UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
      One):





ý
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the fiscal year ended December 31, 2008ORo
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from____________to______________





Commission
File Number 000-53000





SPICY
PICKLE FRANCHISING, INC.


(Exact
Name of Registrant as Specified in its Charter)


Colorado
            
            38-3750924(State
      or other jurisdiction
              of
      incorporation or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





90
      Madison Street, Suite 700, Denver, Colorado
            
            80206(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant's
telephone number, including area code: (303) 297-1902





Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par
value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No ý





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o    No ý





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ý
    No o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendments of this Form 10-K. o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):





Large
      accelerated filer o
            
            Accelerated
      filer o
            
            Non-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company ý








Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o    No ý





State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.  As of June 30, 2008 aggregate market value of the voting and
non-voting common equity held by non-affiliates was $24,098,565.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. As of March 16, 2009, there were
54,387,347shares of common stock outstanding.










Table of
Contents




PagePART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              6Item
      1B.
              Unresolved
      Staff Comments
              14Item
      2.
              Properties
              14Item
      3.
              Legal
      Proceedings
              15Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              15PART
      IIItem
      5.
              Market
      for Common Equity, Related Stockholder Matters and Issuer Purchasesof
      Equity Securities
              16Item
      6.
              Selected
      Financial Data
              16Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              17Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              27Item
      8
              Financial
      Statements and Supplementary Data
              27Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              51Item
      9A(T)
              Controls
      and Procedures
              51Item 9B.
              Other
      Information
              52PART IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              53Item
      11.
              Executive
      Compensation
              55Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              57Item
      13.
              Certain
      Relationships and Related Transactions, and Director Independence
              59Item 14.
              Principal
      Accounting Fees and Services
              60PART
      IVItem
      15.
              Exhibits,
      Financial Statements Schedules
              61







PART
I





Item
1. Business





Our
business is the franchise and operation of Spicy Pickle® and
Bread Garden® Urban
Café restaurants. Spicy Pickle is a fast casual restaurant where made-to-order
panini, submarine-style sandwiches, pizzetti (Neapolitan thin crust pizza), and
salads created by our founders are served using fresh-baked breads and
high-quality ingredients.  Spicy Pickle restaurants are located in 12
states in the United States.  Bread Garden Urban Café restaurants also
specialize in fast casual dining offering specialty coffee, breakfast pastry and
sandwiches, salads, soups, lunch and dinner oven baked entrées, sandwiches,
wraps, and dessert items served all day long.  Bread Garden Urban
Cafés are located in metropolitan Vancouver, British Columbia,
Canada.





Our goal
is to deliver a delicious flavor profile, an exceptional customer experience,
and an enjoyable atmosphere in our locations. We cannot assure you that we will
be successful. We believe our menu items appeal to diners of all ages and
preferences, and we expect to accommodate all day parts, including breakfast,
lunch and dinner.





Spicy
Pickle


Our
franchisees must qualify on the basis of experience in other management and food
service ventures and should have liquid assets of at least $150,000. In the
Spicy Pickle organization franchise fees are $45,000 for the first restaurant
and $20,000 for additional locations. Fees for additional locations are lower
because the training and grand opening are handled by the experienced
franchisee, although these services are still available for purchase from us if
desired. Area development agreements are available to selected franchisees that
wish to secure a territory for future development ($10,000 per store is pre-paid
and the balance of $10,000 is paid when the area developer is ready to begin
build-out for each new site).




Franchisees
pay Spicy Pickle a 5% royalty on weekly gross sales and an additional 2% to
support national and regional marketing efforts that produce brand development,
agency support, point of purchase materials and print and broadcast advertising.
In addition, we require franchisees to dedicate at least 1% of sales to local
advertising. The estimated initial cost of a Spicy Pickle franchise is
approximately $400,000 and varies based on location. Each location has an
end-cap/in-line of approximately 2,000 square feet and seating for 40-60 guests
inside with additional outdoor seating as available.





The first
Spicy Pickle restaurant was launched in 1999 by Kevin Morrison and Anthony
Walker, who remain part of our management team. Spicy Pickle Franchising, LLC
was formed in January 2003 as a Colorado limited liability company. In January
2003, we launched the Spicy Pickle brand as a national franchise with Marc
Geman, former president of the PretzelMaker franchise, as our Chief Executive
Officer. We sold our first franchise in the spring of 2003 and opened our first
franchise restaurant in the second half of 2003. On September 8, 2006, we
converted from a limited liability company to a Colorado corporation named Spicy
Pickle Franchising, Inc. (the “Company”).





Spicy
Pickle has been recognized nationally and in its local markets as a purveyor of
fast casual food to watch. The December 2006, 2007 and 2008 issues of Fast
Casual Magazine feature Spicy Pickle as numbers 29th,
25th
and 32nd,
respectively, in its list of “2006 – 2007 Top 100 Movers and Shakers” “2007-
2008 Top 100 Movers and Shakers” and “2008 – 2009  Top 100 Movers and
Shakers,” respectively. National Restaurant News selected Spicy Pickle as one of
its 2006 Hot Concepts!





We intend
to expand nationally by growing the chain of restaurants in and near downtown
settings where daytime population is dense, as well as near tech centers,
government complexes, universities, and medical centers where large amounts of
administrative and professional people are employed. We have designed systems to
maximize and replicate our success in a variety of settings. Complete programs
have been developed for real estate, architecture, construction management,
equipment procurement, food distribution, training, operations and marketing to
promote the success of each franchisee. Owners generally purchase turn-key
services from us.





In
addition we intend to explore international expansion.  A potential
master developer is in the process of opening a Bread Garden Urban Café in
Brisbane, Australia.  If this initial unit proves successful we intend
to enter into an agreement for the development of Australia.  We are
also exploring the possibility of other international locations.





1


Bread
Garden Urban Café


Bread
Garden Urban Café (“Bread Garden”) is also classified as a fast casual
concept.  Bread Garden has been a fixture in the Vancouver, British
Columbia, Canada market for close to 30 years and is well recognized and
branded.  Bread Garden restaurants have a full line of coffee and
coffee related products as well as a larger offering of food items than a Spicy
Pickle restaurant.  Bread Garden displays their offerings in glass
refrigerated cases in a European style where customers can choose what they
want, have it taken from the case and prepared.  Customers pay for and
take their food to tables rather than have a runner bring it as in Spicy
Pickle.





Bread
Garden was started by two women with culinary backgrounds, similar to our start,
in the late 1970’s and early 1980s.  One of the founders currently
operates two upscale grocery stores in Vancouver which carry many of the
original products found in the Bread Garden restaurants.  Essentially
the restaurants were urban cafes serving breakfast pastries, quiches and coffee
along with fresh baked breads for sandwiches.  In the mid 1980’s the
founders became involved with Spectra Group which owns and operates restaurants
and put the Bread Garden concept into Spectra. At one time Spectra Group owned,
operated and licensed a multi-concept group of 109 restaurants and express
kiosks within five concepts: Bread Garden, The Boathouse, Romano's Macaroni
Grill, Red Door Pan Asian Grill (Red Door) and Yankee Grill and
Roaster.  Along with the Bread Garden, The Boathouse and Red Door were
concepts owned and developed by Spectra Group. Romano's Macaroni Grill is
operated under a license agreement with Brinker International,
Inc.  Spectra developed the Bread Garden concept to 17 units at one
point but over time the concept changed and by the early part of this century
there were 14 units.





In 2003
Mr. Zahir Dhanani was approached by a partner to take over the existing Bread
Garden locations from Spectra Group.  At the time there were 17
restaurants but Spectra Group retained 3 of them to convert to their Red Door
Pan Asian Grills.  Two of those have subsequently sold and the third
never converted and is still the source of negotiations concerning the use of
the name.  In 2004 Mr. Dhanani worked with the 14 restaurants
eventually closing 4 of them but opening others including in late 2004 a
restaurant at Metrotown a large mall in Richmond, British Columbia which is run
by his family.  After these years of ownership Mr. Dhanani realized
that he did not have restaurant experience or staff to improve or grow the
concept.  Mr. Dhanani and principals of Spicy Pickle started
discussing a possible merger/acquisition whereby Spicy Pickle’s culinary
expertise and infrastructure could be used to help improve and grow the Bread
Garden concept in Vancouver and Western Canada.  After several
meetings and on site visits to study the concept, learn about the operations and
distribution we concluded that this situation was an ideal
acquisition.





There are
two other aspects to the concept, one involving a Bread Garden express unit on
the BC ferries running between Vancouver Island and the mainland and the other a
Bread Garden express unit found in approximately 90 Chevron stations throughout
western BC. These express locations are not part of the
acquisition.





However,
the overall brand identification of Bread Garden is exceptional. To some older
Vancouverites who recall the original menu the Bread Garden’s current menu,
other than its coffee, pastry and dessert program, does not measure up to the
earlier days.  Our plan is to refresh the Bread Garden concept with
fresh baked artisan breads and some of our signature sandwiches and if capital
is available convert or open a Spicy Pickle in Vancouver to gauge sales versus
existing Bread Garden units.





As with
our Spicy Pickle concept franchisees must qualify on the basis of experience in
other management and food service ventures and should have liquid assets of at
least $150,000. In the Bread Garden organization franchise fees are CND$50,000
for each restaurant location.





Franchisees
pay SPBG Franchising, Inc., a Canadian corporation and a wholly owned subsidiary
of the Company, a 5% royalty on weekly gross sales and an additional 1.5% to
support marketing efforts that produce brand development, agency support, point
of purchase materials and print and broadcast advertising.  The
estimated initial cost of a Bread Garden franchise is approximately CND$350,000
and varies based on location.  Each location has an end-cap/in-line of
approximately 2,500 square feet and seating for 50-75 guests inside with
additional outdoor seating as available.


2




Industry
Background





Spicy
Pickle and Bread Garden Urban Café restaurants are classified as “fast casual”
restaurants in the restaurant industry. There is no single definition of fast
casual, but in concept a fast casual restaurant does not offer full table
service, but generally offers high-quality food and atmosphere with either
numbered or personalized delivery of meals to the table or a central pick up
area. Fast casual fills the space between fast-food where no table service is
available and food is paid for and delivered to the customer at the register,
and casual dining where full table service is available to the
customer.





Growth
Strategy





We
believe that our ability to deliver value, quality, price and convenience will
help us grow. Our target customer is 21-55 years of age, educated with at least
some college experience, and the typical location for Spicy Pickle and Bread
Garden restaurants is near a downtown area of a dense city, or near a tech
center, government complex, university, or medical center where large numbers of
administrative and professional employees are found.  We also look for
big box centers anchored by a large tenant and in areas of both white collar
workforce and high income households.





Our Spicy
Pickle menu is moderately priced with an average ticket of $8.00 to $9.00. We
have expanded our menu to include catering and expect to add breakfast. We
are committed to providing sufficient variety to encourage guests to return
often and try something new.





Our Bread
Garden menu contains more diversity and serves more day parts than our Spicy
Pickle menu with average ticket prices of CDN$7.00 to CDN$8.00.  The
Bread Garden menu accommodates breakfast, lunch and dinner, as well as an all
day casual coffee and dessert service.





We
believe that our growth is the result of the appeal of our food, the clarity of
our vision, the increasing strength of our brand and our commitment to
constantly improving our customer experience.





As part
of our growth strategy, in addition to our franchised restaurants, we will
operate company-owned restaurants.  At December 31, 2007 we had one
restaurant opened.  In February 2008, we purchased a partial interest
in one Spicy Pickle restaurant from a franchisee.  In March 2008, we
purchased three Spicy Pickle restaurants from another franchisee.  We
also built two Spicy Pickle restaurants in Colorado.  Also in March
2008, we purchased a Spicy Pickle restaurant located in Chicago from another
franchisee which we sold in December 2008 to a new franchisee.  We
will continue to either build or acquire new restaurants in the
future.  There are no other agreements in place at this
time.





Competition





The fast
casual segment of the restaurant industry is highly competitive and fragmented.
In addition, fast casual restaurants compete against other segments of the
restaurant industry, including quick-service restaurants and casual dining
restaurants. The number, size and strength of competitors vary by region. All of
these restaurants compete based on a number of factors, including taste,
quickness of service, value, name recognition, restaurant location and customer
service. Competition within the fast casual restaurant segment, however, focuses
primarily on the taste, quality and freshness of the menu items and the ambience
and condition of each restaurant.





The
industry is often affected by changes in consumer tastes; national, regional or
local economic conditions; currency fluctuations; demographic trends; traffic
patterns; the type, number and location of competing food retailers and
products; and disposable purchasing power. Each of the concepts competes with
international, national and regional restaurant chains as well as locally owned
restaurants, not only for customers, but also for management and hourly
personnel, suitable real estate sites and qualified franchisees.





3


Our
Menu




Our Spicy
Pickle menu offers customers a choice of seven signature submarine-style
sandwiches, eight signature panini, six salads, six signature pizzetti and five
soups, as well as a combo meal consisting of a one-half sandwich or panini and a
small soup or salad. Customers can also build their own sandwich, salad or
pizzetti choosing from three breads, 12 meats (or vegetables); eight cheeses, an
unlimited number of our 22 toppings, and an unlimited number of our 14 spreads.
Some menu items may vary from store to store. We feature high-quality
ingredients consisting of all-natural products with no preservatives or MSG,
except for the coloring in our yellow cheese. This is part of our strategy to
attract the growing number of health-conscious consumers to our restaurants. We
believe our restaurants deliver value, quality and convenience. Our menu is
moderately priced with an average ticket of $8.00 to $9.00. Menu prices are set
by franchisees at the store level and vary from location to location, sandwiches
typically cost between $6.45 and $7.25 with small and large soups and salads
ranging from $3.45 to $7.95. An individual size pizzetti ranges from $7.45 to
$7.95.




Our Bread
Garden menu offers customers a choice of five signature sandwiches, four wraps,
three café sandwiches, a variety of oven baked entrées and pasta dishes, a
variety of soups and salads as well as a number of breakfast item.  We
also offer specialty coffees and tea in addition to an extensive pastry and
dessert selection.





Our
Current Locations




Our
restaurant Spicy Pickle locations (including both company-owned and
franchisee-owned), including those under construction and lease negotiation as
of December 31, 2008, are:




Location
                    Restaurants
      Operating
                    Under
      Construction
                    In
      Lease NegotiationDenver,
      Colorado
                    5Boulder,
      Colorado
                    2Ft.
      Collins, Colorado
                    2Aurora,
      Colorado
                    2Littleton,
      Colorado
                    1Centennial,
      Colorado
                    1Lone
      Tree, Colorado
                    1Greenwood
      Village, Colorado
                    1Federal
      Heights, Colorado
                    1Johnstown,
      Colorado
                    1Colorado
      Springs, Colorado (1)
                    2Louisville,
      Colorado
                    1Englewood,
      Colorado
                    1Ashburn,
      Virginia
                    1Portland,
      Oregon
                    2Poway,
      California
                    1Henderson,
      Nevada
                    1Reno,
      Nevada
                    2Chicago,
      Illinois
                    1Cincinnati,
      Ohio
                    1Austin,
      Texas
                    2San
      Diego, California
                    1Chandler,
      Arizona
                    1Brooklyn,
      New York (2)
                    1Hattiesburg,
      Mississippi
                    1Edmond,
      Oklahoma
                    1Cedar
      Park, Texas
                    1Portage,
      Michigan
                    1Kalamazoo,
      Michigan
                    
                    1Houston,
      Texas
                    
                    1
                    1San
      Antonio, Texas
                    
                    
                    1Las
      Vegas, Nevada
                    
                    
                    139
                    2
                    3
   4


(1)
            One
      restaurant closed subsequent to December 31,
  2008.


(2)
            Closed
      subsequent to December 31, 2008.





Our Bread
Garden locations including those under construction and in lease negotiation as
of December 31, 2008 are:





Location
                      Restaurants
      Operating
                      Under
      Construction
                      In
      Lease NegotiationVancouver,
      British Columbia
                      5
                      3North
      Vancouver, British Columbia (1)
                      1Richmond,
      British Columbia
                      1
                      1Cloverdale,
      British Columbia
                      1Surrey,
      British Columbia
                      1Burnaby,
      British Columbia
                      1Coquitlam,
      British Columbia
                      2Kamloops,
      British Columbia
                      
                      1Brisbane,
      Australia
                      
                      112
                      6


(1)
            Closed
      subsequent to December 31, 2008 and relocated to the Cloverdale location
      included above.





Franchise
Site Development and Expansion




Our
restaurant locations in both concepts are critical to our long-term success, and
we devote significant resources to assessing each prospective site. We have
developed specific criteria to evaluate each site. We continuously review these
criteria and adjust them as warranted by changing circumstances in our business
or local operating conditions.




We focus
our site searches on metropolitan areas where daytime population is dense, as
well as near tech centers, government complexes and medical centers where large
numbers of administrative and professional people are employed. Preferred
locations include shopping center end-caps and free standing buildings near
large intersections, residential areas, offices, retail outlets, universities,
recreational facilities and hospitals. We also consider traffic patterns, area
restaurant competition, the likely impact on sales of our nearby restaurants,
parking, accessibility, potential restaurant size and visibility. In larger
metropolitan regions, we generally open restaurants in urban storefronts. We use
a combination of our own development staff and outside real estate brokers to
locate, evaluate and negotiate new sites.





The cost
to open a restaurant depends on the type of real estate, the location of the
site and the amount of construction required. We generally lease the premises
and build-out the tenant improvements for our restaurants. We sometimes receive
landlord development and/or rent allowances for leasehold improvements,
furniture, fixtures and equipment.




