U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended November 30, 2005.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from __________ to __________
Commission File Number 0-32133
DONINI, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3768426
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4555 Boul. des Grandes Prairies, #30
St-Leonard, Montreal, Quebec, Canada H1R 1A5
(Address of Principal Executive Offices)
(514) 327-6006
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act Yes [ ] No [X]
The number of shares outstanding of each of the issuer's classes of common
equity, as of January 23, 2006: 30,254,716 shares of common stock
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Donini, Inc.
TABLE OF CONTENTS
PART I Page
----
Item 1 - Financial Information
Consolidated Balance Sheets as of November 30, 2005 (Unaudited)
and May 31,2005 (Audited) ......................................... 3
Consolidated Statements of Operations for the three and six months
ended November 30, 2005 and 2004 (Unaudited) ...................... 4
Consolidated Statements of Cash Flows for the six months
ended November 30, 2005 and 2004 (Unaudited)................... 5 - 6
Notes to Consolidated Financial Statements .......................... 7 - 13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 14 - 19
PART II
Item 1 - Legal Proceedings ............................................. 19
Item 2 - Changes in Securities and Use of Proceeds...................... 19
Item 3 - Defaults Upon Senior Securities................................ 19
Item 4 - Submission of Matters to a Vote of Security Holders............ 19
Item 6 - Exhibits and Reports on Form 8-K............................... 19
Signatures.............................................................. 20
Certifications.......................................................... 21 - 22
2
PART I
ITEM 1- FINANCIAL INFORMATION
DONINI, INC.
CONSOLIDATED BALANCE SHEETS
November 30, May 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
Cash and cash equivalents $ 67,598 $ 120,185
Accounts receivables - net 90,673 61,054
Inventories 16,348 15,603
Taxes receivables 16,295 11,051
Prepaid expenses and other current assets 24,342 31,564
Assets held for resale 312,890 274,546
------------ ------------
Total Current Assets 528,146 514,003
Property and equipment - net 223,773 239,761
Investment in related company 105,500 99,000
Loan receivable 42,360 13,609
Deposits 2,314 2,151
Franchise sales receivables - net 24,955 30,933
Trademarks - net 10,281 10,454
------------ ------------
Total Assets $ 937,329 $ 909,911
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payables and accrued liabilities $ 1,144,909 $ 1,121,345
Current portion of long-term debt 512,394 668,967
Convertible note payable - net of issuance costs
of $199,322 1,340,678 --
Loans payable - related parties 352,248 149,131
Loans payable - others 94,939 95,972
------------ ------------
Total Current Liabilities 3,445,168 2,035,415
Long-Term Liabilities:
Loans payable - related parties - net of current portion 25,000 100,000
Long-term debt - net of current portion 27,985 27,985
Convertible note payable - net of issuance costs
of $228,645 -- 1,141,355
------------ ------------
Total Liabilities 3,498,153 3,304,755
------------ ------------
Contingencies
Stockholders' Deficit:
Common stock ($.001 par value 100,000,000 shares
authorized, 30,254,716 and 27,711,205
issued and outstanding, respectively 30,255 27,711
Additional paid-in capital 6,429,530 6,101,760
Common stock issued as collateral for note payable (672,000) (640,000)
Accumulated deficit (8,179,314) (7,779,835)
Foreign currency translation adjustment (169,295) (104,480)
------------ ------------
Total Stockholders' Deficit (2,560,824) (2,394,844)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 937,329 $ 909,911
============ ============
The accompanying notes are an integral part of these financial statements.
3
DONINI INC
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
---------------------------- ----------------------------
November 30, November 30, November 30, November 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Restated) (Restated)
Revenues:
Sales $ 126,393 $ 135,719 $ 244,274 $ 259,635
Royalties and other related revenues 63,541 86,940 122,182 154,634
Order processing fees 35,781 42,612 70,758 81,706
Initial franchise fees 47,458 20,546 47,458 54,355
------------ ------------ ------------ ------------
Total Revenues 273,173 285,817 484,672 550,330
Cost of Goods Sold 82,841 83,490 159,619 161,614
------------ ------------ ------------ ------------
Gross Profit 190,332 202,327 325,053 388,716
------------ ------------ ------------ ------------
Costs and expenses :
General and administrative expenses 233,250 305,044 430,967 566,270
Advertising and promotion 52,802 37,237 159,019 84,841
Salaries 63,079 44,746 124,740 101,225
Product and market development 62,119 39,895 86,975 43,058
Stock-based compensation costs -- -- -- 826,600
Depreciation and amortization 17,205 16,756 32,467 30,555
Amortization of finance costs 57,161 38,108 114,322 76,215
------------ ------------ ------------ ------------
Total Costs and Expenses 485,616 481,786 948,490 1,728,764
------------ ------------ ------------ ------------
Loss from Operations (295,284) (279,459) (623,437) (1,340,048)
Gain on forgiveness of debt 339,112 -- 339,112 --
Interest expense (53,232) (49,579) (116,343) (98,181)
Interest income 789 112 1,189 3,452
Other income, including sale of
assets held for resale -- 4,321 -- 47,339
------------ ------------ ------------ ------------
Net Loss $ (8,615) $ (324,605) $ (399,479) $ (1,387,438)
============ ============ ============ ============
Loss Per Share
Basic and diluted loss per share $ (0.00) $ (0.02) $ (0.02) $ (0.09)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 19,926,120 18,420,871 19,616,982 16,158,576
============ ============ ============ ============
- --------------------
The accompanying notes are an integral part of these financial statements.
