10QSB 1 donini_10q.txt FORM 10-QSB 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. 14 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