Government
Regulation





We are
subject to various federal, state, provincial, and local laws affecting our
business. Each of our restaurants must comply with licensing and regulation by a
number of governmental authorities, which include health, sanitation, safety and
fire agencies in the state, province, or municipality in which the
restaurant is located. In addition, we must comply with various state and
provincial laws that regulate the franchisor/franchisee
relationship.





We are also subject to federal, state, and provincial laws
governing employment and pay practices, overtime, tip credits and working
conditions. The bulk of our employees are paid on an hourly basis at rates
related to regulated minimum wages.





We are
also subject to federal state and provincial child labor laws, which, among
other things, prohibit the use of certain “hazardous equipment” by employees 18
years of age or younger. Under the American with Disabilities Act, we could
be required to expend funds to modify our restaurants to better provide service
to, or make reasonable






5




accommodation
for the employment of, disabled persons. We continue to monitor our facilities
for compliance with the Americans with Disabilities Act in order to conform to
its requirements. We believe future expenditures for such compliance would not
have a material adverse effect on our operations.





Intellectual
Property





We have
registered the following marks with the United States Patent and Trademark
Office: Spicy Pickle (Registration No. 2,905,597), Spicy Pickle Sub Shop &
design (Registration No. 2,918,645) and Spicy Pickle Panini♦Salads♦Subs &
design (Registration No. 3,182,753).  We also have a Canadian registration
that is pending for the Spicy Pickle name and logo.





We have a
license to use the following marks registered with the Canadian Intellectual
Property Office:





Type
                Mark
                Registration NumberWord
                Bread
      Garden
                TMA385925Design
                Bread
      Garden Bakery Café
                TMA389963Word
                Bread
      Garden Catering
                TMA703333Word
                Wholesale
      Food for the Timed Shared
                TMA589191Word
                The
      Break you Need...The Food You Love
                TMA558692Design
                Bread
      Garden Catering
                TMA727604Design
                Bread
      Garden Express
                TMA703428Word
                Bread
      Garden Express
                TMA703338Design
                Bread
      Garden Express
                TMA703427Design
                Bread
      Garden Express
                TMA703336





Employees





As of
March 16, 2009, we have a total of 102 employees in our franchising, restaurant
and bakery operations, of which 28 are full time.








Item
1A.  Risk Factors





Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks described below with all of the other information included in
this report before making an investment decision. If any of the possible adverse
events described below actually occur, our business, results of operations or
financial condition would likely suffer. In such an event, the market price of
our common stock could decline and you could lose all or part of your
investment. The risks and uncertainties described below are not the only ones we
face.





RISKS
RELATING TO OUR BUSINESS





We have historically
incurred losses and may continue to incur losses in the future, which may impact
our ability to implement our business strategy and adversely affect our
financial condition.





In the
future we expect to increase our operating expenses by expanding our marketing
activities and increasing our level of capital expenditures in order to grow our
business and further develop and maintain our services. Such increases in
operating expense levels and capital expenditures may adversely affect our
operating results if we are unable to immediately realize benefits from such
expenditures. In addition, if we are unable to manage a significant increase in
operating expenses, our liquidity will likely decrease and negatively impact our
cash flow and ability to sustain operations. In turn, this would have a negative
impact on our financial condition and share price.





We cannot
assure you that we will be profitable or generate sufficient profits from
operations in the future. If our revenue growth does not continue, we may
experience a loss in one or more future periods. We may not be able to reduce or
maintain our expenses in response to any decrease in our revenue, which may
impact our ability to implement our business strategy and adversely affect our
financial condition. This would also have a negative impact on our share
price.





6


Our operating results are
closely tied to the success of our franchisees.





Our
operating results are dependent upon our selling additional franchises and our
receipt of royalties from our existing franchisees. Franchisees may lack access
to the financial or management resources that they need to open or continue
operating their restaurants. New franchisees may not be able to find suitable
sites on which to develop restaurants, negotiate acceptable lease or purchase
terms for the sites, obtain the necessary permits and government approvals or
meet construction schedules. Our franchisees generally depend upon financing
from banks and other financial institutions to finance the cost of opening a new
restaurant. If franchisees cannot obtain financing and restaurants do not open,
our royalties from those restaurants will not exist. Any decrease or delay in
our planned revenues could slow our planned growth.





Food safety and food-borne
illness concerns may have an adverse effect on our business.





We
dedicate substantial resources to ensuring that our customers enjoy safe,
quality food products. However, food-borne illnesses (such as E. coli, hepatitis
A, trichinosis or salmonella) and food safety issues are an ongoing issue in the
restaurant industry. If a food-borne illness or other food safety issues occur,
whether at our restaurants or those of our competitors, it is likely that
negative publicity would adversely affect our sales and profitability. If our
customers become ill from food-borne illnesses, we might need to temporarily
close some restaurants. Separately, the occurrence of food-borne illnesses or
food safety issues could adversely affect the price and availability of affected
ingredients.





Changes in commodity and
other operating costs or supply chain and business disruptions could adversely
affect our results of operations.





Changes
in food and supply costs are a part of our business; any increase in the prices
of our key ingredients, such as beef, chicken, cheese and produce could
adversely affect our operating results. We remain susceptible to increases in
food costs as a result of factors beyond our control, such as general economic
conditions, seasonal fluctuations, weather conditions, demand, food safety
concerns, product recalls, labor disputes and government regulations. In
addition to food, we purchase electricity, oil and natural gas needed to operate
our restaurants, and suppliers purchase gasoline needed to transport food and
supplies to us. Any significant increase in energy costs could adversely affect
our business through higher rates and the imposition of fuel surcharges by our
suppliers. Because we provide moderately priced food, we may choose not to, or
be unable to, pass along commodity price increases to our customers.
Additionally, significant increases in gasoline prices could result in a
decrease in customer traffic at our restaurants. We rely on third-party
distribution companies to deliver food and supplies to our stores. Interruption
of distribution services due to financial distress or other issues could impact
our operations. Our operating costs also include premiums that we pay for our
insurance (including workers’ compensation, general liability, property and
health), which may increase over time, thereby further increasing our costs.
Finally, our industry is susceptible to natural disasters, which could result in
restaurant closures and business disruptions.





We could be party to
litigation that could adversely affect us by increasing our expenses or
subjecting us to material money damages and other remedies.





We are
susceptible to claims filed by customers alleging that we are responsible for an
illness or injury they suffered at or after a visit to our restaurants.
Regardless of whether any claims against us are valid, or whether we areultimately held liable, such litigation may be expensive to
defend and may divert time and money away from our operations and hurt our
performance. A judgment for significant monetary damages in excess of any
insurance coverage could adversely affect our financial condition or results of
operations. Any adverse publicity resulting from these allegations may also
adversely affect our reputation, which in turn could adversely affect our
results.




In
addition, the restaurant industry has been subject to claims that relate to the
nutritional content of food products, as well as claims that the menus and
practices of restaurant chains have led to the obesity of some guests. We also
may be subject to this type of claim in the future and, even if we are not,
publicity about these matters (particularly directed at the quick-service and
fast casual segments of the industry) may harm our reputation and adversely
affect our results.





7


Compliance with governmental
regulations may adversely affect our business operations.





We and
our franchisees are subject to various federal, state, provincial, and
local regulations. Each of our restaurants is subject to state, provincial, and
local licensing and regulation by health, sanitation, food and workplace safety
and other agencies. Requirements of local authorities with respect to zoning,
land use, licensing, permitting and environmental factors could delay or prevent
development of new restaurants in particular locations.




We are
subject to the U.S. Americans with Disabilities Act and similar state laws that
give civil rights protections to individuals with disabilities in the context of
employment, public accommodations and other areas. The expenses associated with
any facilities modifications required by these laws could be material. Our
operations are also subject to the U.S. Fair Labor Standards Act, which governs
such matters as minimum wages, overtime and other working conditions, family
leave mandates and a variety of similar state laws that govern these and other
employment law matters. The compliance costs associated with these laws and
evolving regulations could be substantial.





The
operation of our franchise system is also subject to franchise laws and
regulations enacted by a number of states and rules promulgated by the U.S.
Federal Trade Commission.  We are also subject to rules and
regulations under Canadian law.  Any future legislation regulating our
franchise relationships may negatively affect our operations, particularly our
relationships with our franchisees. Failure to comply with new or existing
franchise laws and regulations in any jurisdiction or to obtain required
government approvals could result in a ban or temporary suspension on future
franchise sales.





We may not attain our target
development goals.





We are
pursuing a disciplined growth strategy, which will depend in large part on our
ability and the ability of our franchisees to increase sales volumes in existing
restaurants, open new restaurants, and operate these restaurants profitably. We
cannot guarantee that we, or our franchisees, will be able to achieve our
expansion goals or that new or converted restaurants will be operated
profitably. Further, there is no assurance that any restaurant we open or
convert will obtain operating results similar to those of our existing
restaurants. The success of our planned expansion, including our branding
initiatives, will depend upon numerous factors, many of which are beyond our
control.





The fast
casual segment of the restaurant industry is highly
competitive.





The fast
casual segment of the restaurant industry is highly competitive and fragmented.
In addition, fast casual restaurants compete against other segments of the
restaurant industry, including quick-service restaurants and casual dining
restaurants. The number, size and strength of competitors vary by region. All of
these restaurants compete based on a number of factors, including taste,
quickness of service, value, name recognition, restaurant location and customer
service. Competition within the fast casual restaurant segment, however, focuses
primarily on the taste, quality and freshness of the menu items and the ambience
and condition of each restaurant.





We focus
on price and quality of food products, new product development, advertising
levels and promotional initiatives, customer service, reputation, restaurant
location, and attractiveness and maintenance of properties. If our company-owned
restaurants and franchised restaurants are unable to compete successfully with
other restaurants in new and existing markets, our business could be adversely
affected. In the restaurant industry, labor is a primary operating cost
component. Competition for qualified employees also could require us to pay
higher wages to attract a sufficient number of employees. In addition, our
success depends to a significant extent on numerous factors affecting
discretionary consumer spending, including economic conditions, disposable
consumer income and consumer confidence. Adverse changes in these factors could
reduce guest traffic or impose practical limits on pricing, either of which
could harm our results of operations.





8





We may not persuade
customers of the benefits of paying our prices for higher-quality
food.




Our
success as a fast casual restaurant depends in large part on our ability to
persuade customers that food made with higher-quality ingredients is worth the
prices they will pay at our restaurants relative to prices offered by some of
our competitors, particularly those in the quick-service segment. We may not be
able to successfully educate customers about the quality of our food or food
quality may not matter to them even if they do understand we must charge more
for higher-quality food. If that were to happen, we might need to change our
pricing, advertising or promotional strategies, which could materially and
adversely affect our results or the brand identity that we have tried to
create.





Health concerns arising from
outbreaks of Avian flu may have an adverse effect on our
business.





In 2004
and 2005, Asian and European countries experienced outbreaks of Avian flu, and
some commentators have hypothesized that further outbreaks could occur and reach
pandemic levels. While fully cooked chicken has been determined to be safe for
consumption, and while we have taken and continue to take measures to anticipate
and minimize the effect of these outbreaks on our business, any further
outbreaks could adversely affect the price and availability of poultry and cause
customers to shift their preferences. In addition, outbreaks on a widespread
basis could also affect our ability to attract and retain
employees.





We are dependent on key
personnel, the loss of whom could significantly harm our business, results of
operations and financial condition.





Our
success depends to a significant extent upon the efforts and abilities of our
key personnel, including Marc Geman, Chairman and Chief Executive Officer,
Anthony Walker, Chief Operating Officer and co-founder, and Kevin Morrison,
Chief Culinary Officer and co-founder, as well as other key creative and
strategic marketing and operational personnel. Competition for highly qualified
personnel is intense. The loss of any executive officer, manager or other key
employee could have a material adverse effect upon our business, operating
results and financial condition. If we are not able to efficiently replace our
key personnel with qualified individuals, our business and operational
activities could suffer. In turn, if our operational activities decline, our
financial performance and overall financial condition will also suffer. We
cannot assure you that a replacement for these key employees could be located if
their services were no longer available. At present, we do not have key man
insurance for Mr. Geman, Mr. Walker, or Mr. Morrison.





We are a high-risk early
stage company.





We are a
high-risk early stage company with limited operating history in a competitive
industry. Our limited operating history provides a limited basis on which to
base an evaluation of our business and prospects. In addition, our revenue model
relies substantially on the assumption that we will be able to successfully
expand our sales and distribution channels in key markets. Our prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in the earliest stages of development. To be
successful, we must, among other things:





·
            continue
      to expand the number of franchise and corporate
  locations;


·
            attract
      and maintain customer loyalty;


·
            continue
      to establish and increase brand
awareness;


·
            provide
      products to customers at attractive
prices;


·
            establish
      and maintain relationships with strategic partners and
      affiliates;


·
            rapidly
      respond to competitive
developments;


·
            build
      an operations and customer service structure to support our business;
      and


·
            attract,
      retain and motivate qualified
personnel.





We cannot
guarantee that we will be able to achieve these goals, and our failure to do so
could have a material adverse effect on our business. If our business suffers as
a result of failing to meet any one or all of these goals, our performance and
financial condition will suffer.





9


We may need additional
financing to support business growth, and this capital might not be available on
acceptable terms, or at all, which could adversely affect our financial
condition.





We may
need additional funds to develop and expand our franchises, company restaurants
and product lines. Lack of funds may cause us to delay, reduce or abandon
aspects of our expansion or product development programs. Moreover, we cannot
assure you that our financial resources will be sufficient to finance our
operations on an ongoing basis, or that we will be able to obtain additional
funding when our current financial resources are exhausted. We expect thatour revenues and operating results will fluctuate
significantly in the future. We could require additional financing to support
existing and new franchises, and to finance the development, production and
distribution of new products.





Our operating results may
fluctuate in future periods and, as a result, we may fail to meet investor
expectations, which could cause the price of our common stock to
decline.





As a
result of our history of incurring net losses, the relatively short time frame
of the operations of several of our franchises and the highly competitive nature
of the industry, we may not be able to accurately predict our operating results
on a quarterly basis, if at all. We expect to experience significant
fluctuations in our future quarterly operating results due to a variety of
factors, many of which are outside of our control, including:





·
            our
      ability to establish and strengthen brand
  awareness;


·
            our
      success, and the success of our strategic partners, in promoting our
      products;


·
            the
      overall market demand for food products of the type offered by us and in
      general;


·
            pricing
      changes for food products as a result of competition or other
      factors;


·
            the
      amount and timing of the costs relating to our marketing efforts or other
      initiatives;


·
            the
      timing of contracts with strategic partners and other
    parties;


·
            our
      ability to compete in a highly competitive market, and the introduction of
      new products by us; and


·
            economic
      conditions specific to the food industry and general economic
      conditions.





We
believe period-to-period comparisons of our operating results are not
necessarily meaningful, and you should not rely upon them as indicators of
future performance. It is also possible that, in the future, our operating
results will be below the expectations of public market analysts and investors
due to quarterly fluctuations rather than our overall performance. In that
event, the trading price of our common stock may decline.





We could have difficulty in
the management of potential growth, which could adversely affect our business,
results of operations and financial condition.





We
anticipate that a period of significant expansion will be required to capitalize
on the potential growth in our customer base, market opportunities and
personnel. This expansion will place a significant strain on our management,
operational and financial resources, and we will be required to implement new
operational and financial systems, procedures and controls, and to expand, train
and manage our and our franchisees’ growing employee base. We also will be
required to expand our finance, administrative and operations
staff.





Further,
we anticipate entering into relationships with various strategic partners and
third parties necessary to our business. We cannot assure you that our current
and planned personnel, systems, procedures and controls will be adequate to
support our future operations, that management will be able to hire, train,
retain, motivate and manage required personnel for planned operations, or that
our management will be able to identify, manage and exploit existing and
potential strategic relationship and market opportunities. Our failure to manage
growth effectively could have a material adverse effect on our business because
we might be unable to meet the operational and training demands of our
franchisees or maintain a level of inventory sufficient to support demand. This
could cause us to lose customers, which would have an adverse effect on our
results of operations and financial condition.





10





We may not be able to
successfully integrate and oversee the growth of new franchises, which could
adversely affect our business, results of operations and financial
condition.





In
addition to organic growth to expand our operations and market presence, we
intend to pursue a growth strategy driven by selling franchises and territories
in key locations as well as opening additional company-owned and operated
stores. Any such transactions would be accompanied by the risks commonly
encountered in such transactions, including, among others, the difficulty of
assimilating operations, technology and personnel of the combined franchises,
the potential disruption of our ongoing business, the inability to retain key
technical and managerial personnel, the inability of management to maximize our
financial and strategic position through the successful integration of the new
franchises, additional expenses associated with amortization of acquired
intangible assets, the maintenance of uniform standards, controls and policies
and the impairment of relationships with existing employees and customers. We
may not be successful in overcoming these risks or any other potential problems.
Any additional franchises may have a material adverse effect on our business if
any of the risks stated above materialize, and each of the risks stated above
could bring about adverse operating results which, in turn, would negatively
impact our financial condition.





We will incur increased
costs as a result of being a public company and this may adversely affect our
operating results.





As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. We also anticipate that we will
incur costs associated with recently adopted corporate governance requirements,
including requirements under the Sarbanes-Oxley Act of 2002, as well as new
rules implemented by the Securities and Exchange Commission (the “SEC”) and the
OTC Bulletin Board (the “OTCBB”). We expect these rules and regulations to
increase our legal and financial compliance costs and make some activities more
time-consuming and costly. We are currently evaluating and monitoring
developments with respect to these new rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of such
costs.