4
DONINI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
November
----------------------------
2005 2004
------------ ------------
(Restated)
Cash Flows from Operating Activities:
Net loss $ (399,479) $ (1,387,438)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 146,790 30,555
Amortization of convertible note interest 85,000 126,215
Provision for franchise sales receivable 8,319 --
Gain on forgiveness of debt (339,112) --
Common stock issued as compensation
and services rendered -- 826,600
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (29,619) 32,249
Inventories (745) (2,102)
Taxes receivables (5,244) (6,299)
Prepaid expenses and other current assets 7,222 3,233
Deposits (163) --
Increase (decrease) in:
Accounts payable and accrued liabilities 214,943 52,994
------------ ------------
Net cash used in operating activities (312,088) (323,993)
------------ ------------
Cash Flows from Investing Activities:
Net (disbursements) proceeds on loan receivable (28,751) 16,570
Increase (decrease) in franchise sales receivables (2,341) 29,478
Net proceeds (acquisition) of assets held for resale (17,275) (19,104)
Acquisition of property and equipment (16,306) (23,449)
Stockholder loans receivable -- (137,084)
Investment in related company (6,500) --
------------ ------------
Net cash used in
investing activities (71,173) (133,589)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from loans payable 447,916 126,497
Principal payments on loans payable (89,929) (154,717)
Principal payments on long term-debt (15,878) (8,070)
Proceeds from long term-debt 23,331 --
Proceeds from convertible note payable -- 1,200,000
Acquisition costs related to convertible note payable -- (209,800)
Proceeds from issuance of common stock -- 1,400
------------ ------------
Net cash provided by
financing activities 365,440 955,310
------------ ------------
Effect of Foreign Currency Translation (34,766) (109,065)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (52,587) 388,663
Cash and Cash Equivalents - beginning of period 120,185 --
------------ ------------
Cash and Cash Equivalents - end of period $ 67,598 $ 388,663
============ ============
5
DONINI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(CONTINUED)
For the Six Months Ended
November 30,
----------------------------
2005 2004
------------ ------------
(Restated)
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 10,767 $ 48,181
============ ============
Income taxes paid during the period $ -- $ --
============ ============
Supplemental Disclosure of Noncash Activities:
Conversion of debt to equity:
Debt forgiven $ 639,963 $ --
Common stock issued (258,371) --
Warrants issued (39,943) --
Translation adjustment (2,537) --
------------ ------------
Gain on forgiveness of debt $ 339,112 $ --
============ ============
Warrants issued in connection with
convertible note $ -- $ 247,490
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
6
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
1. DESCRIPTION OF BUSINESS
Donini, Inc. (the "Company") is incorporated in the State of New
Jersey. Pizza Donini Inc. ("PDI"), a wholly-owned subsidiary of the Company
operates a franchise management company in the Greater Montreal area. The
Company's franchise outlets operate under the trade name "Pizza Donini", which
name is also primarily used for the distribution of the Company's frozen pizza
to the food service industry. PDI holds twenty-three (23) locations. At November
30, 2005, nineteen (19) were franchised and four (4) others were being held by
PDI with the intention of selling them as Pizza Donini franchises. All outlets
are in Greater Montreal.
As franchisor, PDI supplies the franchisees, through its wholly-owned
subsidiary Pizado Foods (2001) Inc. ("Pizado"), with the dough and sauces used
in the preparation of Pizza Donini recipes. Pizado also supplies a separate
product line of pizza dough and sauces to other restaurants and distributors in
the Province of Quebec. In connection with frozen pizza wholesale orders, the
Company employs subcontractors to produce its products.
Pizza Donini.Com Inc. ("Donini.Com"), a wholly-owned subsidiary of PDI,
operates a call center that executes home delivery through one central telephone
number. The call center dispatches telephone orders to the closest franchisee
for prompt delivery. Donini.Com has also embarked on the development of an
internet-based order taking and processing program. DoniniCo Inc. ("DoniniCo"),
a wholly-owned subsidiary of PDI, repurchases under performing existing Donini
franchised restaurants and operates or holds them, pending their resale to new
franchisees.
