease in the loss from operations of $1,047,653 (68.36%) was
primarily due to increased revenue and the decrease to personnel expenses,
investor relations, stock options and other operating expenses.
Liquidity
and Capital Resources
At March
31, 2009, we had a working capital deficit of $864,088, as compared to working
capital deficit of $925,635 at December 31, 2008. Of the working
capital deficit at March 31, 2009, $812,505 was deferred franchise fee revenue
and does not represent a cash liability. The increase in working
capital is primarily due to borrowing under a line of credit. We obtained a
$550,000 line of credit from two of our directors in 2008. We
borrowed $400,000 against this line of credit during the three months ended
March 31, 2009. As of March 31, 2009 the balance on this line is
$500,000.
During
the three months ended March 31, 2009, we used cash in operating activities of
$435,039 as compared to cash used in operations of $1,013,379 for the same
period in 2008. We also used no cash for the acquisition of assets for the three
months ended March 31, 2009 as compared to $810,065 for the same period in
2008. We receive payments from franchisees when they sign a franchise
agreement. We do not include those payments in revenue until such time as the
franchisee opens the restaurant. The amount recorded as deferred revenue at
March 31, 2009 was $812,505, an increase of $41,005 compared to December 31,
2008. Although not recorded as revenue, any payments received will provide
working capital.
At March
31, 2009, we had contractual obligations for operating leases of approximately
$2,802,357, of which $343,357 is due by December 31, 2009.
18
As of March 31, 2009, our aggregate minimum requirements under
non-cancelable leases are as follows:
|
2009
|
$ | 343,357 | ||
|
2010
|
435,447 | |||
|
2011
|
417,091 | |||
|
2012
|
378,369 | |||
|
2013
|
351,734 | |||
|
Later
years
|
876,359 | |||
| $ | 2,802,357 |
We pay to
each holder of Series A Preferred Stock cumulative dividends at a rate per share
of 5% per annum until December 14, 2010, 7.5% per annum from December 15, 2010
until December 14, 2011, and 14% per annum thereafter, payable semi-annually on
January 1 and July 1, beginning on July 1, 2008, In July 2008
we made the first required payment of $159,596 in cash. In January
2009 we issued 798,555 shares of our $.001 par value common stock in
settlement of $135,035 of the accrued dividend at December 31, 2008 and made a
cash payment of $2,853 for the balance. Whenever possible we will
make dividend payments in our common stock in lieu of cash. There is
no guarantee that we will be able to continue to do so.
Summary
– March 31, 2009
The
difficult economic conditions of 2008 resulted in us not selling as many new
franchises as we initially projected. The extent of the recession was
not clear until the third or fourth quarter of 2008. We reacted to
the downturn as soon as it became apparent that it would not correct itself in
the short term. Our need to raise additional equity or debt financing
and our ability to generate cash flow from operations will depend on the length
of time we are in a recession, the availability of financing for existing and
potential franchisees to open new restaurants, our future performance and our
ability to successfully implement our stated business and growth
strategies. Many of these factors are beyond our control. If our
working capital is insufficient to fund the implementation of our business plan
we will be required to seek additional financing sooner than currently
anticipated in order to proceed with our business goals. In the event
that we need additional capital and are unable to obtain it, we could be left
without sufficient liquidity. The nature of our business is that a
portion of our revenue is a continuing stream from franchisees. We
will continually monitor our expenses and reduce those expenses as best we can
to match the revenue flow. In the past we have issued common stock to
our consultants and professional services providers in lieu of cash payments for
these services. We may continue this practice to conserve our cash to pay for
operations, product development and inventory.
Off-Balance
Sheet Arrangements
At
December 31, 2008, we had no obligations that would qualify to be disclosed as
off-balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
Not
required.
Item
4T. Controls and Procedures
Our
management, with the participation of our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report. Based
on such evaluation, our CEO and CFO have concluded that, as of the end of such
period, the Company’s disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act and are effective in ensuring that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is
19
accumulated
and communicated to the Company’s management, including the Company’s CEO and
CFO, as appropriate, to allow timely decisions regarding required
disclosure.
Part
II – OTHER INFORMATION
Item
1. Legal
Proceedings
None.
Item
1A. Risk Factors
Not
required.
Item
2. Unregistered Sales
of Equity Securities and Use of Proceeds
During
the three months ended March 31, 2009, the Company issued 53,545 shares of
common stock in lieu of a cash payment of accounts payable of $46,361 which
existed at December 31, 2008.
No
underwriter was used in this transaction. The Company relied upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as the investor was deemed to be sophisticated with respect to the
investment in the securities due to its financial condition and involvement in
the Company’s business. A restrictive legend was placed on the
certificate evidencing the securities issued in this transaction.
Item
3. Defaults Upon
Senior Securities
None.
Item
4. Submission of
Matters to a Vote of Security Holders
None.