New rules, including those
contained in and issued under the Sarbanes-Oxley Act of 2002, may make it
difficult for us to retain or attract qualified officers and directors, which
could adversely affect the management of our business and our ability to retain
the trading status of our common stock on the OTCBB.





The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a
series of new rules and regulations and the strengthening of existing rules and
regulations by the SEC. We may be unable to attract and retain qualified
officers, directors and members of board committees required for our effective
management as a result of the recent and currently proposed changes in the rules
and regulations that govern publicly held companies. The perceived increased
personal risk associated with these recent changes may deter qualified
individuals from accepting these roles.




If we fail to comply with
federal and state statutes, regulations and rules governing our offer and sale
of franchises and our relationship with our franchisees, we may be subject to
franchisee-initiated litigation and governmental or judicial fines or
sanctions.





We are
subject to the Federal Trade Commission and to various state laws that govern
the offer and sale of franchises. Additionally, many state laws regulate various
aspects of the franchise relationship, including the following:




·
            the
      nature, timing and sufficiency of disclosures to franchisees upon the
      initiation of the franchisor-potential franchisee
      relationship;


·
            our
      conduct during the franchisor-franchisee relationship;
  and


·
            renewals
      and terminations of franchises.




Any past
or future failures by us to comply with these laws and regulations in any
jurisdiction or to obtain required government approvals could result in
franchisee-initiated lawsuits, a ban or temporary suspension on future franchise
sales, or civil and administrative penalties or other fines, or require us to
make offers of rescission, disgorgement or restitution, any of which could
adversely affect our business and operating results. We could also face lawsuits
by our franchisees based upon alleged violations of these laws. In the case of
willful violations, criminal sanctions could be brought against us.





11


Our franchisees could take
actions that could be harmful to our business.





Our
franchisees are contractually obligated to operate their restaurants in
accordance with our standards and all applicable laws. Although we attempt to
properly train and support franchisees, franchisees are independent third
parties that we do not control, and the franchisees own, operate and oversee the
daily operations of their restaurants. As a result, the ultimate success and
quality of any franchised restaurant rests with the franchisee. If franchisees
do not successfully operate restaurants in a manner consistent with our
standards, the Spicy Pickle image and reputation could be harmed, which in turn
could adversely affect our business and operating results. Further, a
franchisee’s inability to remain financially viable could result in its failure
to pay various franchise-related fees owed to us. Finally, regardless of the
actual validity of such a claim, we may be named as a party in an action
relating to, and/or be held liable for, the conduct of our franchisees if it is
shown that we exercise a sufficient level of control over a particular
franchisee’s operation.





RISKS
RELATING TO OWNERSHIP OF OUR COMMON STOCK





Our common stock price has
been volatile, which could result in substantial losses for investors purchasing
shares of our common stock.





The
market price of our common stock has fluctuated significantly in the past. Our
common stock started trading on the OTCBB under the symbol “SPKL” on August 20,
2007.  Since it started trading, the high and low prices of a share of
our common stock have been $2.02 and $0.145, respectively.  On March
16, 2009, the last reported sale price of a share of our common stock was
$0.145. The market price of our common stock may continue to fluctuate in
response to the following factors, in addition to others, many of which are
beyond our control:





·
            conversion
      of our Series A Variable Rate Convertible Preferred Stock (“Series A
      Preferred Stock”) and exercise of our warrants and the sale of their
      underlying common stock;


·
            changes
      in market valuations of similar companies and stock market price and
      volume fluctuations generally;


·
            economic
      conditions specific to the industries within which we
    operate;


·
            announcements
      by us or our competitors of new franchises, food products or marketing
      partnerships;


·
            actual
      or anticipated fluctuations in our operating
  results;


·
            changes
      in the number of our franchises;
and


·
            loss
      of key employees.





In
addition, the stock market in general, and the OTCBB specifically, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of the listed companies. These
broad market and industry factors may seriously harm the market price of our
common stock, regardless of our operating performance. In the past, following
periods of volatility in the market, securities class action litigation has
often been instituted against public companies. Litigation against us, whether
or not a judgment is entered against us, could result in substantial costs, and,
potentially, economic loss and a diversion of our management's attention and
resources.





The
market price of our common stock is likely to be highly volatile, which could
cause investment losses for our shareholders and result in shareholder
litigation with substantial costs, economic loss and diversion of our
resources.





The conversion of our Series
A Preferred Stock and the exercise of outstanding options and warrants to
purchase our common stock could substantially dilute your investment, impede our
ability to obtain additional financing, and cause us to incur additional
expenses.





Under the
terms of our Series A Preferred Stock and existing warrants to purchase our
common stock, and outstanding options to acquire our common stock issued to
employees and others, the holders are given an opportunity to profit from a rise
in the market price of our common stock that, upon the conversion of our Series
A Preferred Stock and the exercise of the warrants and/or options, could result
in dilution in the interests of our other shareholders. The terms on which we
may obtain additional financing may be adversely affected by the existence






12




and
potentially dilutive impact of our Series A Preferred Stock, options and
warrants. In addition, holders of the Series A Preferred Stock and warrants have
registration rights with respect to the common stock underlying such Series A
Preferred Stock and warrants, the registration of which has caused, and may
continue to cause, us to incur substantial expenses.





The voting power and value
of your investment could decline if our Series A Preferred Stock and warrants
are converted or exercised at a reduced price due to our issuance of
lower-priced shares that trigger rights of the holders of our Series A Preferred
Stock and warrants to receive additional shares of our
stock.





As part
of our recent issuance of Series A Preferred Stock, we issued a significant
number of warrants to the purchasers of the Series A Preferred Stock, the
conversion or exercise of which could have a substantial negative impact on the
price of our common stock and could result in a dramatic decrease in the value
of your investment. The initial conversion price of our Series A Preferred Stock
and the initial exercise price of the warrants will be subject to downward
anti-dilution adjustments in most cases, from time to time, where we issue
securities at a purchase, exercise or conversion price that is less than the
then-applicable conversion price of our Series A Preferred Stock or exercise
price of the warrants. Consequently, the voting power and value of your
investment in each such event would decline if our Series A Preferred Stock or
the warrants are converted or exercised for shares of our common stock at the
new lower price as a result of sales of our securities made below the
then-applicable conversion price of the Series A Preferred Stock and/or the
exercise price of the warrants.





We may continue to pay for
consulting and professional services fees with our stock, and this would be
dilutive to investors.





In the
past, we have issued shares to consultants and professional services providers
as a means of paying certain professional service fees and consulting
agreements. We may continue to use our stock in the future as a means of paying
for these kinds of services and believe that doing so will enable us to retain a
greater percentage of our operating capital to pay for operations, product
development and marketing.





Price and
volume fluctuations in our stock might negatively impact our ability to
effectively use our stock to pay for services, or it could cause us to offer
stock as compensation for services on terms that are not favorable to us and our
shareholders. If we did resort to granting stock in lieu of cash for consulting
and professional services fees under unfavorable circumstances, it would result
in increased dilution to investors.





Our executive officers and
directors own a significant amount of our common stock, which probably will
allow them to control the outcome of matters submitted to our shareholders for
vote.





As of
March 16, 2009, management owns a significant number of our issued and
outstanding shares of common stock. Management owns approximately 32.11% of our
issued and outstanding common stock, and other remaining shareholders own
approximately 67.89% of our issued and outstanding common stock. Because
management owns a significant block of the common stock, management probably
will have the ability to elect a majority of the Board of Directors and thereby
control our management. Although they are under no obligation to do so, if our
executive officers and directors (and their affiliates) were to vote together,
they probably also would have the ability to control the outcome of corporate
actions requiring shareholder approval, including mergers and other changes of
corporate control, going private transactions, and other extraordinary
transactions. This concentration of ownership may have the effect of delaying or
preventing a change of control, even if a change of control would benefit
shareholders.




We have not paid cash
dividends to our common stockholders, and it is unlikely that we will pay cash
dividends to our common stockholders in the foreseeable
future.





To the
extent that we have earnings, we plan to use earnings to fund our operations. We
do not plan to pay any cash dividends on our common stock in the foreseeable
future. We cannot guarantee that we will generate, at any time, sufficient
surplus cash that would be available for distribution as a dividend to the
holders of our common stock. You should not expect to receive cash dividends on
our common stock.





13





Our common stock is
considered to be a “penny stock” as defined by Section 3(a)(51) and Rule 3a51-1
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and,
therefore, is subject to penny stock regulations. These regulations could make
it more difficult for you to sell shares you acquire.





Our
common stock is subject to regulations of the SEC relating to the market for
penny stocks. These regulations generally require broker-dealers who sell penny
stocks to persons other than established customers and accredited investors to
deliver a disclosure schedule explaining the penny stock market and the risks
associated with that market. These regulations also impose various sales
practice requirements on broker-dealers. The regulations that apply to penny
stocks may severely affect the market liquidity for our securities, and that
could limit your ability to sell your securities in the secondary market.





NOTE
REGARDING FORWARD-LOOKING STATEMENTS





This
report, including the sections entitled “Business,” “Risk Factors” and
“Management's Discussion and Analysis of Financial Condition and Results of
Operations,” contains forward-looking statements.





These
statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks and other factors include those listed under “Risk Factors” and elsewhere
in this report. In some cases, you can identify forward-looking statements by
terminology such as “may,” “expects,” “intends,” “plans,” “anticipates,”
“believes,” “potential,” “continue” or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We do not intend to
update any of the forward-looking statements after the date of this report or to
conform these statements to actual results.





You
should rely only on the information contained in this report. We have not
authorized any other person to provide you with information that is different
from that contained in this report. If anyone provides you with different or
inconsistent information, you should not rely on it. The information presented
on, or that can be accessed through, our website is not a part of this report.
You should assume the information appearing in this report is accurate only as
of the date on which this report was filed. Our business, financial condition,
results of operations and prospects may have changed since that
date.








Item
1B.  Unresolved Staff Comments





Not
required for small reporting companies.








Item
2.  Properties





We do not
own any real property. We lease all of the real properties we use in our
business. The table below sets forth information regarding each of those
properties as of March 16, 2009. We believe that each of our leased facilities
is suitable for the operations we conduct in it.





Use
                                                                                                                                                          Location
                                                                                                                                                          
                                                                                                                                                          Current
      Monthly Rent
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          Square
      Footage
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          Remaining
      Term (in years)
                                                                                                                                                            Including
      Expected Renewal Period
                                                                                                                                                          
                                                                                                                                                          CommentsCorporate
      headquarters
                                                                                                                                                          90
      Madison St.
                                                                                                                                                            Denver,
      CO
                                                                                                                                                          
                                                                                                                                                          $
                                                                                                                                                          11,963
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          7,869
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          
                                                                                                                                                          4.50
                                                                                                                                                          
                                                                                                                                                          Rent
      increases each year through
2013.







14


Use
                Location
                
                Current
      Monthly Rent
                
                
                Square
      Footage
                
                
                Remaining
      Term (in years)
                  Including
      Expected Renewal Period
                
                CommentsRestaurant
      and bakery
                1298
      S. Broadway
                  Denver,
      CO
                
                $
                4,081
                
                
                
                3,481
                
                
                
                8.17
                
                Rent
      increases in 2012.Restaurant
                10320
      Federal Heights Blvd.#200
                  Federal
      Heights, CO
                
                $
                2,609
                
                
                
                1,453
                
                
                
                10.67
                
                Rent
      increases each year.  Includes 2 five-year
    renewals.Restaurant
                8923
      E. Union Ave.
                  Greenwood
      Village, CO
                
                $
                1,909
                
                
                
                1,516
                
                
                
                11.75
                
                Rent
      increases each year.  Includes 2 five-year
    renewals.Restaurant
                2043
      S. University Blvd.
                  Denver,
      CO
                
                $
                3,740
                
                
                
                2,200
                
                
                
                9.42
                
                Rent
      increases each year.  Includes 2 five-year
    renewals.Restaurant
                123
      N. College Ave.
                  Ft.
      Collins, CO
                
                $
                1,952
                
                
                
                1,848
                
                
                
                17.83
                
                Includes
      3 five-year options.Restaurant
                2120
      E. Harmony Rd.#101
                  Ft.
      Collins, CO
                
                $
                4,650
                
                
                
                1,800
                
                
                
                9.83
                
                Includes
      1 five-year option.Restaurant
                2300
      Parker Rd.
                  Aurora,
      CO
                
                $
                5,250
                
                
                
                1,800
                
                
                
                9.00
                
                Rent
      increases each year.


Item
3.  Legal Proceedings.





We are
not involved in any material legal proceedings.  None of our officers,
directors or affiliates, nor any owner of record or beneficially of more than
five percent of any class of our voting securities, nor any associate of any
such director, officer, affiliate of the Company, or security holder is a party
adverse to us or any of our subsidiaries or has a material interest adverse to
us or any of our subsidiaries.








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





No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended December 31, 2008.





15


PART
II





Item 5. Market for Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.





Market
Information





Our
common stock is quoted on the OTCBB under the symbol “SPKL.” Trading of our
stock on the OTCBB began on August 20, 2007. The following table sets forth, for
the periods indicated, the reported high and low closing bid quotations for our
common stock as reported by NASDAQ in the Info Quotes section of its website
located at www.nasdaq.com. The bid prices reflect inter-dealer quotations, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.





Quarter Ended
                  High Bid
                  Low BidDecember
      31, 2008
                  $0.46
                  $0.17September
      30, 2008
                  $0.84
                  $0.39June
      30, 2008
                  $1.01
                  $0.67March
      31, 2008
                  $1.40
                  $0.80December
      31, 2007
                  $2.02
                  $0.92September
      30, 2007
                  $1.24
                  $0.48





Shareholders





We have
approximately 70 record holders of our common stock as of March 16,
2009.





Dividends





We have
not paid any cash dividends on our common stock, and we currently intend to
retain any future earnings to fund the development and growth of our business.
Any future determination to pay dividends on our common stock will depend upon
our results of operations, financial condition and capital requirements,
applicable restrictions under any credit facilities or other contractual
arrangements or related to the Series A Preferred Stock and such other factors
deemed relevant by our Board of Directors.





Equity
Compensation Plan Information





Information
relating to compensation plans under which our equity securities are authorized
for issuance is set forth in Item 12 of this report under “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.”





Issuance
of Unregistered Shares





During
the year ended December 31, 2008 we issued an aggregate of 80,000 shares of our
common stock in consideration for services rendered.  The shares were
valued at $70,000, the trading value on the date of issuance.  No
underwriters were used in the above stock transactions.  We relied
upon the exemption from registration contained in Section 4(2) of the Securities
Act of 1933, as the investors were either deemed to be sophisticated with
respect to the investment in the securities due to their financial condition and
involvement in our business or accredited investors.  Restrictive
legends were placed on the certificates evidencing the securities issued in
these transactions.








Item
6. Selected Financial Data





Not
required for small reporting companies.








16





Item
7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations





The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors discussed in "Risk
Factors" and elsewhere in this report.





Overview





Our
business is the franchise and operation of Spicy PickleTM and Bread Garden
Urban Café restaurants. Spicy Pickle is a fast casual restaurant where
made-to-order panini, submarine-style sandwiches, pizzetti (Neapolitan thin
crust pizza), and salads created by our founders are served using fresh-baked
breads and high-quality ingredients.  Spicy Pickle restaurants are
located in 12 states in the United States.  Bread Garden Urban Café
restaurants also specialize in fast casual dining offering salads, soups,
sandwiches and dessert items.  Bread Garden Urban Cafés are located in
metropolitan Vancouver, British Columbia, Canada.





We market
our menu primarily through targeted local store marketing efforts, mail drops,
media advertising, and print campaigns, as well as through other grass roots
efforts. The "Spicy Pickle" brand name has existed for eight
years.   The “Bread Garden Urban Café” brand name has existed
since 1979.  We are headquartered in Denver, Colorado.





The first
Spicy Pickle restaurant was launched in 1999 by founders Kevin Morrison and
Anthony Walker under the name Spicy Pickle, LLC. In late 2001, there were three
restaurants, two in Denver and one in Lakewood, a Denver suburb. By January
2003, we organized Spicy Pickle Franchising, LLC and launched the Spicy Pickle
brand as a national franchise and recruited Marc Geman, former president of the
PretzelMaker franchise, as our Chief Executive Officer.





As of
December 31, 2008, we had 32 franchised restaurants and seven company-owned
restaurant opened.  Co-located with one of the restaurants is a bakery
which provides fresh baked breads to the local area Denver
restaurants.  This bakery has replaced the previous supplier of our
artisan breads and is expected to result in a food cost savings for the
franchisees in that market. Spicy Pickle restaurants outside this market are
equipped for bread baking at the store location.





Our
franchise agreements include build-out schedules for franchisee restaurants.
Through December 31, 2008, the Company has signed agreements with franchisees to
open 102 restaurants under the Spicy Pickle Brand.  Based on current
franchise agreements and construction schedules, we believe there will be
approximately 40 Spicy Pickle, franchisee-owned and operated restaurants and at
least 7 company-operated restaurants open by the end of 2009.  The
Company continues to interview prospective franchisees and relies on the cash
deposits from the franchise sales as well as royalty fees from the existing
stores to support the expenses of the business.





Our
locations and marketing efforts are directed principally to white collar
administrative, managerial, professional, and sales personnel, who are generally
found in and near downtown districts, technological centers, universities,
hospitals and government complexes.