During February 2005, the Company entered into a joint venture
agreement whereby the Company effectively owns 36.6% of a U.S. based entity
called Pronto Donini, LLC (Pronto). The purpose of this entity is to help expand
its Donini products into the U.S. market. Pronto will operate a Donini Resto-Bar
business. The business was not in operation as of November 30, 2005.
The investment in Pronto Donini, LLC is carried at equity, adjusted for
the Company's proportionate share of Pronto's undistributed earnings or losses.
Going Concern
- -------------
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern and that assets and
liabilities have been recorded on the basis that the entity will be able to
realize its assets and discharge its liabilities in the normal course of
business. However, the accompanying financial statements reflect that the
Company has incurred significant operating losses, has a deficit in
stockholders' equity and a working capital deficit at November 30, 2005. In
addition, the Company will require additional financing to meet its future
obligations. These matters raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern will depend on its attaining profitable operations and the ability to
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue its existence.
In order to secure additional capital funding, the Company has engaged
the services of a financial consultant to assist on a "best efforts" basis to
raise an additional $5,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company continues to attempt to secure commitments from its
customers for additional installations at their food services facilities to
provide ready made frozen pizza, including its new products such as the new
microwaveable pizza and seeks to finance its future growth partly through
equipment leasing arrangements and other means. The Company also continues to
implement various cost control measures to attempt to achieve optimal profit
margins and to improve the revenue potential of its franchises. In the event
that additional capital is raised, part of the proceeds will be used for those
purposes. It is anticipated that any cash shortfalls that might arise will be
funded by the officers and management of the Company.
7
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
1. DESCRIPTION OF BUSINESS (Continued)
Restatement
- -----------
The 2004 statements of operations and cash flows were restated to
correct the following:
1. To record warrants issued in connection with the issuance of the convertible
notes (see Note 3). The value of the warrants totaled $247,490.
2. To increase the amortization of unamortized finance costs in the amount of
$3,108 and $6,215 for the three and six months ended November 30, 2005,
respectively.
3. To reduce stock-based compensation costs in the amount of $0 and $1,400 for
the three and six months ended November 30, 2005 and 2004, respectively.
The effect of the restatement was to increase the net loss of the Company by
$3,108 and $4,815 for the three and six months ended November 30, 2004,
respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
- -----------------------------------------------------
The accompanying financial statements consolidate the accounts of
Donini, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
from prior years have been reclassified to conform to the current year
presentation.
The accompanying unaudited consolidated financial statements reflect
all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the financial position and results
of operations for the interim periods presented. The consolidated financial
statements are unaudited and are subject to such year-end adjustments as may be
considered appropriate and should be read in conjunction with the historical
consolidated financial statements of the Company for the years ended May 31,
2005 and 2004 included in its Annual Report on Form 10-K for the fiscal year
ended May 31, 2005. Operating results for the three and six months ended
November 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending May 31, 2006.
These consolidated financial statements have been prepared in
accordance with US GAAP and under the same accounting principles as the
consolidated financial statements included in the Annual Report on Form 10-K.
Certain information and footnote disclosures related thereto normally included
in the financial statements prepared in accordance with US GAAP have been
omitted in accordance with Rule 10-01 of Regulation S-X.
Assets Held for Resale
- ----------------------
Assets held for resale consist of franchise equipment reacquired by the
Company and are recorded at the lower of cost and net realizable value.
8
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) per Share
- -------------------------
The Company computes earnings or loss per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other agreements to issue common stock were exercised or converted
into common stock, only in the periods in which the effect is dilutive. The
following securities have been excluded from the calculation of net loss per
share, as their effect would be antidilutive.
2005 2004
---- ----
Options (weighted average) 2,736,813 265,574
Warrants (weighted average) 857,458 528,962
Common shares issued as collateral for the convertible note payable
totaling 8,400,000 shares have been excluded from the weighted average number of
shares outstanding for 2005.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion
No. 25, (APB 25) "Accounting for Stock Issued to Employees" in accounting for
options and warrants granted to its employees. Under APB 25, when the exercise
price of the Company's options or warrants equals or is above the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Stock options and warrants granted to non-employees are recorded at
their fair value, as determined in accordance with Financial Accounting
Standards Board Statement No. 123, (SFAS 123) "Accounting for Stock Based
Compensation" and Emerging Issues Task Force Consensus No. 96-18, and recognized
over the related service period.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which replaces SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). SFAS 123(R) requires
companies to recognize in their income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees. The
Company is required to adopt SFAS 123(R) beginning March 1, 2006. Grant-date
fair value will be determined using one of two acceptable valuation models. This
Standard requires that compensation expense for most equity-based awards be
recognized over the requisite service period, usually the vesting period; while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) be re-measured to fair-value at each balance sheet date until
the award is settled. The Standard also provides guidance as to the accounting
treatment for income taxes related to such compensation costs, as well as
transition issues related to adopting the new Standard.