Item
5. Other
Information
Not
applicable
Item
6. Exhibits
|
Regulation
S-K
Number
|
Exhibit
|
|
2.1
|
Asset
Purchase Agreement between SPBG Franchising, Inc. and Bread Garden
Franchising, Inc. dated September 30, 2008 (1)
|
|
3.1
|
Amended
and Restated Articles of Incorporation
(2)
|
20
|
Regulation
S-K
Number
|
Exhibit
|
|
3.2
|
Bylaws
(3)
|
|
4.1
|
Certificate
of Designation of Series A Variable Rate Convertible Preferred Stock
(4)
|
|
10.1
|
Employment
Agreement – Marc Geman (3)
|
|
10.2
|
Employment
Agreement – Anthony Walker (3)
|
|
10.3
|
Employment
Agreement – Kevin Morrison (3)
|
|
10.4
|
2006
Stock Option Plan (3)
|
|
10.5
|
Promissory
Note to Spicy Pickle, LLC (3)
|
|
10.6
|
Securities
Purchase Agreement dated as of December 14, 2007 (5)
|
|
10.7
|
Form
of Warrant (6)
|
|
10.8
|
Registration
Rights Agreement dated as of December 14, 2007 (7)
|
|
10.9
|
Lock-Up
Agreement of Marc Geman (8)
|
|
10.10
|
Form
of Lock-Up Agreement executed by other officers and directors
(9)
|
|
10.11
|
Amendment
No. 1 to Securities Purchase Agreement dated as of May 22, 2008
(10)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(11)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(11)
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer (11)
|
|
32.2
|
Section
1350 Certification of Chief Financial Officer
(11)
|
|
(1)
|
Incorporated
by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K
filed on October 2, 2008.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to Amendment No. 1 to the
registrant’s registration statement on Form SB-2 filed on December 12,
2006.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
registration statement on Form SB-2 filed on October 26,
2006.
|
|
(4)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s Current
Report on Form 8-K filed on December 19,
2007
|
|
(5)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.2 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.3 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.4 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(9)
|
Incorporated
by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
Current Report on Form 8-K filed on December 27,
2007.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on May 23, 2008.
|
| (11) | Filed herewith. |
21
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.
| SPICY PICKLE FRANCHISING, INC. | |||
|
May
14, 2009
|
By:
|
/s/ Marc Geman | |
| Marc Geman | |||
| Chief Executive Officer | |||
|
May
14, 2009
|
By:
|
/s/ Arnold Tinter | |
| Arnold Tinter | |||
| Chief Financial Officer | |||
22
EXHIBIT
INDEX
|
Regulation
S-K
Number
|
Exhibit
|
|
2.1
|
Asset
Purchase Agreement between SPBG Franchising, Inc. and Bread Garden
Franchising, Inc. dated September 30, 2008 (1)
|
|
3.1
|
Amended
and Restated Articles of Incorporation (2)
|
|
3.2
|
Bylaws
(3)
|
|
4.1
|
Certificate
of Designation of Series A Variable Rate Convertible Preferred Stock
(4)
|
|
10.1
|
Employment
Agreement – Marc Geman (3)
|
|
10.2
|
Employment
Agreement – Anthony Walker (3)
|
|
10.3
|
Employment
Agreement – Kevin Morrison (3)
|
|
10.4
|
2006
Stock Option Plan (3)
|
|
10.5
|
Promissory
Note to Spicy Pickle, LLC (3)
|
|
10.6
|
Securities
Purchase Agreement dated as of December 14, 2007 (5)
|
|
10.7
|
Form
of Warrant (6)
|
|
10.8
|
Registration
Rights Agreement dated as of December 14, 2007 (7)
|
|
10.9
|
Lock-Up
Agreement of Marc Geman (8)
|
|
10.10
|
Form
of Lock-Up Agreement executed by other officers and directors
(9)
|
|
10.11
|
Amendment
No. 1 to Securities Purchase Agreement dated as of May 22, 2008
(10)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
(11)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
(11)
|
|
32.1
|
Section
1350 Certification of Chief Executive Officer (11)
|
|
32.2
|
Section
1350 Certification of Chief Financial Officer
(11)
|
|
(1)
|
Incorporated
by reference to Exhibit 2.1 to the registrant’s Current Report on Form 8-K
filed on October 2, 2008.
|
|
(2)
|
Incorporated
by reference to the exhibit of the same number to Amendment No. 1 to the
registrant’s registration statement on Form SB-2 filed on December 12,
2006.
|
|
(3)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s
registration statement on Form SB-2 filed on October 26,
2006.
|
|
(4)
|
Incorporated
by reference to the exhibit of the same number to the registrant’s Current
Report on Form 8-K filed on December 19,
2007.
|
|
(5)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.2 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(7)
|
Incorporated
by reference to Exhibit 10.3 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
|
(8)
|
Incorporated
by reference to Exhibit 10.4 to the registrant’s Current Report on Form
8-K filed on December 19, 2007.
|
23
|
(9)
|
Incorporated
by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
Current Report on Form 8-K filed on December 27,
2007.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on May 23, 2008.
|
| (11) | Filed herewith. |
24
Exhibit
31.1
RULE
13a-14(a) CERTIFICATION
I, Marc
Geman, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of Spicy Pickle Franchising,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
May 14, 2009
|
|
/s/ Marc Geman | |
| Marc Geman | |||
| Chief Executive Officer | |||
Exhibit
31.2
RULE
13a-14(a) CERTIFICATION
I, Arnold
Tinter, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of Spicy Pickle Franchising,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
May 14, 2009
|
|
/s/ Arnold Tinter | |
| Arnold Tinter | |||
| Chief Financial Officer | |||
Exhibit
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Spicy Pickle Franchising, Inc. (the
“Company”) on Form 10-Q for the period ended March 31, 2009, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Marc
Geman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Marc Geman
Marc
Geman
Chief
Executive Officer
May 14,
2008
Exhibit
32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Spicy Pickle Franchising, Inc. (the
“Company”) on Form 10-Q for the period ended March 31, 2009, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Arnold
Tinter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Arnold Tinter
Arnold
Tinter
Chief
Financial Officer
May 14,
2009