We
currently derive our revenue from the sale of franchises, from royalties paid by
franchisees and from the sale of food and beverages at the company owned
restaurants.  Our business is headquartered in Colorado, and we have a
high concentration of restaurants in the Rocky Mountain region. Additionally, we
have franchises opened and planned in a number of other regions in the United
States. Our restaurant Spicy Pickle locations (including both company-owned and
franchisee-owned), including those under construction and lease negotiation as
of December 31, 2008, are:


17








Location
                    Restaurants
      Operating
                    Under
      Construction
                    In
      Lease NegotiationDenver,
      Colorado
                    5Boulder,
      Colorado
                    2Ft.
      Collins, Colorado
                    2Aurora,
      Colorado
                    2Littleton,
      Colorado
                    1Centennial,
      Colorado
                    1Lone
      Tree, Colorado
                    1Greenwood
      Village, Colorado
                    1Federal
      Heights, Colorado
                    1Johnstown,
      Colorado
                    1Colorado
      Springs, Colorado (1)
                    2Louisville,
      Colorado
                    1Englewood,
      Colorado
                    1Ashburn,
      Virginia
                    1Portland,
      Oregon
                    2Poway,
      California
                    1Henderson,
      Nevada
                    1Reno,
      Nevada
                    2Chicago,
      Illinois
                    1Cincinnati,
      Ohio
                    1Austin,
      Texas
                    2San
      Diego, California
                    1Chandler,
      Arizona
                    1Brooklyn,
      New York (2)
                    1Hattiesburg,
      Mississippi
                    1Edmond,
      Oklahoma
                    1Cedar
      Park, Texas
                    1Portage,
      Michigan
                    1Kalamazoo,
      Michigan
                    
                    1Houston,
      Texas
                    
                    1
                    1San
      Antonio, Texas
                    
                    
                    1Las
      Vegas, Nevada
                    
                    
                    139
                    2
                    3


(1)
            One
      restaurant closed subsequent to December 31,
  2008.


(2)
            Closed
      subsequent to December 31, 2008.








On
October 1, 2008, we acquired all of the operating assets of Bread Garden, a
company which franchises fast casual restaurants under the trade name Bread
Garden Urban Café.  The assets were acquired in exchange for 5,177,500
restricted shares of our common stock and warrants to purchase 3,038,750 shares
of our common stock.





18





Our Bread
Garden locations including those under construction and in lease negotiation as
of December 31, 2008 are:





Location
                    Restaurants
      Operating
                    Under
      Construction
                    In
      Lease NegotiationVancouver,
      British Columbia
                    5
                    3North
      Vancouver, British Columbia (1)
                    1Richmond,
      British Columbia
                    1
                    1Cloverdale,
      British Columbia
                    1Surrey,
      British Columbia
                    1Burnaby,
      British Columbia
                    1Coquitlam,
      British Columbia
                    2Kamloops,
      British Columbia
                    
                    1Brisbane,
      Australia
                    
                    112
                    6


(1)
            Closed
      subsequent to December 31, 2008 and relocated to the Cloverdale location
      included above.





We intend
to increase our revenues by adding new company-owned stores, selling new
franchises and expanding consumption of our food products at all restaurants.
General economic and industry conditions may affect our ability to do so and our
revenue performance.





Critical
Accounting Policies and Estimates





The
financial statements included in this filing have been prepared in conformity
with accounting principles generally accepted in the United States of America
(GAAP), which contemplates continuation of the Company as a going
concern.  We incurred a net loss of $5,612,749 for the year ended
December 31, 2008 and have incurred significant net losses since
inception.





We have
been developing our franchise network through the sale of franchises and through
acquisition.  We have relied on fund raising and the sales of new
franchises to augment the cash we receive from continuing royalty payments for
our cash flow.  The unanticipated economic conditions of 2008 resulted
in a significant reduction in the sales of new franchises which has resulted in
a significant decrease in our cash position.  As soon as it became
apparent that the economic downturn would not correct itself in 2008, we
significantly reduced our corporate overhead mostly in the area of personnel
cost.





Our
ability to fund our operations will depend on the length of time of the current
economic downturn, our future performance and our ability to successfully
implement our business and growth strategies.  In the event that we
need additional capital and are unable to obtain it, we could be left without
sufficient liquidity.  The nature of our business is that a portion of
our revenue is a continuing stream from franchisees.  We will
continually monitor our expenses and reduce those expenses as best we can to
match the revenue flow.  We may elect to raise money during the year
ended December 31, 2009 to meet any shortfalls from
operations.  However a realization of a significant portion of the
assets in the balance sheet is dependent on our continued operations, which in
turn is dependent on the increase in sales of new franchises, the number of
operating franchise restaurants, or the additional capital raised through a
placement of our securities.





The
preparation of our financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from those estimates. A summary
of accounting policies that have been applied to the historical financial
statements presented in this report can be found in the footnotes
thereto.  We consider certain of these accounting policies to be
critical as they are important to the portrayal of our financial condition and
results of operations and may require judgments on the part of management about
matters that are uncertain. We have identified the following accounting policies
that are important to the presentation of financial information in this
report.





19


Revenue
Recognition





Initial
Franchise Fees - We enter into franchise agreements, which grant franchisees the
exclusive right to develop and operate businesses at certain locations. Initial
franchise fees are recognized as revenue when all material services and
conditions required to be performed by us have been substantially completed,
which is generally when the restaurant opens.  Initial franchise fees were
established at $45,000 and $35,000 for the years ended December 31, 2008 and
2007, respectively.  Franchise fees recognized were $252,500 and
$497,500 for the years ended December 31, 2008 and 2007
respectively.





Royalty
Fees - Pursuant to the franchise agreements of both our Spicy Pickle and Bread
Garden Urban Café brands, franchisees are required to pay royalties to us based
on 5% of weekly gross sales as reported to us through the franchisees’ point of
sales systems. The royalties are recognized as revenue in the period
corresponding to the sales reporting period. Royalty fees were $819,489 and
$577,334 for the years ended December 31, 2008 and 2007,
respectively.





With
regard to royalty fees, our franchisees grant us the right to extract data from
their point of sale systems in each restaurant they operate. We receive weekly
reports on sales at each franchise location and calculate our revenue directly
from those reports. This allows for extremely accurate accounting of our revenue
stream from royalty fees. We do not anticipate any future change in the method
of reporting.





Rebates -
We receive rebates from certain purveyors that supply products to our
franchisees, these rebates are included in Franchise Fees and Royalties. The
rebates are recorded when earned. Rebates that relate to company-owned
restaurants are offset against restaurant cost of sales. Rebates related to
franchisees were $235,305, and $151,020 for the years ended December 31, 2008
and 2007, respectively.





Product
Sales – Prior to the fourth quarter of 2007, we sold logo products to our
franchisees. Sales were recognized when products were shipped to the
franchisee.  These types of sales are now handled by a third-party
supplier who sells directly to our franchisees.





Restaurant
and Bakery Sales - We record revenue from company-owned restaurant sales upon
delivery of the related food and other products to customers. Our restaurant
sales are either cash or credit card (which are pre-approved) sales and,
therefore, no estimate for collectibility is necessary.  We record
revenue from bakery sales when sold to the bakery customers, which are our
franchisees.





Advertising
Costs





Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales. In our discretion, we may spend more or less than
our actual advertising receipts from the franchisees. Advertising fees collected
were $375,477 and $291,881 for the years ended December 31, 2008 and 2007,
respectively.  These fees are offset against actual advertising
expenses, which are recognized when incurred. We incurred advertising expenses
of $828,335 and $443,566 for the years ended December 31, 2008 and 2007,
respectively. We paid those expenses from the advertising fund and from our own
funds. The net amounts reflected as advertising costs in the financial
statements are $452,858 and $151,685 for the years ended December 31, 2008 and
2007, respectively.





Rent
Expense





We
recognize rent expense on a straight-line basis over the reasonably assured
lease term as defined in the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 98, "Accounting for
Leases”. ' In addition, certain of our lease agreements provide for scheduled
rent increases during the lease term or for rental payments commencing on a date
other than the date of initial occupancy. We include any rent escalations and
construction period and other rent holidays in our determination of
straight-line rent expense. Therefore, rent expense for new locations is charged
to expense beginning with the start of the construction period.





20


Equity-Based
Compensation





On
January 1, 2006, we adopted FASB SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair values. SFAS
123(R) supersedes our previous accounting under Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees”.  In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to
SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS
123(R).





SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our statement of operations. Prior
to the adoption of SFAS 123(R), we had no stock-based compensation awarded to
employees and directors.





Recent
Pronouncements





We have
reviewed all recently issued, but not yet effective, accounting pronouncements
and do not believe the future adoption of any such pronouncements may be
expected to cause a material impact on our financial condition or the results of
our operations.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R will change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will change the
accounting treatment and disclosure for certain specific items in a business
combination. SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business
combinations we engage in will be recorded and disclosed following existing GAAP
until January 1, 2009. We expect that SFAS 141R will have an impact on
accounting for business combinations once adopted, but the effect is dependent
upon acquisitions at that time. We are still assessing the impact of this
pronouncement.





In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51" (“SFAS 160"). SFAS
160 establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
is effective for fiscal years beginning on or after December 15, 2008. We
believe that SFAS 160 should not have a material impact on our financial
position or results of operations.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the our future financial
position or results of operations.





In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS 163").
SFAS 163 interprets Statement 60 and amends existing accounting pronouncements
to clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, we are required to adopt
these provisions at the beginning of the fiscal year ended December 31, 2009. We
are currently evaluating the impact of SFAS 163 on its financial statements but
does not expect it to have an effect on our financial position or results of
operations.





21


Also in
May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertibledebt securities that, upon conversion, may be settled by the
issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for
financial statements issued for fiscal years after December 15, 2008, and must
be applied on a retrospective basis. Early adoption is not permitted. We do not
expect it to have an effect on our financial position or results of
operations.





In June
2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF
03-6-1"). FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting, and therefore need to be included in the earnings allocation in
computing earnings per share under the two-class method as described in SFAS No.
128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings-per-share pursuant to the
two-class method. FSP EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008 and all prior-period earnings
per share data presented shall be adjusted retrospectively. Early application is
not permitted. We do not expect it to have an effect on our financial position
or results of operations.





Also in
June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5").
EITF 07-5 provides that an entity should use a two-step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Early application is not
permitted. We are assessing the potential impact of this EITF 07-5 on the
financial condition and results of operations and do not expect it to have an
effect on our financial position or results of operations.





In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (“FSP FAS 133-1” and “FIN 45-4”). FSP 133-1 and FIN 45-4
amend disclosure requirements for sellers of credit derivatives and financial
guarantees and also clarify the disclosure requirements of SFAS
161.   FSP FAS 133-1 and FIN 45-4 are effective for quarterly
periods beginning after November 15, 2008, and fiscal years that include those
periods. The adoption of FSP 133-1 and FIN 45-4 did not have a material impact
on our current financial position or results of operation.








22


Results
of Operations





Operating
Statistics


The
following analysis shows operating statistics for the years ended December 31,
2008 and 2007:





2008
                
                
                2007Revenues:
                
                Amount
                
                
                As
      a Percentage of Total Revenue
                
                
                Amount
                
                
                As
      a Percentage of Total RevenueRestaurant
      and bakery sales
                
                $
                3,110,351
                
                
                
                70.41
                %
                
                $
                30,730
                
                
                
                2.41
                %Franchise
      fees and royalties
                
                
                1,307,295
                
                
                
                29.59
                %
                
                
                1,243,263
                
                
                
                97.59
                %Total
      revenue
                
                $
                4,417,646
                
                
                
                100.00
                %
                
                $
                1,273,993
                
                
                
                100.00
                %Operating
      costs and expenses:Restaurant:
                
                
                
                
                
                As
      a Percentage of Restaurant Sales
                
                
                
                
                
                
                As
      a Percentage of Restaurant SalesCost
      of sales
                
                $
                1,090,129
                
                
                
                35.05
                %
                
                $
                30,383
                
                
                
                98.87
                %Labor
                
                
                1,434,518
                
                
                
                46.12
                %
                
                
                33,137
                
                
                
                107.83
                %Occupancy
                
                
                436,889
                
                
                
                14.05
                %
                
                
                44,423
                
                
                
                144.56
                %Depreciation
                
                
                256,147
                
                
                
                8.24
                %
                
                
                3,876Other
      operating cost
                
                
                490,073
                
                
                
                15.76
                %
                
                
                38,675
                
                
                
                138.47
                %Total
      restaurant operating expenses
                
                $
                3,707,756
                
                
                
                119.22
                %
                
                $
                150,494
                
                
                
                489.73
                %Franchise
      and general:
                
                
                
                
                
                As
      a Percentage of Franchise Fees and Royalties
                
                
                
                
                
                
                As
      a Percentage of Franchise Fees and RoyaltiesGeneral
      and administrative
                
                
                6,291,136
                
                
                
                515.19
                %
                
                
                4,735,854
                
                
                
                380.92
                %Depreciation
                
                
                29,455
                
                
                
                2.41
                %
                
                
                22,744
                
                
                
                1.83
                %Total
      franchise and general expenses
                
                $
                6,320,591
                
                
                
                517.60
                %
                
                $
                4,758,598
                
                
                
                382.75
                %As
      a Percentage of Total Revenue
                
                
                
                
                
                
                As
      a Percentage of Total RevenueTotal
      operating costs and expenses
                
                $
                10,028,347
                
                
                
                227.01
                %
                
                $
                4,909,092
                
                
                
                385.33
                %(Loss)
      from operations
                
                
                (5,610,701
                )
                
                
                (127.01
                %)
                
                
                (3,635,099
                )
                
                
                (285.33
                )%Other
      income and (expense):Loss
      on sale of assets
                
                
                (32,015
                )
                
                
                (0.72
                %)Interest
      income
                
                
                72,472
                
                
                
                1.64
                %
                
                
                51,252
                
                
                
                4.02
                %Other
      income (expense)
                
                
                (42,505
                )
                
                
                (0.96
                %)
                
                
                (18,037
                )
                
                
                (1.42
                )%Total
      other income and (expense)
                
                
                (2,048
                )
                
                
                (0.04
                %)
                
                
                33,215
                
                
                
                2.60
                %Net
      (loss)
                
                $
                (5,612,750
                )
                
                
                (127.05
                %)
                
                $
                (3,601,884
                )
                
                
                (282.72
                )%








23


For the twelve months ended December 31, 2008, total revenue
increased $3,143,653 (247%) from $1,273,993 in 2007 to $4,417,646 in 2008. For
the twelve months ended December 31, 2008, restaurant and bakery sales increased
by $3,079,621 over the same period in 2007. This increase is the result of us
building two new restaurants, acquiring four existing restaurants from
franchisees and acquiring a partial interest in one existing restaurant in
2008.  In addition our bakery operation opened in the beginning of
2008.





For the
year ended December 31, 2008, franchise fees and royalties increased $64,032
(5.15%) over the same period in 2007. The increase relates directly to the
number of franchised restaurants sold and opened. For the year ended December
31, 2008, we recognized franchise fees of $252,500. Of this amount $145,000
represented 5 locations opened during this period and $167,500 represented
deferred revenue recognized for 14 future franchise agreements that were
terminated.  During the period ended December 31, 2007, we recognized
franchise fees of $497,500. This represented 19 locations opened in
2007.  Deferred franchise revenue (not included in the statement of
operations) increased $1,500 from $770,000 at December 31, 2007 to $771, 500 at
December 31, 2008.  We experienced decreased sales of new
franchises.  In 2008 we sold development agreements for 20 new
restaurants as compared to 45 in 2007.  We believe that the tightening
of bank credit and limited availability of financing for new enterprises
contributed to this decrease.  At December 31, 2008, there were
deferred fees for 70 new locations. Royalty fees increased $242,155 as a result
higher system-wide revenue during 2008 than in 2007.  The year ended
December 31, 2008, began with 35 franchised restaurants.  An
additional six restaurants were opened during the year with four of those in the
first quarter and one in each of the second and third quarters.  Five
of the franchised restaurants were sold to us and we operated them as company
owned units.  As a result of our acquisition of Bread Garden in
October, we added ten franchised Bread Garden Urban Cafés for the fourth quarter
of 2008.





Cost of
restaurant and bakery operations increased $3,557,262 (2,364%) from $150,494 in
2007 to $3,707,756 in 2008 as a result of the increased number of restaurants
and the bakery operating in 2008 as compared to 2007.  During 2008 we
operated eight restaurants and the bakery as compared to only one restaurant for
one month of 2007.





The
following table sets forth details of the costs that make up general and
administrative expenses and the differences for the year ended December 31, 2008
as compared to December 31, 2007.