9
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Stock-Based Compensation (Continued)
- ---------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Only stock
options granted after September 30, 1995 have been included for the Company's
pro forma information as follows:
2005 2004
------------ ------------
(Restated)
Net Loss - as reported $ (399,479) $ (1,387,438)
Less: Total compensation expense
determined under fair value based
method - net of tax effect 53,731 131,923
------------ ------------
Pro Forma Net Loss $ (453,210) $ (1,519,361)
============ ============
Pro Forma Loss Per Share:
Basic and Diluted $ (0.02) $ (0.09)
============ ============
For the purpose of providing pro forma disclosures, the fair value of
stock options granted were estimated using the Black-Sholes option pricing model
with the following weighted-average assumptions used for grants in 2005 and
2004: risk-free rates of 1.32% to 4.49%, an expected life of 2 to 5 years, an
expected volatility of 248% to 518% and no expected dividends.
Recent Accounting Pronouncements
- --------------------------------
In May 2005, the FASB issued FASB Statement No. 154, "Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting
Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements" ("SFAS 154"). SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It establishes,
unless impracticable, retrospective application as the required method for
reporting a change in accounting principles in the absence of explicit
transition requirements specific to the newly adopted accounting principle. SFAS
154 also provides guidance for determining whether retrospective application of
a change in accounting principles is impracticable and for reporting a change
when retrospective application is impracticable. The provisions of SFAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the Company's financial
position or results of operations.
10
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
3. CONVERTIBLE NOTE PAYABLE
On June 7, 2004, the Company entered into a Security Purchase Agreement
with Global Capital Funding Group, L.P. ("Global") whereby Global purchased a
$1,500,000 convertible note ("Note") for $1,200,000. The Note was to mature on
June 7, 2007 and was secured by the Company's accounts receivable, inventory,
property and equipment and general intangibles.
In connection with the Agreement, the Company issued a warrant to Global
to purchase 500,000 shares of common stock as additional finance costs. In
addition, the Company issued a warrant to an unrelated corporation to purchase
50,000 shares of common stock as a finder's fee. Both warrants are exercisable
at $.495 per share and expire on June 7, 2009.
On October 1, 2004, the Company and Global entered into an Exchange
Agreement whereby the Note was exchanged for a new note ("New Note") in the
amount of $1,540,000. The New Note matures on June 7, 2006 and is secured by a
first lien on the Company's non-real estate assets and the issuance and pledge
of 8,400,000 shares of common stock. The effective interest rate on the New Note
is approximately 13%.
Other terms under the New Note are as follows:
1. As long as there is no event of default (as defined), the Company may, at its
option, prepay the New Note at a price equal to the outstanding principal amount
of the New Note, $40,000 of liquidating damages and all accrued and unpaid
interest.
2. Global has the right to convert the New Note into shares of common stock upon
an event of default (as defined) or at any time following June 7, 2005 at the
following conversion price - (a) Principal amount being converted together with
the accrued and unpaid interest through the date of conversion divided by (b)
100% of the three lowest bid prices during the twenty (20) trading days
immediately preceding the date of conversion. Global can only convert (other
than due to an event of default) if the price of the Company's common stock is
equal to or greater than $.60 per share at the time of conversion.
The balance owed under the New Note is as follows:
November 30, May 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
Balance owed at maturity $ 1,540,000 $ 1,540,000
Unamortized finance costs (114,322) (228,645)
Unamortized interest (85,000) (170,000)
------------ ------------
$ 1,340,678 $ 1,141,355
============ ============
Interest incurred amounted to $42,500 and $85,000 for the three and six months
ended November 30, 2005, respectively, and $25,000 and $50,000 for the three and
six months ended November 30, 2004, respectively.
11
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
4. RELATED PARTY TRANSACTIONS
Loans Payable
- -------------
Loans payable - related parties consist of the following:
November 30, May 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
8% stockholder loan, interest payable quarterly
with principal and accrued and unpaid
interest due January 1, 2007 $ 25,000 $ 100,000
12% stockholder loan, guaranteed by the
President of the Company, payable in twelve
monthly installments of C$5,568 (US$4,772)
The loan is past due 53,648 49,873
12% stockholder loan, guaranteed by the President
of the Company 15,833 14,719
Non-interest bearing stockholder and director loans 282,767 84,539
------------ ------------
377,248 249,131
Less: Current portion 352,248 149,131
------------ ------------
$ 25,000 $ 100,000
============ ============
Other
- -----
The Company's President, who is also its chief executive officer and a
principal stockholder, has made personal guarantees on certain obligations of
the Company and pledged 300,000 shares of his Company stock as collateral for a
bank demand note with a balance of approximately $247,000 as of November 30,
2005.