2008
                  
                  
                  2007
                  
                  
                  DifferencePersonnel
      cost
                  
                  $
                  2,654,500
                  
                  
                  $
                  1,935,067
                  
                  
                  $
                  719,433Stock
      options
                  
                  
                  840,395
                  
                  
                  
                  403,368
                  
                  
                  
                  437,027Investor
      relations
                  
                  
                  825,610
                  
                  
                  
                  731,343
                  
                  
                  
                  94,267Marketing,
      advertising and promotion
                  
                  
                  452,858
                  
                  
                  
                  151,685
                  
                  
                  
                  301,173Travel
      and entertainment
                  
                  
                  394,135
                  
                  
                  
                  440,982
                  
                  
                  
                  (46,847
                  )Professional
      fees
                  
                  
                  378,337
                  
                  
                  
                  348,931
                  
                  
                  
                  29,406MIS
                  
                  
                  178,741
                  
                  
                  
                  113,015
                  
                  
                  
                  65,726Rent
                  
                  
                  174,933
                  
                  
                  
                  138,865
                  
                  
                  
                  36,068Office
      supplies and expenses
                  
                  
                  88,813
                  
                  
                  
                  109,972
                  
                  
                  
                  (21,159
                  )Communication
                  
                  
                  60,951
                  
                  
                  
                  112,200
                  
                  
                  
                  (51,249
                  )Other
      general and administrative expenses
                  
                  
                  241,862
                  
                  
                  
                  250,426
                  
                  
                  
                  (8,564
                  )Total
      general and administrative expenses
                  
                  $
                  6,291,135
                  
                  
                  $
                  4,735,854
                  
                  
                  $
                  1,555,281





General
and administrative expenses increased $1,555,281 (32.84%) from $4,735,854 for
the year ended December 31, 2007 to $6,291,135 for the year ended December 31,
2008.  In general, during 2008, we continued to grow the
infrastructure related to our franchise operations.  The growth was to
meet expected needs as new franchise restaurants were anticipated to be
opened.  In the first quarter of 2008 we entered into agreements for
23 new franchises.  Although we continued to have inquires and visits
from potential franchisees in the second and third quarters of 2008 we did not
sell any new franchises.  Towards the end of the third quarter of 2008
we began to scale back in the infrastructure we had in place.  Our
most significant expense is personnel and related costs.  We reduced
the number of employees from a high of 28 to 19 by the year end.  The
number of employees as well as increased wages and benefits resulted in an
increase in personnel cost of $719,433 (37.18%) from $1,935,067 in 2007 to
$2,654,500 in 2008.  We also reduced overhead expenses that have a
direct bearing on the number of personnel






24




employed
as well as other areas such as travel and entertainment and
communication.  We had a decrease in general and administrative
expenses in the fourth quarter of 2008 as compared to the third quarter of 2008
of $389,207.  We will continue to review our general and
administrative costs and respond to the effects of the general economy as timely
as possible.





Stock
option expense is a non-cash expense.  We estimate the fair value of
share-based payment awards on the date of grant using the Black-Scholes
option-pricing model.  Stock option expense increased $437,027 (108%)
from $403,368 for the year ended December 31, 2007 to $840,395 for the year
ended December 31, 2008.  We granted 3,060,000 stock options during
the year ended December 31, 2008. We granted 3,960,000 stock options during the
year ended December 31, 2007.  At December 31, 2008 there were
6,146,250 options outstanding with an intrinsic value of $1,148,040 and
5,532,500 exercisable with an intrinsic value of $1,060,771.





Our stock
began trading on the OTCBB in August 2007.  We engaged a number of
investor relations firms to assist in attracting new shareholders in the
Company.  We expensed $825,610 for these investor relations expenses
in 2008 as compared to $731,343 in 2007.  Of the amount expensed in
2008 $71,191 was paid in cash and $754,419 was paid in our common
stock.  We will continue to incur investor relations expenses in the
future.





Franchisees
must contribute to an advertising fund established by us at a rate of up to 2%
for our Spicy Pickle brand and 1.5% for our Bread Garden Urban Café brand of
total franchisee gross sales.  In our discretion, we may spend more or
less than our actual advertising receipts from the
franchisees.  Advertising fees collected were $375,477 and $291,881
for the years ended December 31, 2008 and 2007, respectively. These fees are
offset against advertising expenses, which are recognized when incurred. The
Company incurred advertising expense of $828,335 and $443,566 in 2008 and 2007,
respectively, including those from the advertising fund and the Company’s own
advertising expenses. The net amounts reflected in the financial statements are
$452,858 and $151,685 in 2008 and 2007, respectively.  The increase in
the amount reflected as expense in the income statement results primarily from
an outdoor advertising campaign conducted in 2008.





Travel
and entertainment decreased $46,847 (10.62%) from $440,982 in 2007 to $394,135
in 2008, primarily as a result a corporate decision to make fewer visits to
franchised restaurants in the fourth quarter of 2008 and fewer new restaurant
openings in 2008.





Professional
fees increased $29,406 (8.43%) from $348,931 for 2007 to $378,337 for
2008.  The increase results primarily from higher accounting fees and
legal as a result of increased activity related to regulatory filings deemed
necessary with our Bread Garden acquisition.  In addition, we incurred
higher consulting fees.





Other
general and administrative expenses increased as our infrastructure grew before
we began reduction backs in the infrastructure.





The net
loss for the year ended December 31, 2008 was $5,612,749 compared to a loss of
$3,601,884 for the same period in 2007 for an increased loss of $2,010,865
(55.83%). The loss from operations was $5,610,701 in the year ended December 31,
2008 compared to $3,635,099 for the year ended December 31, 2007. The increase
in the loss from operations of $1,975,602 (54.35%) was primarily due to
increased payroll expenses, investor relations, stock options and increases in
other operating expenses.





Liquidity
and Capital Resources





At
December 31, 2008, we had a working capital deficit of $925,635, as compared to
working capital of $4,398,216 at December 31, 2007.  Of the working
capital deficit, $771,500 was deferred franchise fee revenue and does not
represent a cash liability.  The decrease in working capital is
primarily due to increased operating activities and losses.  During
2007, we completed two separate financings. The first was the public sale of
4,352,780 shares of our common stock for gross proceeds of $1,741,112 offset by
offering expenses of $162,361 for net proceeds of $1,578,751.  The
second was a private equity financing of $5,992,500.  The net proceeds from
the offering were $5,622,996.  The Company issued 705 shares of its
Series A Preferred Stock, par value $0.001 per share and stated value of $8,500
per share. Each share of the Series A Preferred Stock is immediately convertible
into 1,000 shares of the Company’s $.001 par value common stock.  No
fund raising activities were conducted in 2008.  Instead, we






25




obtained
a $550,000 line of credit from two of our directors in 2008.  We
borrowed $100,000 against this line of credit in 2008.





During
the year ended December 31, 2008, we used cash in operating activities of
$3,775,810 as compared to cash used in operations of $2,425,198 for the same
period in 2007. We also used cash for the acquisition of assets in the amount of
$1,307,681 in 2008 as compared to $584,389 in 2007.  We receive
payments from franchisees when they sign a franchise agreement. We do not
include those payments in revenue until such time as the franchisee opens the
restaurant. The amount recorded as deferred revenue at December 31, 2008 was
$771,500, an increase of $1,500 compared to December 31, 2007. Although not
recorded as revenue, any payments received will provide working
capital.





At
December 31, 2008, we had contractual obligations for operating leases of
approximately $2,917,742, of which $458,743 was due in less than one
year.





As of December 31, 2008, our aggregate minimum requirements under
non-cancelable leases are as follows:





2009
                    
                    $
                    458,7432010
                    
                    
                    435,4472011
                    
                    
                    417,0912012
                    
                    
                    378,3692013
                    
                    
                    351,734Later
      years
                    
                    
                    876,358$
                    2,917,742





We pay to
each holder of Series A Preferred Stock cumulative dividends at a rate per share
of 5% per annum until December 14, 2010, 7.5% per annum from December 15, 2010
until December 14, 2011, and 14% per annum thereafter, payable semi-annually on
January 1 and July 1, beginning on July 1, 2008,   In July 2008
we made the first required payment of $159,596 in cash.  In January
2009 we issued 798,555 shares of our $.001 par value common stock in
settlement of $135,035 of the accrued dividend at December 31, 2008 and made a
cash payment of $2,853 for the balance.  Whenever possible we will
make dividend payments in our common stock in lieu of cash.  There is
no guarantee that we will be able to continue to do so.





Summary
– December 31, 2008





The
unanticipated economic conditions of 2008 resulted in us not selling as many new
franchises as we initially predicted.  The extent of the recession was
not clear until the third or fourth quarter of 2008.  We reacted to
the downturn as soon as it became apparent that it would not correct itself in
2008.  Our need to raise additional equity or debt financing and our
ability to generate cash flow from operations will depend on the length of time
we are in a recession, our future performance and our ability to successfully
implement our stated business and growth strategies.  Many of these
factors are beyond our control. If our working capital is insufficient to fund
the implementation of our business plan we will be required to seek additional
financing sooner than currently anticipated in order to proceed with our
business goals.  In the event that we need additional capital and are
unable to obtain it, we could be left without sufficient
liquidity.  The nature of our business is that a portion of our
revenue is a continuing stream from franchisees.  We will continually
monitor our expenses and reduce those expenses as best we can to match the
revenue flow.  In the past we have issued common stock to our
consultants and professional services providers in lieu of cash payments for
these services. We may continue this practice to conserve our cash to pay for
operations, product development and inventory.








Off-Balance
Sheet Arrangements





At
December 31, 2008, we had no obligations that would qualify to be disclosed as
off-balance sheet arrangements.








26





Item
7A. Quantitative and Qualitative Disclosures About Market Risk





Not
required








Item
8.  Financial Statements and Supplementary Data








Index
      to Consolidated Financial Statements
            
            PageReports
      of Independent Registered Public Accounting Firm
            
            28
      -29Consolidated
      Balance Sheets as of December 31, 2008 and 2007
            
            30Consolidated
      Statements of Operations and Comprehensive Loss for the Years Ended
      December 31, 2008 and 2007
            
            31Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2008
      and 2007
            
            32Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
            
            33Notes
      to Consolidated Financial Statements
            
            34
      - 50





27





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors and Stockholders of


Spicy
Pickle Franchising, Inc.


Denver,
Colorado





We have
audited the accompanying consolidated balance sheet of Spicy Pickle Franchising,
Inc. (the “Company”) as of December 31, 2008 and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive
income and cash flows for the year then ended.  These consolidated
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company has determined that it is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audit provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spicy Pickle
Franchising, Inc. as of December 31, 2008 and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.



















Greenwood
Village, Colorado


March 26,
2009





28








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders of


Spicy
Pickle Franchising, Inc.


Denver,
Colorado





We have
audited the accompanying consolidated balance sheet of Spicy Pickle Franchising,
Inc. as of December 31, 2007 and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spicy Pickle
Franchising, Inc as of December 31, 2007 and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.













Greenwood
Village, Colorado


March 21,
2008








29





Spicy
      Pickle Franchising, Inc.Consolidated
      Balance SheetsDecember
      31, 2008 and 20072008
                        
                        
                        2007AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        287,482
                        
                        
                        $
                        5,405,069Current
      portion of notes receivable
                        
                        
                        35,000
                        
                        
                        
                        40,000Accounts
      receivable, trade, net
                        
                        
                        251,173
                        
                        
                        
                        60,489Inventory
                        
                        
                        34,180
                        
                        
                        
                        11,383Prepaid
      expenses and other current assets
                        
                        
                        63,449
                        
                        
                        
                        184,498Total
      current assets
                        
                        
                        671,284
                        
                        
                        
                        5,701,439Property
      and equipment, net of accumulated depreciation
                        
                        
                        1,897,639
                        
                        
                        
                        685,751Other
      assets:Notes
      receivable, less current portion
                        
                        
                        -
                        
                        
                        
                        40,000Deposits
      and other assets
                        
                        
                        81,806
                        
                        
                        
                        12,869Goodwill
      and other intangible assets
                        
                        
                        2,914,461
                        
                        
                        
                        -Total
      other assets
                        
                        
                        2,996,267
                        
                        
                        
                        52,869Total
      assets
                        
                        $
                        5,565,190
                        
                        
                        $
                        6,440,059Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
                        
                        $
                        440,190
                        
                        
                        $
                        441,096Accrued
      expenses and compensation
                        
                        
                        247,340
                        
                        
                        
                        89,827Accrued
      dividends
                        
                        
                        137,889
                        
                        
                        
                        -Deferred
      franchise revenue
                        
                        
                        771,500
                        
                        
                        
                        770,000Other
                        
                        
                        -
                        
                        
                        
                        2,300Total
      current liabilities
                        
                        
                        1,596,919
                        
                        
                        
                        1,303,223Notes
      payable to related parties
                        
                        
                        100,000
                        
                        
                        
                        -Long-term
      debt
                        
                        
                        500,000
                        
                        
                        
                        -Deferred
      rent expense
                        
                        
                        93,052
                        
                        
                        
                        -Total
      long-term liabilities
                        
                        
                        693,052
                        
                        
                        
                        -Minority
      interest
                        
                        
                        51,955
                        
                        
                        
                        -Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $.001 par value, 20,000,000 shares authorized,649
      and 705 shares of Series A Variable RateConvertible
      Preferred Stock, stated value $8,500per
      share, issued and outstanding in 2008 and 2007,
    respectively
                        
                        
                        4,418,941
                        
                        
                        
                        4,801,124Common
      stock, $.001 par value, 200,000,000 sharesauthorized,
      53,535,247 and 47,634,053 shares issuedand
      outstanding in 2008 and 2007, respectively
                        
                        
                        53,535
                        
                        
                        
                        47,634Additional
      paid in capital
                        
                        
                        9,548,678
                        
                        
                        
                        5,546,692Fair
      value of common stock warrants
                        
                        
                        873,825
                        
                        
                        
                        873,825Accumulated
      (deficit)
                        
                        
                        (11,658,300
                        )
                        
                        
                        (5,562,772
                        )Accumulated
      comprehensive income (loss)
                        
                        
                        (13,415
                        )
                        
                        
                        -Deferred
      compensation
                        
                        
                        -
                        
                        
                        
                        (569,667
                        )Total
      stockholders' equity
                        
                        
                        3,223,264
                        
                        
                        
                        5,136,836Total
      liabilities and stockholders’ equity
                        
                        $
                        5,565,190
                        
                        
                        $
                        6,440,059


See the
accompanying notes to the consolidated financial statements


30





Spicy
      Pickle Franchising, Inc.Consolidated
      Statements of Operations and Comprehensive LossFor
      The Years Ended December 31, 2008 and 20072008
                  
                  
                  2007Revenue:Restaurant
      and bakery sales
                  
                  $
                  3,110,351
                  
                  
                  $
                  30,730Franchise
      fees and royalties
                  
                  
                  1,307,295
                  
                  
                  
                  1,243,263Total
      revenues
                  
                  
                  4,417,646
                  
                  
                  
                  1,273,993Operating
      costs and expenses:Restaurant
      and bakery:Cost
      of sales
                  
                  
                  1,090,129
                  
                  
                  
                  30,383Labor
                  
                  
                  1,434,518
                  
                  
                  
                  33,137Occupancy
                  
                  
                  436,889
                  
                  
                  
                  44,423Depreciation
                  
                  
                  256,147
                  
                  
                  
                  3,876Other
      operating costs
                  
                  
                  490,073
                  
                  
                  
                  38,675Total
      restaurant and bakery operating costs
                  
                  
                  3,707,756
                  
                  
                  
                  150,494Franchise
      and general:General
      and administrative
                  
                  
                  6,291,136
                  
                  
                  
                  4,735,854Depreciation
                  
                  
                  29,455
                  
                  
                  
                  22,744Total
      franchise and general
                  
                  
                  6,320,591
                  
                  
                  
                  4,758,598Total
      operating costs and expenses
                  
                  
                  10,028,347
                  
                  
                  
                  4,909,092(Loss)
      from operations
                  
                  
                  (5,610,701
                  )
                  
                  
                  (3,635,099
                  )Other
      income (expense):Loss
      on sale of assets
                  
                  
                  (32,015
                  )
                  
                  
                  -Interest
      income
                  
                  
                  72,472
                  
                  
                  
                  51,252Interest
      (expense)
                  
                  
                  (42,504
                  )
                  
                  
                  (18,037
                  )Total
      other income (expense):
                  
                  
                  (2,048
                  )
                  
                  
                  33,215Net
      (loss)
                  
                  
                  (5,612,749
                  )
                  
                  
                  (3,601,884
                  )Dividend
      on preferred stock
                  
                  
                  (295,185
                  )
                  
                  
                  -Net
      (loss) attributable to common shareholders
                  
                  
                  (5,907,934
                  )
                  
                  
                  (3,601,884
                  )Other
      comprehensive (loss):Foreign
      currency exchange (loss)
                  
                  
                  (13,415
                  )
                  
                  
                  -Comprehensive
      (loss)
                  
                  $
                  (5,921,349
                  )
                  
                  $
                  (3,601,884
                  )Per
      share information - basic and fully diluted:Weighted
      average shares outstanding
                  
                  
                  49,487,007
                  
                  
                  
                  44,315,486Net
      (loss) per share attributable to common shareholders
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.08
                  )





See the
accompanying notes to the consolidated financial statements




31


Spicy
      Pickle Franchising, Inc.Consolidated
      Statement of Stockholders’ EquityFor
      The Years Ended December 31, 2008 and 2007Additional
                          
                          
                          Common
                          
                          
                          
                          
                          
                          
                          
                          
                          AccumulatedPreferred
      Stock
                          
                          
                          Common
      Stock
                          
                          
                          Paid
      in
                          
                          
                          Stock
                          
                          
                          Deferred
                          
                          
                          Accumulated
                          
                          
                          ComprehensiveShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Warrants
                          
                          
                          Compensation
                          
                          
                          (Deficit)
                          
                          
                          (Loss)
                          
                          
                          TotalBalances
      at January 1, 2007
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          40,996,455
                          
                          
                          $
                          40,996
                          
                          
                          $
                          1,161,516
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          (610,667
                          )
                          
                          $
                          -
                          
                          
                          $
                          591,845Common
      shares issued for cash and services in connection with registered
      offering
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,352,780
                          
                          
                          
                          4,353
                          
                          
                          
                          1,574,398
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,578,751Common
      shares issued for services
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,284,818
                          
                          
                          
                          2,285
                          
                          
                          
                          1,109,142
                          
                          
                          
                          -
                          
                          
                          
                          (871,292
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          240,135Preferred
      shares issued for cash
                          
                          
                          705
                          
                          
                          
                          5,622,996
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,622,996Allocation
      of fair value common stock
            warrants
                          
                          
                          -
                          
                          
                          
                          (821,872
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          821,872
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Fair
      value of placement consultant warrants
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (51,953
                          )
                          
                          
                          51,953
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Beneficial
      conversion dividend on preferred
            stocks
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,350,221
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,350,221
                          )
                          
                          
                          -
                          
                          
                          
                          -Fair
      value of stock options granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          403,368
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          403,368Amortization
      of deferred compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          301,625
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          301,625Net
      (loss) for the year
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (3,601,884
                          )
                          
                          
                          -
                          
                          
                          
                          (3,601,884
                          )Balances
      at December 31, 2007
                          
                          
                          705
                          
                          
                          
                          4,801,124
                          
                          
                          
                          47,634,053
                          
                          
                          
                          47,634
                          
                          
                          
                          5,546,692
                          
                          
                          
                          873,825
                          
                          
                          
                          (569,667
                          )
                          
                          
                          (5,562,772
                          )
                          
                          
                          -
                          
                          
                          
                          5,136,836Common
      shares issued for cash
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          82,500
                          
                          
                          
                          83
                          
                          
                          
                          25,417
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          25,500Common
      shares issued for services
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          80,000
                          
                          
                          
                          80
                          
                          
                          
                          69,920
                          
                          
                          
                          -
                          
                          
                          
                          (70,000
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Common
      shares issued for asset acquisition
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,177,500
                          
                          
                          
                          5,177
                          
                          
                          
                          2,497,038
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,502,215Conversion
      of preferred stock
                          
                          
                          (56
                          )
                          
                          
                          (382,183
                          )
                          
                          
                          561,194
                          
                          
                          
                          561
                          
                          
                          
                          381,622
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Cancellation
      of service contract
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          23,467
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          23,467Dividends
      on preferred stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (295,185
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (295,185
                          )Beneficial
      conversion dividend on preferred
        stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          482,779
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (482,779
                          )
                          
                          
                          -
                          
                          
                          
                          -Fair
      value of stock options granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          840,395
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          840,395Amortization
      of deferred compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          616,200
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          616,200Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (13,415
                          )
                          
                          
                          (13,415
                          )Net
      (loss) for the year
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (5,612,749
                          )
                          
                          
                          -
                          
                          
                          
                          (5,612,749
                          )Balances
      at December 31, 2008
                          
                          
                          649
                          
                          
                          $
                          4,418,941
                          
                          
                          
                          53,535,247
                          
                          
                          $
                          53,535
                          
                          
                          $
                          9,548,678
                          
                          
                          $
                          873,825
                          
                          
                          $
                          -
                          
                          
                          $
                          (11,658,300
                          )
                          
                          $
                          (13,415
                          )
                          
                          $
                          3,223,264





See the
accompanying notes to the consolidated financial statements


32


Spicy Pickle Franchising, Inc.Consolidated
      Statements of Cash FlowsYears
      Ended December 31, 2008 and 20072008
                
                
                2007Cash
      flows from operating activities:Net
      (loss)
                
                $
                (5,612,749
                )
                
                $
                (3,601,884
                )Adjustments
      to reconcile net (loss) to net cash (used in)operating
      activities:Depreciation
                
                
                285,602
                
                
                
                26,620Stock
      based compensation expense
                
                
                1,480,062
                
                
                
                901,201Loss
      on sale of assets
                
                
                32,015
                
                
                
                -Changes
      in operating assets and liabilities:Accounts
      receivable, trade
                
                
                (191,263
                )
                
                
                3,108Notes
      receivable
                
                
                80,000
                
                
                
                (80,000
                )Prepaid
      expenses and other
                
                
                93,004
                
                
                
                (155,327
                )Inventories
                
                
                (29,650
                )
                
                
                20,586Deposits
                
                
                (70,937
                )
                
                
                17,238Accounts
      payable, trade
                
                
                (907
                )
                
                
                385,656Accrued
      expenses and compensation
                
                
                157,513
                
                
                
                26,529Deferred
      franchise revenue
                
                
                1,500
                
                
                
                85,000Other
      liabilities
                
                
                -
                
                
                
                (53,925
                )Net
      cash (used in) operating activities
                
                
                (3,775,810
                )
                
                
                (2,425,198
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (762,400
                )
                
                
                (584,389
                )Proceeds
      from sale of assets
                
                
                76,319
                
                
                
                -Investment
      in purchased subsidiaries
                
                
                (621,600
                )
                
                
                -Net
      cash (used in) investing activities
                
                
                (1,307,681
                )
                
                
                (584,389
                )Cash
      flows from financing activities:Proceeds
      from exercise of common stock options
                
                
                25,500
                
                
                
                -Payment
      of preferred stock dividends
                
                
                (159,596
                )
                
                
                -Proceeds
      from note payable to related parties
                
                
                100,000
                
                
                
                -Repayment
      of notes payable to related party
                
                
                -
                
                
                
                (30,000
                )Proceeds
      from sale of common stock
                
                
                -
                
                
                
                1,622,678Proceeds
      from sale of preferred stock and warrants
                
                
                -
                
                
                
                5,622,996Net
      cash (used in)  provided by financing activities
                
                
                (34,096
                )
                
                
                7,215,674Net
      (decrease) increase in cash and cash equivalents
                
                
                (5,117,587
                )
                
                
                4,206,087Cash
      and cash equivalents, beginning of period
                
                
                5,405,069
                
                
                
                1,198,982Cash
      and cash equivalents, end of period
                
                $
                287,482
                
                
                $
                5,405,069Supplemental
      cash flow information:Cash
      paid for income taxes
                
                $
                -
                
                
                $
                -Cash
      paid for interest
                
                $
                37,500
                
                
                $
                -Non-cash
      investing activities:Notes
      payable issued for acquisition of assets
                
                $
                500,000
                
                
                $
                -Common
      stock issued for acquisition of assets
                
                $
                2,502,215
                
                
                $
                -Non-cash
      financing activities:Common
      stock issued for offering expenses
                
                
                -
                
                
                $
                43,927Accrued
      preferred stock dividends
                
                $
                137,889
                
                
                $
                -


See the
accompanying notes to the consolidated financial statements


33


Spicy
Pickle Franchising, Inc.


Notes to
Consolidated Financial Statements




1.
Nature of Business





Spicy
Pickle Franchising, Inc. ("Spicy Pickle" or the "Company”) was organized in the
State of Colorado on January 14, 2003 as a limited liability company and on
September 8, 2006 converted to a corporation. The Company is engaged in the
business of marketing and franchising Spicy Pickle restaurants, which specialize
in fast casual food featuring fresh, made-to-order, premium submarine-style,
deli and Panini sandwiches, salads, soups and soft drinks. Through December 31,
2008, the Company has signed agreements with franchisees to open 102
restaurants. Thirty two of the franchisee-owned restaurants and seven
Company-owned restaurants were open as of December 31, 2008.  The
restaurants are located in 13 states. The Company continues to interview
prospective franchisees and relies on the cash deposits from the franchise sales
as well as royalty fees from the existing stores to support the expenses of the
business.





The
business of each of the Company owned restaurants is operated by a wholly owned
subsidiary.





In
October 2008 the Company, acquired the operating assets of Bread Garden
Franchising, Inc. (“Bread Garden”).  Bread Garden is in the business
of marketing and franchising Bread Garden Urban Cafés, restaurants that also
specialize in fast casual dining.  At December 31, 2008 there were 11
franchised Bread Garden Urban Cafés located in metropolitan Vancouver in British
Columbia, Canada.








2.
Summary of Significant Accounting Policies





The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern.  The
Company incurred a net loss of $5,612,749 for the year ended December 31, 2008
and has incurred significant net losses since inception.





The
Company has been developing its franchise network through the sale of franchises
and through acquisition.  The Company has relied on fund raising and
the sales of new franchises to augment the cash it receives from continuing
royalty payments for its cash flow.  The unanticipated economic
conditions of 2008 resulted in a significant reduction in the sales of new
franchises which has resulted in a significant decrease in the Company’s cash
position.  As soon as it became apparent that the economic downturn
would not correct itself in 2008, the Company significantly reduced its
corporate overhead mostly in the area of personnel cost.





The
Company’s ability to fund its operations will depend on the length of time of
the current economic downturn, its future performance and its ability to
successfully implement its business and growth strategies.  In the
event that the Company needs additional capital and is unable to obtain it, it
could be left without sufficient liquidity.  The nature of the
Company’s business is that a portion of its revenue is a continuing stream from
franchisees.  The Company will continually monitor its expenses and
reduce those expenses as best it can to match the revenue
flow.  Management may elect to raise money during the year ended
December 31, 2009 to meet any shortfalls from operations.  However a
realization of a significant portion of the assets in the accompanying balance
sheet is dependent on the continued operations of the Company, which in turn is
dependent on the increase in sales of new franchises, the number of operating
franchise restaurants, or the additional capital raised through a placement of
its securities.





Principles
of Consolidation


The
accompanying consolidated financial statements include the accounts of the
Company and our wholly owned subsidiaries, SP Broadway, LLC, SP Chicago, LLC,
Crumb Rustic Bakery, LLC, SP Promenade, LLC, SP DU, LLC, SP Federal Heights,
LLC, SP Greenwood, LLC, SP Harmony, LLC, SP College Avenue, LLC, all of which
are established as Colorado limited liability companies, and SPBG Franchising,
Inc., a Canadian corporation.  All material inter-company transactions
and balances have been eliminated in consolidation.





Cash
and Cash Equivalents


The
Company considers all highly liquid investments with an original maturity of
three months or less, at the time of purchase, to be cash
equivalents.




34
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements


Accounts
Receivable


Accounts
receivable consists primarily of amounts billed to franchisees for royalties,
advertising fees, expenses advanced on behalf of the franchisees and expected
rebates from vendors. The Company makes its best estimate of the amounts of
probable credit losses in the Company’s existing accounts receivable and
provides for such loss as an allowance for doubtful accounts.  At December
31, 2008 and at December 31, 2007, the Company estimated an allowance for
doubtful accounts of $70,595.  Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The Company does not have any
off-balance-sheet credit exposure related to its customers.





Inventories


Inventories
are stated at the lower of cost or market, with cost being determined on the
first-in, first-out method. Inventories include food, beverage and supply items
at Company-owned or operated locations.





Property
and equipment


Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
their estimated useful lives or the related reasonably assured lease term. The
estimated useful lives used for financial statement purposes are:





Computer
software and equipment 3 years


Furniture
and fixtures 5 to 7 years


Kitchen
equipment 5 years


Office
equipment 5 years


Leasehold
improvements 5 years





Maintenance
and repairs of property and equipment are charged to operations. Major
improvements are capitalized. Upon retirement, sale or other disposition of
property and equipment, the cost and accumulated depreciation are eliminated
from the accounts and any gain or loss is included in operations.





Goodwill
and Other Intangibles


Intangible
assets include both goodwill and identifiable intangibles arising from the
allocation of the purchase prices of assets acquired. Goodwill represents the
excess of cost over fair value of net assets acquired in various transactions
conducted during 2008.  Other intangibles consist mainly of reacquired
franchise rights.





Goodwill
and other intangible assets with indefinite lives are not subject to
amortization, but are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired.
SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”),
requires a two-step approach for testing impairment. For goodwill, the fair
value of each reporting unit is compared to its carrying value to determine
whether an indication of impairment exists. If impairment is indicated, the fair
value of the reporting unit’s goodwill is determined by allocating the unit’s
fair value to its assets and liabilities (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination.
For intangibles with indefinite lives, the fair value is compared to the
carrying value. The amount of impairment for goodwill and other intangible
assets is measured as the excess of its carrying amount over its fair
value.





As of
December 31, 2008, the Company performed an impairment analysis of the
goodwill and indefinite lived intangibles assets.  For the year ended
December 31, 2008 there was no indication of impairment in goodwill and
indefinite lived intangible assets.





Long-Lived
Assets


In
accordance with the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”), long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment






35
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements




charge is
recognized as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Based on the Company’s analysis, no impairment charges
were recognized for the years ended December 31, 2008 and 2007.





Use
of Estimates


The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.





Concentration
of Credit Risks


Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and trade accounts receivable. The Company’s
receivables are primarily from its franchisees. To the extent our franchisees
face difficult economic conditions, the Company is exposed to a concentration of
credit risk.





The
Company’s cash is primarily in demand deposit accounts placed with federally
insured financial institutions. Such deposit accounts at times may exceed
federally insured limits. However, the Company believes the risk of loss to be
minimal.





Fair
Value Measurements


Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“SFAS 157”), which provides a comprehensive
framework for measuring fair value and expands disclosures which are required
about fair value measurements.  Specifically, SFAS 157 sets forth a
definition of fair value and establishes a hierarchy prioritizing the inputs to
valuation techniques, giving the highest priority to quoted prices in active
markets for identical assets and liabilities and the lowest priority to
unobservable value inputs.  The adoption of this statement had no
impact on the Company’s financial statements.  SFAS 157 defines the
hierarchy as follows:


Level 1 –
Quoted prices are available in active markets for identical assets or
liabilities as of the reported date. The types of assets and liabilities
included in Level 1 are highly liquid and actively traded instruments with
quoted prices, such as equities listed on the New York Stock
Exchange.


Level 2 –
Pricing inputs are other than quoted prices in active markets, but are either
directly or indirectly observable as of the reported date.  The types
of assets and liabilities in Level 2 are typically either comparable to actively
traded securities or contracts, or priced with models using highly observable
inputs.


Level 3 –
Significant inputs to pricing that are unobservable as of the reporting
date.  The types of assets and liabilities included in Level 3 are
those with inputs requiring significant management judgment or estimation, such
as complex and subjective models and forecasts used to determine the fair value
of financial transmission rights.





Revenue
Recognition


Initial
Franchise Fees - The Company enters into franchise agreements, which grant
franchisees the exclusive right to develop and operate businesses at certain
locations. Initial franchise fees are recognized as revenue when all material
services and conditions required to be performed by the Company have been
substantially completed, which is generally when the business commences
operations. Initial franchise fees were established at $45,000 and $35,000 for
the years ended December 31, 2008 and 2007, respectively.  Franchise
fees recognized were $252,500 and $497,500 for the years ended December 31, 2008
and 2007 respectively.





Royalty
Fees - Pursuant to the franchise agreements, franchisees are required to pay
royalties to the Company based on 5% of weekly gross sales as reported to the
Company through the franchisees’ point of sales systems. The royalties are
recognized as revenue in the period corresponding to the sales reporting period.
Royalty fees were $819,489 and $577,334 for the years ended December 31, 2008
and 2007, respectively.





Product
Sales – During the year ended December 31, 2007 the Company sold logo
products to its franchisees. Sales were recognized when products are shipped to
the franchisee. Product sales were $17,411 for the year ended December 31,
2007.  As of December 31, 2008 the Company is using a third party to
provide logo products to its franchisees.





36
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements


Rebates -
Rebates received from purveyors that supply products to the Company's
franchisees are included in Franchise Fees and Royalties. The rebates are
recorded when earned. Rebates that relate to company-owned restaurants are
offset against restaurant cost of sales. Rebates related to franchisees were
$235,305, and $151,020 for the years ended December 31, 2008 and 2007,
respectively.





Restaurant
and Bakery Sales - The Company records revenue from restaurant and bakery sales
upon delivery of the related food and other products to customers, which, in the
case of the bakery, are our franchisees.  There were no bakery sales
in 2007.





Advertising
Costs


Franchisees
must contribute to an advertising fund established by the Company at a rate of
up to 2% for the Spicy Pickle brand and 1.5% for the Bread Garden Urban Café
brand of total franchisee gross sales. The Company, at its discretion, may spend
more or less than actual advertising receipts from the franchises. Advertising
fees collected were $375,477 and $291,881 for the years ended December 31, 2008
and 2007, respectively. These fees are offset against advertising expenses,
which are recognized when incurred. The Company incurred advertising expense of
$828,335 and $443,566 in 2008 and 2007, respectively, including those from the
advertising fund and the Company’s own advertising expenses. The net amounts
reflected in the financial statements are $452,858 and $151,685 in 2008 and
2007, respectively.





Income
Taxes


The
provision for income taxes is determined in accordance with the provisions of
SFAS 109, “Accounting for Income Taxes.” Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted income tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Any effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.





In
June 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, “Accounting for Uncertainties in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes” (“FIN 48”).
FIN 48 prescribes a comprehensive model for how companies should recognize,
measure, present, and disclose in their financial statements uncertain tax
positions taken or expected to be taken on a tax return. Under FIN 48, tax
positions must initially be recognized in the financial statements when it is
more likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions must initially and subsequently be measured as
the largest amount of tax benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and relevant facts. FIN 48 is effective for fiscal
years beginning after December 15, 2006.





FIN 48
became effective for the Company on January 1, 2007. The cumulative effect of
adopting FIN 48 on January 1, 2007 has been recorded net in deferred tax
assets, which resulted in no FIN 48 liability on the balance sheet. The total
amount of unrecognized tax benefits as of the date of adoption was zero. There
are open statutes of limitations for taxing authorities in federal and state
jurisdictions to audit the Company’s tax returns from 2006 through the current
period. The Company’s policy is to account for income tax related interest and
penalties in income tax expense in the statement of operations. There have been
no income tax related interest or penalties assessed or recorded. Because the
Company has provided a full valuation allowance on all of its deferred tax
assets, the adoption of FIN 48 had no impact on the Company’s effective tax
rate.