5. STOCKHOLDERS' DEFICIT
Debt to Equity Conversion
- -------------------------
On November 8, 2005, the Company converted $639,963 of accounts and
loans payable from various note holders and vendors in exchange for 2,543,511
shares of common stock and 1,271,757 warrants. The warrants have a three-year
term and allow the holder to purchase shares of the Company's common stock at
$.30 per share. Of those amounts 702,024 shares of common stock and 351,012
warrants were issued to related parties. This transaction resulted in a gain on
forgiveness of debt in the amount of $339,112.
Stock Options
- -------------
On November 8, 2005, the Company issued 8,000,000 five-year options to
its employees to purchase its common stock at $.30 per share. The options vest
at a rate of 20% per annum but terminate upon the employees leaving the Company
for any reason.
12
DONINI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005 and 2004
6. CONTINGENCIES
Litigation
- ----------
The Company is subject from time to time to litigation arising from the
normal course of business. In management's opinion, any such contingencies are
appropriately provided for or would not materially affect the Company's
financial position or results of operations.
Pizza Donini was sued by a former franchisee of a former subsidiary who
is seeking to obtain an order from the Court declaring that the transfer and
sale to Pizza Donini of trademarks by the former subsidiary is null and void and
to have Pizza Donini declared jointly and severally liable for a claim of the
former franchisee against the former subsidiary.
This action stems from a separate suit filed by the former franchisee
against the former subsidiary, in the amount of C$637,000 (approximately
US$546,000) which suit was dismissed by the Superior Court of Quebec on May 19,
1998. The former franchisee has appealed the original judgment of the lower
court and legal counsel for the former subsidiary does not expect a hearing date
before December 2005. In the meantime, in the suit against PDI, there is an
agreement between the attorneys of the parties to await the outcome of the
decision of the Court of Appeal in the original proceedings prior to pursuing
this action.
Other
- -----
The Company and its President are guarantors on a five-year 8%
promissory note ("Note") of $250,000 made by a non-affiliated person to a
franchisee of the Company. The Note is payable in monthly installments of $5,054
including interest commencing in October 2004 through September 2009. Other
terms of the Note include:
1. The Note is secured by a subordinated interest in all of the assets of the
franchisee.
2. If an event of default occurs, the lender, at his option, can demand
immediate payment of any and all amounts then owing or to become owing.
As of November 30, 2005, the franchisee has not made any of the
required monthly installments. The Company has made interest payments on behalf
of the franchisee totaling approximately $21,600. Such amounts have been
classified as loan receivable on the balance sheet. Although the Note is in
default, the lender has not demanded immediate payment of all amounts owed and
owing.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements and Associated Risks
The various sections of the MD&A include certain "forward-looking
statements" within the meaning of that term in Section 13 or 15(d) of the
Securities Act of 1934, and Section 21E of the Exchange Act, including, among
others, those statements preceded by, followed by or including the words
"believes," "expects," "anticipates" or similar expressions.
These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Our actual
results could differ materially from these forward-looking statements. In
addition to the other risks described in the "Factors That May Affect Future
Results" discussion under Item 6, Management's Discussion and Analysis of
Financial Condition and Results of Operations in Part II of this Report,
important factors to consider in evaluating such forward-looking statements
include:
o changes in our business strategy or an inability to execute
our strategy due to unanticipated changes in the market,
o our ability to raise sufficient capital to meet operating
requirements,
o various competitive factors that may prevent us from
competing successfully in the marketplace, and
o changes in external competitive market factors or in our
internal budgeting process which might impact trends in our
results of operations.
In light of these risks and uncertainties, there can be no assurances
that the events contemplated by the forward-looking statements contained in this
Report will, in fact, occur.
Overview
At November 30, 2005, PDI supports twenty-three (23) pizza outlets.
Nineteen (19) were franchised and four (4) locations represent outlets at which
the Company has terminated franchises due to under performance by the
franchisees. All locations feature a moderately priced Italian menu with its
traditional and gourmet pizzas, submarine sandwiches, pasta dishes, fries,
chicken wings, salads and desserts.
The Company operates one (1) Resto-Bar and has commenced plans to
locate at least one (1) Resto-Bar in the U.S. and one (1) more in Montreal as
either franchise or company-owned units. In addition to the traditional Donini
menu, the Resto-Bar offers an expanded menu featuring a selection of veal and
chicken dishes, appetizers, a new selection of pasta dishes, foccaccia and
ciabatta sandwiches as well as a breakfast menu, wine, beer and cocktails.
PDI is further developing its B2B (business to business) distribution
network of fully-topped, ready-to-use self-rising crust frozen pizza to food
service customers and is in discussion with a number of potential customers such
as department store cafeterias, other restaurants, hospitality and leisure
venues, convenience stores, and contract caterers. The Company has also
completed the development of its frozen microwaveable pizza. A truly
pizzeria-tasting pizza coming out of a microwave. This new product is an
extension of the Company's frozen pizza line.