37
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





Rent
Expense


The
Company recognizes rent expense on a straight-line basis over the reasonably
assured lease term as defined in SFAS No. 98, "Accounting for Leases.'' In
addition, certain of the Company's lease agreements provide for scheduled rent
increases during the lease terms or for rental payments commencing at a date
other than the date of initial occupancy. Beginning January 1, 2006, the Company
adopted FASB Staff Position (“FSP”) No. FAS 13-1, "Accounting for Rental Costs
Incurred During a Construction Period'' ("FSP 13-1''). FSP 13-1 states that
rental costs associated with operating leases must be recognized as rental
expense allocated on a straight-line basis over the lease term, which includes
the construction period.  Deferred rent expense at December 31, 2008
was $93,052 and will be charge to rent expense over the life of the leases to
which it relates.





The
Company includes any rent escalations and construction period and other rent
holidays in its determination of straight-line rent expense. Therefore, rent
expense for new locations is charged to expense beginning with the start of the
construction period.





Equity-Based
Compensation


On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on estimated fair values. SFAS
123(R) supersedes our previous accounting under Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees”. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of
SAB 107 in our adoption of SFAS 123(R).





The
Company has adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006, the first day of our fiscal year 2006. Our financial statements as of
and for the year ended December 31, 2007 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, the Company’s
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R). Stock-based compensation expense
recognized under SFAS 123(R) for the years ended December 31, 2008 and 2007 was
$840,395 and $403,368, respectively, which consisted of stock-based compensation
expense related to employee stock options.





SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our statement of operations. Prior
to the adoption of SFAS 123(R), the Company had no stock-based compensation
awarded to employees and directors.





Upon
adoption of SFAS 123(R), the Company used the Black-Scholes option-pricing model
(“Black-Scholes model”) to determine fair value. The determination of fair value
of share-based payment awards on the date of grant using an option-pricing model
is affected by the Company’s stock price as well as assumptions regarding a
number of highly complex and subjective variables. These variables include, but
are not limited to, our expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors.
Although the fair value of employee stock options is determined in accordance
with SFAS 123(R) and SAB 107 using an option-pricing model, that value may not
be indicative of the fair value observed in a willing buyer/willing seller
market transaction.





The
weighted average fair value of options granted during 2008 of $0.168 was
estimated on the grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions: expected volatility of 43.18%,
expected term of 2.5 years, risk-free interest rate of 2.4% and no expected
dividend yield.





The
weighted average fair value of options granted during 2007 of $0.222 was
estimated on the grant date using the Black-Scholes option-pricing model with
the following assumptions: expected volatility of 41.66%, expected term of 2.5
years, risk-free interest rate of 5.9%, and expected dividend yield of
0%.





38


Spicy
Pickle Franchising, Inc.


Notes to
Consolidated Financial Statements







Foreign
Currency Transactions


Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the date of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of
operations.





The
reporting currency of the Company is the United States dollars (“U.S. dollars”)
and the accompanying consolidated financial statements have been expressed in
U.S. dollars. In addition, one of the Company’s operating subsidiaries in
Canada maintains their books and record in their local currency,
Canadian dollars, which are the functional currency of the economic
environment in which their operations are conducted.





Assets
and liabilities of the subsidiary whose functional currency is not the U.S.
dollars are translated into US dollars, in accordance with SFAS No 52, “Foreign
Currency Translation”, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements
of foreign subsidiary is recorded as a separate component of accumulated other
comprehensive income within the statement of stockholders’ equity.





Comprehensive
Income


SFAS
No. 130, “Reporting Comprehensive Income”, establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income as defined includes all changes in equity during
a period from non-owner sources. Accumulated comprehensive income, as presented
in the accompanying consolidated statement of stockholders’ equity consists of
changes in unrealized gains and losses on foreign currency translation. This
comprehensive income is not included in the computation of income tax expense or
benefit.





Recent
Pronouncements


The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R will change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will change the
accounting treatment and disclosure for certain specific items in a business
combination. SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following
existing GAAP until January 1, 2009. The Company expects SFAS 141R will have an
impact on accounting for business combinations once adopted, but the effect is
dependent upon acquisitions at that time.





In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51" (“SFAS 160"). SFAS
160 establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
is effective for fiscal years beginning on or after December 15, 2008. The
Company believes that SFAS 160 should not have a material impact on our
financial position or results of operations.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's future
financial position or results of operations.





39
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements


In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS 163").
SFAS 163 interprets Statement 60 and amends existing accounting pronouncements
to clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ended December 31,
2009. The Company is currently evaluating the impact of SFAS 163 on its
financial statements but does not expect it to have an effect on the Company's
financial position or results of operations.





Also in
May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt
securities that, upon conversion, may be settled by the issuer fully or
partially in cash. FSP APB 14-1 specifies that issuers of such instruments
should separately account for the liability and equity components in a manner
that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14-1 is effective for
financial statements issued for fiscal years after December 15, 2008, and must
be applied on a retrospective basis. Early adoption is not permitted. The
Company does not expect it to have an effect on the Company's financial position
or results of operations.





In June
2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF
03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting, and
therefore need to be included in the earnings allocation in computing earnings
per share under the two-class method as described in SFAS No. 128, Earnings per
Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings-per-share pursuant to the two-class method. FSP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and all prior-period earnings per share data presented
shall be adjusted retrospectively. Early application is not permitted. The
Company does not expect it to have an effect on the Company's financial position
or results of operations.





Also in
June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5").
EITF 07-5 provides that an entity should use a two-step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Early application is not
permitted. The Company is assessing the potential impact of this EITF 07-5 on
the financial condition and results of operations and does not expect it to have
an effect on the Company's financial position or results of
operations.





In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (“FSP FAS 133-1” and “FIN 45-4”). FSP 133-1 and FIN 45-4
amends disclosure requirements for sellers of credit derivatives and financial
guarantees and also clarify the disclosure requirements of SFAS
161.  FSP 133-1 and FIN 45-5 are effective for quarterly periods
beginning after November 15, 2008, and fiscal years that include those periods.
The adoption of FSP 133-1 and FIN 45-4 did not have a material impact on the
Company’s current financial position or results of operation.





40


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements




3.
Property and Equipment





Major
classes of property and equipment consist of the following:





2008
                  
                  
                  2007Computer
      software and equipment
                  
                  $
                  161,860
                  
                  
                  $
                  86,643Furniture
      and fixtures
                  
                  
                  296,056
                  
                  
                  
                  47,753Office
      equipment
                  
                  
                  26,681
                  
                  
                  
                  26,344Leasehold
      improvements
                  
                  
                  1,153,294
                  
                  
                  
                  392,994Kitchen
      equipment
                  
                  
                  533,862
                  
                  
                  
                  147,548Vehicles
                  
                  
                  17,340
                  
                  
                  
                  17,340Construction
      in progress
                  
                  
                  41,186
                  
                  
                  
                  35,3032,230,279
                  
                  
                  
                  753,926Less:
      accumulated depreciation
                  
                  
                  (332,640
                  )
                  
                  
                  (68,175
                  )$
                  1,897,639
                  
                  
                  $
                  685,751





The
Company recorded depreciation expense related to these assets of $285,602 and
$26,620 in 2008 and 2007, respectively.








4.
Business Combinations





In 2008
the Company made an investment in an existing franchised restaurant, purchased
the assets of four existing franchised restaurants and acquired the assets of an
existing franchisor in an effort to expand its operations in the Spicy Pickle
brand and to franchise another branded concept, Bread Garden Urban Cafés, in the
fast casual restaurants industry.





On
February 5, 2008, the Company acquired from a franchisee a 60% ownership
interest in an existing franchised restaurant operating in Ft. Collins,
Colorado.  The Company paid an aggregate of $120,000 for its interest,
which included the repayment of a $119,400 note owed by the previous owner to a
third party.  The results of the operations have been included in the
consolidated financial statements beginning at the acquisition date. The
aggregate value ascribed to the assets acquired including minority interest of
$80,000 at the purchase date is as follows:





At
February 5, 2008:





Current
      assets
                  $
                  14,900Property
      and equipment
                  
                  120,718Lease
      deposits
                  
                  7,200Goodwill
                  
                  57,182Total
      and net assets acquired
                  $
                  200,000





Goodwill
consists of the excess of the purchase price over the fair value of the net
assets acquired in connection with this acquisition.  Subsequent to
the date of purchase an additional $2,572 was added to goodwill for acquisitions
costs.





Subsequent
to the acquisition of the minority interest in the franchised restaurant an
amount of $28,045 which was owed to the Company by the franchisee was converted
to additional equity thereby reducing the minority interest.





On
February 21, 2008, the Company acquired substantially all of the assets,
including lease assignments, of an existing franchise restaurant location in
Chicago, Illinois from a franchisee.  No liabilities were assumed in
the






41


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements






transaction.
The results of the operations have been included in the consolidated financial
statements since November 2007 pursuant to an operating agreement. The aggregate
purchase price of $157,300 was paid in cash and allocated in full to property
and equipment and lease deposit.  No goodwill was recorded as a result
of the transaction.





On March
1, 2008, the Company acquired substantially all of the assets, including lease
assignments, of three existing franchise restaurant locations in Colorado from a
franchisee.  No liabilities were assumed in the transaction. The
results of these operations have been included in the consolidated financial
statements since that date.  The acquisition will permit the Company
to expand its presence in its home location and is expected to increase sales
volume at the acquired locations.  Additionally, the expansion of the
company-owned restaurant base will demonstrate to potential franchisees and
investors the Company’s commitment to overall Company growth.  The
Company also expects to reduce costs through economies of scale.





The
aggregate purchase price was $844,310, including $344,310 of cash and three-year
notes aggregating $500,000 with interest at 10% per year payable
monthly.  Additional consideration may be required if aggregate annual
sales for the locations exceed $1,425,000 at a rate of 6% of any such excess
through February 28, 2011.  Any additional consideration will be
expensed as paid.  The following table summarizes the estimated fair
values of the assets acquired at the date of acquisition.





At March
1, 2008:





Current
      assets
                        
                        $
                        21,410Property,
      and equipment
                        
                        
                        498,785Lease
      deposits
                        
                        
                        8,290Other
      intangible assets
                        
                        
                        55,000Goodwill
                        
                        
                        260,825Total
      and net assets acquired
                        
                        $
                        844,310










Other
intangible assets consist of reacquired franchise rights assumed in connection
with this acquisition and were recorded in accordance with the provisions of
EITF No. 04-1.





Goodwill
consists of the excess of the purchase price over the fair value of the net
assets acquired in connection with this acquisition.





On
October 1, 2008, the Company acquired all of the operating assets of Bread
Garden, a company which franchises fast casual restaurants under the trade name
Bread Garden Urban Café.  Bread Garden currently has 11 franchised
locations in the Vancouver, British Columbia, Canada metropolitan
area.  The assets were acquired in exchange for 5,177,500 restricted
shares of the registrant’s common stock and warrants to purchase 3,038,750
shares of the registrant’s common stock, 2,700,000 are exercisable at $0.63 per
share and 338,750 are exercisable at $0.615 per share.  The warrants
are exercisable for five years.  Certain of the shares and warrants
are subject to a lock-up agreement.  Pursuant to the lock-up
agreement, 4,500,000 shares of the common stock and 2,700,000 of the warrants
issued pursuant to the Asset Purchase Agreement, cannot be sold, transferred or
otherwise disposed of for a period of one year from the effective date of the
closing.  The remaining 677,500 common shares and 338,750 warrants are
not covered by the lock-up agreement and are only subject to the restriction of
the Securities and Exchange Commission rules and regulations for unregistered
securities.





The
following table summarizes the estimated fair values of the assets acquired at
the date of acquisition.







42
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





At
October 1, 2008:





Property,
      and equipment
                    
                    $
                    52,175Lease
      deposits
                    
                    
                    7,702Goodwill
                    
                    
                    2,538,882Total
      and net assets acquired
                    
                    $
                    2,598,759










Goodwill
consists of the excess of the purchase price over the fair value of the net
assets acquired in connection with this acquisition.





As of
December 31, 2008 the purchase price allocation of the acquisition of this
restaurant’s operations is preliminary dependent on finalization of the
Company’s valuation assessment in accordance with SFAS No. 141, “Business
Combinations.”





The
proforma unaudited results of operations for the years ended December 31, 2008
and 2007, assuming that the acquisitions had occurred at the beginning of each
period presented, would be as follows:





2008
                  
                  
                  2007Revenue
                  
                  $
                  4,803,224
                  
                  
                  $
                  3,462,268Net
      loss attributed to common shareholders
                  
                  $
                  (5,810,697
                  )
                  
                  $
                  (3,430,300
                  )Loss
      per share
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.8
                  )





The
$2,859,461 of aggregate goodwill recognized in all of the acquisitions was
assigned to the franchise operations segment and the restaurant operations
segment in the amounts of $2,538,882 and $320,579, respectively.  The
total amount is expected to be deductable over a fifteen year period for tax
purposes.








5.
Commitments and Contingencies





The
Company leases office space, as well as restaurant locations, under
non-cancelable operating leases, which expire through 2018.





The
aggregate minimum requirements under non-cancelable leases as of December 31,
2008 are as follows:








2009
                        
                        $
                        458,7432010
                        
                        
                        435,4472011
                        
                        
                        417,0912012
                        
                        
                        378,3692013
                        
                        
                        351,734Later
      years
                        
                        
                        876,358$
                        2,917,742





Rent
expense for the years ended December 31, 2008 and 2007 was $529,465 and
$146,039, respectively.








43


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





6.
Stockholders’ Equity





The
Company is authorized to issue two hundred million (200,000,000) shares of
common stock, par value $0.001. At December 31, 2008, the Company has reserved
7,417,500 shares of common stock for issuance upon exercise of awards granted
under the Company’s 2006 Stock Option Plan (Note 10).





The
Company also is authorized to issue twenty million (20,000,000) shares of
preferred stock, $0.001 par value. The Board of Directors of the Company is
authorized to provide for the issuance of shares of preferred stock in one or
more classes or series and to fix the designation, powers, preferences and
rights of shares to be included in each such class or series. Each such class or
series of preferred stock shall have such voting power as shall be authorized by
the Board of Directors.





The
Company filed a registration statement with the United States Securities and
Exchange Commission (“SEC”) that became effective during January 2007. The
registration statement covered 8,240,000 common shares of the Company held by
shareholders. The Company has not received and will not receive any proceeds
from the sales of these shares by the selling shareholders. In addition, the
Company registered 10,000,000 common shares to be sold by the Company, and the
Company received the proceeds from such sales.  As of December 31,
2007, the Company had sold 4,352,780 of such shares at a price of $.40 per share
for gross proceeds of $1,741,112, less offering expenses of $162,361, for net
proceeds of $1,578,751.  The offering was terminated November 15,
2007.





The
Company completed a private equity financing of $5,992,500 on December 14, 2007,
with 14 accredited investors.  Net proceeds from the offering were
approximately $5,623,000.  The Company issued 705 shares of its Series
A Variable Rate Convertible Preferred Stock, par value $0.001 per share and
stated value of $8,500 per share (the “Series A Preferred Stock”). Each share of
the Series A Preferred Stock is immediately convertible into 10,000 shares of
the Company’s $.001 par value common stock.  This conversion rate
implies a discount to the fair value of the common stock of $.26 per share
($1,833,000), which amount will be recorded by the Company $1,350,221 as a
current dividend on the Series A Preferred Stock with an additional dividend of
$482,779 recorded ratably over a 45-day period immediately subsequent to
December 31, 2007.  During the year ended December 31, 2008 56 shares
of the Series A Preferred Stock were converted into 561,194 shares of the
Company’s $.001 par value common stock.





Additionally,
the Company shall pay each holder of Series A Preferred Stock cumulative
dividends at a rate per share of 5% per annum until the second anniversary of
the original issue date, 7.5% per annum from the second anniversary of the
original issue date until the third anniversary of the original issue date, and
14% per annum thereafter, payable semi-annually on January 1 and July 1,
beginning on July 1, 2008, and upon conversion or redemption of the Series A
Preferred Stock. Such dividends are payable in cash or, at the Company’s option,
in shares of common stock or a combination thereof.  The dividend on
the Series A Preferred stock for the year ended December 31, 2008 was
$298,485.  Subsequent to December 31, 2008 the Company issued 798,555
shares of its $.001 par value common stock in settlement of $135,035 of the
accrued dividend at December 31, 2008 and cash of $2,854.





The terms
of the Series A Preferred Stock include certain “Non-Cash Redemption Triggering
Events” that may be considered to be outside of the control of the Company that
would, if occurring and elected by the investor, require the Company to (a)
redeem all of the Series A Preferred Stock then held by the investors for a
redemption price, in shares of common stock, equal to a number of shares of
common stock equal to the stated redemption amount divided by 75% of the average
of the 10 daily volume weighted average price calculations (“VWAPs”) immediately
prior to the date of redemption election or (b) increase the dividend rate on
all of the outstanding Series A Preferred Stock held by the investor to 18% per
annum thereafter.





Additionally,
the investors received warrants to purchase an aggregate of 5,287,500 shares of
the Company’s $.001 par value common stock at an exercise price of $1.60 per
share. Should the warrants be exercised in full, the Company would receive
additional proceeds from the offering of $8,460,000.





The
warrants that each investor received as a result of the Series A Preferred Stock
financing are exercisable immediately at an exercise price of $1.60 per
share.  The Company was obligated to register the common shares






44


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements






underlying
the warrants within 180 days of the closing date in order to avoid cash
penalties which could amount to an aggregate of $719,100.  The Company
completed the registration of the shares during February 2008.  No warrants
were exercised during the year ended December 31, 2008.