In addition to generating revenues from its franchisees in the form of
initial franchise fees and royalties, revenues have also been generated by three
other operating subsidiaries, Pizado, Donini.Com and DoniniCo. Pizado sells raw
food products and other supplies to our franchisees and is offering selected
products to other distributors and manufacturers. Pizado also intends to expand
its distribution business. Donini.Com. manages the call center that executes
home delivery orders made from a single telephone number to the closest
franchisee. DoniniCo. repurchases under performing existing Donini franchised
restaurants and operates or holds them, pending their resale to new franchisees.
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Going Concern
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern and that assets and
liabilities have been recorded on the basis that the entity will be able to
realize its assets and discharge its liabilities in the normal course of
business. However, the accompanying financial statements reflect that the
Company has incurred significant operating losses, has a deficit in
stockholders' equity and a working capital deficit at November 30, 2005. In
addition, the Company will require additional financing to meet its future
obligations. These matters raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern will depend on its attaining profitable operations and the ability to
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue its existence.
In order to secure additional capital funding, the Company has engaged
the services of a financial consultant to assist on a "best efforts" basis to
raise an additional $5,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company continues to attempt to secure commitments from its
customers for additional installations at their food services facilities to
provide ready made frozen pizza, including its new products such as the new
microwaveable pizza and seeks to finance its future growth partly through
equipment leasing arrangements and other means. The Company also continues to
implement various cost control measures to attempt to achieve optimal profit
margins and to improve the revenue potential of its franchises. In the event
that additional capital is raised part of the proceeds will be used for these
purposes. It is anticipated that any cash shortfalls will be funded by the
officers and management of the Company.
Significant Accounting Policies
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in our financial statements and the accompanying
notes. The amounts of assets and liabilities reported in our balance sheets and
the amounts of revenues and expenses reported for each of our fiscal periods are
affected by estimates and assumptions which are used for, but not limited to,
the accounting for allowance for doubtful accounts, fair market values of
marketable securities, asset impairments, inventory and income taxes. Actual
results could differ from these estimates.
The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial
statements.
Revenue Recognition
Franchise agreements provide the terms of the arrangement between PDI
and the franchisee. The franchise agreements may or may not require the
franchisee to pay an initial, nonrefundable fee. Royalties and advertising
revenues are based on a percentage of the sales of the franchisees according to
the terms of the franchise agreement. Order processing fees for the operation of
the call center are based on a percentage of the franchisees' sales generated by
the call center. These revenues are recorded as earned, with an appropriate
provision for estimated uncollectible amounts.
Initial fees are recognized as revenue when PDI has substantially
performed all initial services required by the franchise agreement, which is
generally upon opening. Direct costs incurred to secure and perform the required
services under the franchise agreement are charged to expense as incurred.
Refranchising gains include gains on sales of company-operated
restaurants to new and existing franchisees and the related initial franchise
fees, if any. Gains on subsequent restaurant franchising are recognized when the
sale transaction closes, the franchisee has a minimum amount of the purchase
price in at-risk equity and the Company is satisfied that the franchisee can
meet its financial obligations. Otherwise, refranchising gains are deferred
until those criteria have been met.
Revenue from sales of frozen pizza, dough and sauces are recorded upon
shipment.
15
Assets Held for Resale
Assets held for resale consist of franchise equipment reacquired by the
Company and are recorded at the lower of cost and net realizable value.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion
No. 25, (APB 25) "Accounting for Stock Issued to Employees" in accounting for
options and warrants granted to its employees. Under APB 25, when the exercise
price of the Company's options or warrants equals or is above the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Stock options and warrants granted to non-employees are recorded at
their fair value, as determined in accordance with Financial Accounting
Standards Board Statement No. 123, (SFAS 123) "Accounting for Stock Based
Compensation" and Emerging Issues Task Force Consensus No. 96-18, and recognized
over the related service period.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which replaces SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), and supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). SFAS 123(R) requires
companies to recognize in their income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees. The
Company is required to adopt SFAS 123(R) beginning March 1, 2006. Grant-date
fair value will be determined using one of two acceptable valuation models. This
Standard requires that compensation expense for most equity-based awards be
recognized over the requisite service period, usually the vesting period; while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) be re-measured to fair-value at each balance sheet date until
the award is settled. The Standard also provides guidance as to the accounting
treatment for income taxes related to such compensation costs, as well as
transition issues related to adopting the new Standard.
Results of Operations
Revenues
For the three months ending November 30, 2005, franchise and corporate
operations accounted for approximately 53% of the Company's operating revenues.
The sale of food products equaled approximately 46% and the remaining
miscellaneous revenues accounted for 1%. This compares to 45%, 48% and 7%
respectively for the same period in fiscal 2005.
For the six months ending November 30, 2005, franchise and corporate
operations accounted for approximately 40% of the Company's total revenues. The
sale of food products equaled approximately 50% and the remaining miscellaneous
revenues accounted for 10%. This compares to 43%, 47% and 10% respectively for
the same period in fiscal 2005. Sales fluctuated in the above-mentioned period,
because we were operating at two stores less than in the corresponding period in
2005.
Our revenues for the three months ending November 30, 2005 decreased
$12,644 or 4.4% to $273,173 from fiscal 2005 revenues of $285,817. Cost of goods
sold for fiscal 2006 was $82,841 or 65.5% of sales as compared to $83,490 or
61.5% for fiscal 2005. Product sales and gross profit decreased primarily due to
the Company having fewer franchised outlets (23 in fiscal 2006 versus 25 during
fiscal 2005).
For the six months of fiscal 2006 Company revenues were $484,672
compared to $550,330 for the same period in 2005, decreasing by $65,658 or
11.9%. Cost of goods sold for fiscal 2006 was $159,619 or 65.3% of sales as
compared to $161,614 or 62.2% for fiscal 2005. The decrease in revenues is
primarily a result of operating two less stores in fiscal 2006 than in the
corresponding period in 2005.
16
Costs and Expenses
Costs and expenses totaled $485,616 and $481,786, for the three months
ending November 30, 2005 and corresponding period ending 2004, relatively. For
the six months ending November 30, 2005 costs and expenses amounted to $948,490
as opposed to $1,728,764 recorded in the same period 2004. The breakdown of
costs and expenses in both accounts included the following:
General and Administrative Expenses
General and administrative expenses include payroll and payroll taxes,
office and occupancy expenses, professional, legal and accounting fees and
consulting fees and services.
General and administrative expenses for the three months ending
November 30, 2005 and 2004 totaled $233,250 and $305,044, respectively,
resulting in a decrease of $71,794 or 23.5%. The decrease was primarily due to a
drop in office and administrative expenses and a decrease in bad debt expenses.
For the six months ending November 30, 2005 and 2004, general and
administrative expenses totaled $430,967 and $566,270, respectively, resulting
in a decrease of $135,303 or 23.9%. The decrease was due to a lowering of bad
debts, auto expenses and office expenses.
Advertising and Promotion
Advertising and promotion costs for the three months ending November
30, 2005 totaled $52,802 as opposed to $37,237 for the same period in 2004. For
the six months ending November 30, 2005, advertising and promotion totaled
$159,019 and $84,841 respectively for the same period 2004. The Company
substantially increased its advertising and promotional activities in an attempt
to increase sales and promote a new product line.
Product and Market Development
Product and market development costs for the three months ending
November 30, 2005 totaled $62,119 as opposed to $39,895 for the same period in
2004. For the six months ending November 30, 2005, product and market
development totaled $86,975 and $43,058 respectively for the same period 2004.
These expenses include costs relating to the microwaveable pizza line, Resto-Bar
and the B2B business.
Stock Based Compensation
Stock based compensation amounted to $826,600 in fiscal 2005. The
Company issued 9,200,000 shares of common stock to employees and various vendors
for services rendered in fiscal 2005.
Amortization of Finance Costs
Amortization amounted to $57,161 for the three months ending November
30, 2005 and $38,108 for the corresponding period in 2004. For the six months
ending November 30, 2005 amortization amounted to $114,322 and $76,215
respectively for the same period in 2004. This relates to the costs incurred of
issuing the convertible note payable ("Note") to Global Capital Funding Group,
L.P. ("Global").
Other Income and Expenses
Other income and expenses include the following:
Interest Expense
Interest amounted to $53,232 for the three months ending November 30,
2005 versus $49,579 for the same period in 2004. During the six months ending
November 30, 2005, interest amounted to $116,343 as opposed to $98,181 for the
same period in 2004. Interest incurred on the Note to Global totaled $42,500 and
$85,000 for the three and six months ended November 30, 2005, respectively, and
$25,000 and $50,000 for the three and six months ended November 2004. The
increase in interest was primarily due to the exchange of Global Notes, the New
Note having a effective interest rate of approximately 13% while the original
note had an effective interest rate of approximately 7.7%.
17
Gain on Forgiveness of Debt
On November 8, 2005, the Company converted $639,963 of accounts and
loans payable from various note holders and vendors in exchange for common stock
and warrants. This transaction resulted in a gain on forgiveness of debt in the
amount of $339,112. A further discussion of the transaction is described in
Liquidity and Capital Resources.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern and that assets and
liabilities have been recorded on the basis that the entity will be able to
realize its assets and discharge its liabilities in the normal course of
business. However, the accompanying financial statements reflect that the
Company has incurred significant operating losses, has a deficit in
stockholders' equity and a working capital deficit at November 30, 2005. In
addition, the Company will require additional financing to meet its future
obligations. These matters raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's ability to continue as a going
concern will depend on its attaining profitable operations and the ability to
obtain additional financing. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be
necessary in the event the Company cannot continue its existence.
In order to secure additional capital funding, the Company has engaged
the services of a financial consultant to assist on a "best efforts" basis to
raise an additional $5,000,000 of equity and/or debt financing through the
issuance of common stock, convertible debentures or a combination thereof. In
addition, the Company continues to attempt to secure commitments from its
customers for additional installations at their food services facilities to
provide ready made frozen pizza, including its new products such as the new
microwaveable pizza and seeks to finance its future growth partly through
equipment leasing arrangements and other means. The Company also continues to
implement various cost control measures to attempt to achieve optimal profit
margins and to improve the revenue potential of its franchises. In the event
that additional capital is raised, part of the proceeds will be used for these
purposes. It is anticipated that any cash shortfalls will be funded by the
officers and management of the Company.
At November 30, 2005, the Company had cash of $67,598. Net cash used in
operating activities amounted to $312,088 in fiscal 2006 and $323,993 in fiscal
2005. The primary reason for the decreases were the net losses incurred for the
periods, net of non-cash expenses.
Cash used in investing activities amounted to $71,173 in fiscal 2006
and included the acquisition of assets held for resale of approximately $17,000
and disbursements for loans totaling approximately $29,000. Cash used in
investing activities in fiscal 2005 amounted to $133,589 and included loans to a
stockholder of approximately $137,000.
Cash provided by financing activities amounted to $365,440 in fiscal
2006 and $955,310 in fiscal 2005. In fiscal 2006, the Company received loans
from related parties of approximately $331,000. In fiscal 2005, the Company
received approximately $1 million net from the Note issued to Global, net of the
repayments of various loans payable and long-term debt.
On November 8, 2005, the Company converted $639,963 of accounts and
loans payable from various note holders and vendors in exchange for 2,543,511
shares of common stock and 1,271,757 warrants. The warrants have a three-year
term and allow the holder to purchase shares of the Company's common stock at
$.30 per share. Of those amounts 702,024 shares of common stock and 351,012
warrants were issued to related parties. This transaction resulted in a gain on
forgiveness of debt in the amount of $339,112.
On November 8, 2005, the Company issued 8,000,000 five-year options to
its employees to purchase its common stock at $.30 per share. The options vest
at a rate of 20% per annum but terminate upon the employees leaving the Company
for any reason.
18
Off-Balance Sheet Arrangements
The Company and its President are guarantors on a five-year 8%
promissory note ("Note") of $250,000 made by a non-affiliated person to a
franchisee of the Company. The Note is payable in monthly installments of $5,054
including interest commencing in October 2004 through September 2009. Other
terms of the Note include:
1. The Note is secured by a subordinated interest in all of the assets of the
franchisee.
2. If an event of default occurs, the lender, at his option, can demand
immediate payment of any and all amounts then owing or to become owing.
As of November 30, 2005, the franchisee has not made any of the
required monthly installments. The Company has made interest payments on behalf
of the franchisee totaling approximately $21,600. Such amounts have been
classified as loan receivable on the balance sheet. Although the Note is in
default, the lender has not demanded immediate payment of all amounts owed and
owing.
We do not have any other off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues and expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is subject from time to time to litigation arising from the normal
course of business. In management's opinion, any such contingencies are
appropriately provided for or would not materially affect the Company's
financial position or results of operations.
Pizza Donini was sued by a former franchisee of a former subsidiary who is
seeking to obtain from the Court a declaration that the transfer and sale to
Pizza Donini of trademarks by the former subsidiary is null and void and to have
Pizza Donini declared jointly and severally liable for a claim of the former
franchisee against the former subsidiary.
This action stems from a separate suit filed by the former franchisee against
the former subsidiary, in the amount of C$637,000, which suit was dismissed by
the Superior Court of Quebec on May 19, 1998. The former franchisee has appealed
the original judgment of the lower Court and legal counsel for the former
subsidiary does not expect a hearing date before December 2005. In the meantime,
in the case against Pizza Donini, there is an agreement between the attorneys of
the parties to await the outcome of the decision of the Court of Appeal in the
original proceedings prior to pursuing this action. Counsel to Pizza Donini and
to its former subsidiary is confidant that the appeal will be dismissed in the
original suit and therefore, the action against Pizza Donini will also be
dismissed.
No director, officer, or affiliate of the Company, or any associate of any of
them, is a party to, or has a material interest in, any proceeding adverse to
our company.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes have occurred during the six months ended November 30, 2005.
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Not applicable
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
DONINI, INC.
Date: January 23, 2006 By: /s/ PETER DEROS
--------------------------------
Peter Deros, President
20