The
Company has determined the fair value of the warrants as of the issuance date.
The Company used the Black-Scholes option-pricing model with the following
assumptions: an expected life equal to half of the contractual term of the
warrants, no dividends, a risk free rate of 5.5%, and volatility of 39%. Under
the assumptions, the Black-Scholes option pricing model yielded an aggregate
fair value of approximately $952,500.  A portion of this amount
($821,872) has been allocated to Common Stock Warrants in the accompanying
balance sheet based upon the percentage relationship of the warrant fair value
to the total fair value of the offering multiplied by the gross proceeds of the
offering.





In
connection with this financing, the Company paid cash compensation to a
placement consultant in the amount of $369,500 and issued it 288,400 placement
consultant warrants (fair value $51,953), exercisable at $1.60 per share for a
period of five years from the date of issue.  Also, the placement
consultant may be entitled to 216,300 additional warrants based on subsequent
exercise of warrants by certain investors. The fees were recorded as a cost of
capital.





Proceeds
were used during 2008 for the acquisition and /or internal development of eight
Company owned restaurant locations, the bakery facility and to fund working
capital requirements.





In
addition, the Company issued 80,000 shares and 2,284,818 shares of common stock
to non-employees for services rendered during 2008 and 2007, respectively.
The Company recorded the shares at their fair value at the issue dates with fair
value determined to be equivalent to the then-current market
price.  For the year ended December 31, 2008 the fair value of the
shares amounted to an aggregate of $70,000 which was recorded as deferred
compensation.  For the year ended December 31, 2007 the fair value of
the shares amounted to an aggregate of $1,067,500 of which $196,208 has been
recorded as current expenses for consulting services with the remaining balance
of $871,292 recorded as deferred compensation costs. All of the deferred
compensation was amortized to expense during 2008.





During
the year ended December 31, 2008, holders of 82,500 common stock purchase
options issued pursuant to Company’s 2006 Stock Option Plan (see Note 10)
exercised their options, pursuant to which the Company issued 82,500 shares of
common stock resulting in $25,500 of proceeds to the Company.








7.
Earnings Per Share Data




Earnings
per share is based on the weighted average number of shares outstanding during
the period after consideration of the dilutive effect, if any, for common stock
equivalents, including stock options, restricted stock, and other stock-based
compensation. Earnings per common share are computed in accordance with SFAS No.
128 "Earnings Per Share,'' which requires companies to present basic earnings
per share and diluted earnings per share. Basic earnings per share are computed
by dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share are computed by
dividing net income by the weighted average number of shares of common stock
outstanding and dilutive securities outstanding during the year. At December 31,
2008 and 2007, any equivalents would be anti-dilutive as the Company had losses
for the years then ended.








8.
Income Taxes




The
Company accounts for income taxes under SFAS 109, which requires the use of the
liability method. SFAS 109 provides that deferred tax assets and liabilities are
recorded based on the differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred tax assets and liabilities at the
end of each period are determined using the currently enacted tax rates applied
to taxable income in the periods in which the deferred tax assets and
liabilities are expected to be settled or realized.





45
 
 Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements


Income
tax provision (benefit) for the year ended December 31, 2008 and 2007 is
summarized below:


2008
                    
                    
                    2007Current:Federal
                    
                    $
                    -
                    
                    
                    $
                    -State
                    
                    
                    -
                    
                    
                    
                    -Total
      current
                    
                    
                    -
                    
                    
                    
                    -Deferred:Federal
                    
                    
                    (1,606,000
                    )
                    
                    
                    (1,053,000
                    )State
                    
                    
                    (249,000
                    )
                    
                    
                    (163,000
                    )Total
      deferred
                    
                    
                    (1,855,000
                    )
                    
                    
                    (1,216,000
                    )Increase
      in valuation allowance
                    
                    
                    1,855,000
                    
                    
                    
                    1,216,000Total
      provision
                    
                    $
                    -
                    
                    
                    $
                    -





The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences are as follows:





2008
                  
                  
                  2007Income
      tax provision at the federal statutory rate
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %State
      income taxes, net of federal benefit
                  
                  
                  3.3
                  %
                  
                  
                  3.3
                  %Effect
      of net operating loss
                  
                  
                  (37.3
                  %)
                  
                  
                  (37.3
                  %)0.0
                  %
                  
                  
                  0.0
                  %





Components
of the net deferred income tax assets at December 31, 2008 and 2007 were as
follows:





Deferred
      tax assets:
                  
                  2008
                  
                  
                  2007Net
      operating loss carryovers
                  
                  $
                  3,051,000
                  
                  
                  $
                  1,299,000Taxable
      deferred franchise fees
                  
                  
                  238,000
                  
                  
                  
                  130,000Other
                  
                  
                  9,000
                  
                  
                  
                  14,000Valuation
      allowance
                  
                  
                  (3,298,000
                  )
                  
                  
                  (1,443,000
                  )$
                  -
                  
                  
                  $
                  -





SFAS 109
requires a valuation allowance to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $3,298,000 allowance at December 31, 2008 is necessary to
reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$1,855,000.





As of
December 31, 2008, the Company has a net operating loss carry forward of
approximately $8,150,000. This loss will be available to offset future taxable
income. If not used, this carry forward will expire as follows:





2026
                      
                      $
                      619,0002027
                      
                      $
                      2,807,0002028
                      
                      $
                      4,724,000








46


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





9.
Related Party Transactions





Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.





The
Company rents a suite at a local events center from a partnership in which an
officer and member of the Company is a partner. The partnership passed through
the rent at the same rate it paid to the event center owner. The booth is used
primarily for marketing entertainment purposes. The amounts charged to expense
were $75,641 and $75,197 for the years ended December 31, 2008 and 2007,
respectively.





In
December 2008 two members of the Board of Directors granted the Company a line
of credit which expires January 31, 2010.  The line of credit is for
an aggregate of $550,000 and bears interest at a rate of one percent above the
prime rate and is secured by certain assets of the Company.  At
December 31, 2008 the interest rate on the borrowings was 4.25% and balance
outstanding was $100,000.





10.
Stock-Based Compensation





In
October 2006, the Company’s Board of Directors adopted the 2006 Stock Option
Plan (“2006 Plan”), which was approved by the Company’s stockholders the same
month. The 2006 Plan provides for the grant of up to 7,500,000 shares of the
Company’s common stock (subject to certain adjustments in the event of stock
splits or other similar events) as incentive stock options. The Company’s Board
of Directors has delegated authority to grant awards under the 2006 Plan to the
Company’s Compensation Committee.





A summary
of stock option activity under the Company’s stock-based compensation plan is
set forth below:





Weighted AverageWeighted
                
                
                RemainingAverage
                
                
                Contractual Term
                
                
                AggregateOptions
                
                
                Exercise Price
                
                
                (in
      years)
                
                
                Intrinsic ValueOutstanding
      January 1, 2007
                
                
                100,000
                
                
                $
                0.25
                
                
                
                
                
                $
                7,590Granted
                
                
                3,960,000
                
                
                $
                0.78
                
                
                
                
                
                
                893,796Exercised
                
                
                -Cancelled
                
                
                -Outstanding
      December 31, 2007
                
                
                4,060,000
                
                
                $
                0.76
                
                
                
                4.80
                
                
                
                901,386Granted
                
                
                3,060,000
                
                
                $
                0.65
                
                
                
                4.49
                
                
                
                515,232Exercised
                
                
                82,500
                
                
                $
                0.31
                
                
                
                
                
                
                
                7,997Cancelled
                
                
                891,250
                
                
                $
                0.98
                
                
                
                
                
                
                
                260,581Outstanding
      December 31, 2008
                
                
                6,146,250
                
                
                $
                0.67
                
                
                
                4.02
                
                
                $
                1,148,040Exercisable
      December 31, 2008
                
                
                5,532,500
                
                
                $
                0.65
                
                
                
                4.01
                
                
                $
                1,060,771





The
following table summarizes information concerning outstanding and exercisable
options at December 31, 2008:





Options Outstanding
                                    Options ExercisableRange of
      Exercise Price
                                    Number
      Outstanding
                                    Weighted
      Average Remaining Contractual Life
                                    Weighted
      Average Exercise Price
                                    Number
      Exercisable
                                    Weighted
      Average Exercise Price$.25
      - $1.29
                                    6,146,250
                                    4.02
                                    $0.67
                                    5,532,500
                                    $0.65








47


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





11.
Business Segment information





The
Company operates in three business segments. The Company Restaurant Operations
segment is comprised of restaurants owned by the Company.  The
company-owned restaurants conduct business under the Spicy Pickle name. These
restaurants specialize in fast casual dining featuring fresh, made-to-order,
premium submarine, deli and panini sandwiches, salads, soups and soft drinks.
Information for this segment for the year ended December 31, 2008 includes the
operating activities of eight company-owned restaurants.





The
Bakery Operations segment is comprised of the operating activities of a bakery
located at one of the Company’s Denver restaurants, which supplies breads and
other bakery products for Company and franchisee-owned locations in
Colorado.





The
Franchise Operations segment is comprised of the operating activities of the
franchise business unit, which licenses qualified operators to conduct business
under the Spicy Pickle name or the Bread Garden name, and also of the costs to
monitor the operations of these restaurants. Under the terms of the agreements,
the licensed operators pay royalties and fees to the Company in return for the
use of the Spicy Pickle or the Bread Garden name as the case may
be.





The
following table sets forth certain restaurant data relating to company-owned and
franchise-operated restaurants:





2008
                  
                  
                  2007Number
      of restaurants:Company-owned:Beginning
      of period
                  
                  
                  1
                  
                  
                  
                  -Restaurants
      opened (includes 4 restaurants converted from franchise owned to
      company owned)
                  
                  
                  7
                  
                  
                  
                  1Restaurants
      sold
                  
                  
                  (1
                  )
                  
                  
                  -End
      of period
                  
                  
                  7
                  
                  
                  
                  1Franchise-operated:Beginning
      of period
                  
                  
                  35
                  
                  
                  
                  16Restaurants
      opened
                  
                  
                  5
                  
                  
                  
                  19Restaurants
      closed (includes 4 restaurants converted from franchise owned to
      company owned)
                  
                  
                  (8
                  )
                  
                  
                  -End
      of period
                  
                  
                  32
                  
                  
                  
                  35System-wide:Beginning
      of period
                  
                  
                  36
                  
                  
                  
                  16Restaurants
      opened (net of conversions from company owned to
      franchised)
                  
                  
                  7
                  
                  
                  
                  20Restaurants
      closed
                  
                  
                  (4
                  )
                  
                  
                  -End
      of period
                  
                  
                  39
                  
                  
                  
                  36





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2). In 2008 the Company’s
bakery segment had sales to the restaurant segment in the amount of
$112,594.  There were no inter-segment sales in
2007.  Management has determined that the Company’s reportable
segments are strategic business units that offer different products and
services.





48


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





Segment
information related to the Company's three business segments
follows:





2008
                  
                  
                  2007Revenues:Company
      restaurant operations
                  
                  $
                  2,756,276
                  
                  
                  $
                  (119,764
                  )Franchise
      operations
                  
                  
                  354,075
                  
                  
                  
                  -Franchise
      operations
                  
                  
                  1,307,295
                  
                  
                  
                  (3,515,335
                  )Total
      revenues
                  
                  $
                  4,417,646
                  
                  
                  $
                  (3,635,099
                  )Segment
      profit (loss)Company
      restaurant operations
                  
                  $
                  (560,713
                  )
                  
                  $
                  102,615Bakery
      operations
                  
                  
                  (64,254
                  )
                  
                  
                  -Franchise
      operations
                  
                  
                  (4,985,734
                  )
                  
                  
                  1,200,608Total
      profit (loss)
                  
                  $
                  (5,610,701
                  )
                  
                  $
                  1,303,223





Segment
      assets:Company
      restaurant operations
                
                $
                2,014,714
                
                
                $
                625,874Bakery
      operations
                
                
                372,146
                
                
                
                -Franchise
      operations
                
                
                3,178,330
                
                
                
                5,814,185Total
      segment assets
                
                $
                5,565,190
                
                
                $
                6,440,059





Segment
      liabilities:Company
      restaurant operations
                
                $
                1,484,406
                
                
                $
                102,615Bakery
      operations
                
                
                24,793
                
                
                
                -Franchise
      operations
                
                
                832,727
                
                
                
                1,200,608Total
      segment liabilities
                
                $
                2,341,926
                
                
                $
                1,303,223





Depreciation
      and amortization (included in segment profit (loss):Company
      restaurant operations
                
                $
                216,495
                
                
                $
                3,876Bakery
      operations
                
                
                39,652
                
                
                
                -Franchise
      operations
                
                
                29,455
                
                
                
                22,744Total
      depreciation and amortization
                
                $
                285,602
                
                
                $
                26,620





Capital
      expenditures:Company
      restaurant operations
                
                $
                994,025
                
                
                $
                561,761Bakery
      operations
                
                
                261,240
                
                
                
                -Franchise
      operations
                
                
                2,591,298
                
                
                
                22,628Total
      capital expenditures
                
                $
                3,846,563
                
                
                $
                584,389





49


Spicy
Pickle Franchising, Inc.
 Notes to
Consolidated Financial Statements





The
Company operates in the United States of America and Canada.  In
respect of geographical segment reporting, revenues and total assets are based
on the country where the operations are conducted.





Geographic
      Revenues:United
      States of America
                
                $
                4,256,612
                
                
                $
                1,273,993Canada
                
                
                74,861
                
                
                
                -Total
      Revenues
                
                $
                4,331,473
                
                
                $
                1,273,993Geographic
      assets:United
      States of America, including goodwill of $320,579
                
                $
                2,952,456
                
                
                $
                6,440,059Canada,
      including goodwill of $2,538,882
                
                
                2,612,734
                
                
                
                -Total
      assets
                
                $
                5,565,190
                
                
                $
                6,440,059








Note
12. Sales of Assets





In
December 2008 the Company sold all of the operating assets of one of its
restaurants to a new franchisee for approximately $116,000, paid with $81,000 in
cash and a note in the amount of $35,000.  The note is payable in ten
installment of $3,500 plus accrued interest on the unpaid principal at a rate of
8% per annum.  The note will be fully paid during 2009.  The
Company recognized a loss on the sale of approximately $32,000.








50


Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure





On
November 1, 2008, Gordon, Hughes & Banks, LLP (“GH&B”) resigned as our
independent registered public accounting firm.  GH&B recently
entered into an agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to
which Eide Bailly acquired the operations of GH&B and certain of the
professional staff and shareholders of GH&B joined Eide Bailly either as
employees or partners of Eide Bailly and will continue to practice as members of
Eide Bailly.  Concurrent with the resignation of GH&B, we, through
and with the approval of our Audit Committee, engaged Eide Bailly as our
independent registered public accounting firm.





During
our two most recent fiscal years and the period through November 1, 2008, there
were no disagreements with GH&B on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of GH&B, would have
caused it to make reference to the subject matter of the disagreements in
connection with its report.  Further, there were no reportable events
as described in Item 304(a)(1)(v) of Regulation S-K occurring from during our
two most recent fiscal years and the period through November 1,
2008.







During
the period prior to the engagement of Eide Bailly, neither we nor anyone on our
behalf consulted Eide Bailly regarding the application of accounting principles
to a specific completed or contemplated transaction, the type of audit opinion
that might be rendered on our financial statements, or any matter that was
either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a reportable event as described in Item 304(a)(1)(v) of
Regulation S-K.  Further, Eide Bailly has not provided written or oral
advice to us that was an important factor considered by us in reaching a
decision as to any accounting, auditing or financial reporting
issues.





We
provided a copy of the foregoing disclosures to GH&B prior to the date of
the filing of our report on Form 8-K and requested that GH&B furnish us with
a letter addressed to the Securities and Exchange Commission stating whether or
not it agreed with the statements in that report. A copy of the letter furnished
in response to that request was filed as an exhibit to the Form
8-K.








Item
9A(T).  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





We have
established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify our financial reports and to other
members of management and the Board of Directors. Based on their evaluation as
of December 31, 2008, our Chief Executive Officer (the “CEO”) and Chief
Financial Officer (the “CFO”) have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) are effective in ensuring that the information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms and that such information is accumulated and communicated to our
management, including our CEO and our CFO, as appropriate to allow timely
decisions regarding required disclosure.





Internal
Control over Financial Reporting





(a)
Management’s annual report on
internal control over financial reporting.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed under the supervision of our CEO and CFO to provide
reasonable assurance regarding the reliability of financial reporting and
preparation of our financial statements for external purposes in accordance with
generally accepted accounting principles.





As of
December 31, 2008, management assessed the effectiveness of our internal
control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based






51




on that
assessment, management determined that we maintained effective internal control
over financial reporting as of December 31, 2008, based on those
criteria.





Because
of its inherent limitations, our internal control over financial reporting may
not prevent or detect misstatements. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this annual report.





(b)
Changes in internal control over financial reporting.





There
were no changes in our internal control over financial reporting that occurred
during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.








Item
9B.  Other Information





None.


52


PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance





Our
executive officers and directors are as follows:




Name
                
                Age
                
                PositionMarc
      N. Geman
                
                63
                
                Chairman
      and Chief Executive OfficerAnthony
      S. Walker
                
                36
                
                Director
      and Chief Operating OfficerKevin
      Morrison
                
                43
                
                Chief
      Culinary OfficerArnold
      Tinter
                
                63
                
                Chief
      Financial OfficerRaymond
      BonAnno
                
                68
                
                DirectorPresley
      Reed
                
                62
                
                Director








Background of Officers and Directors





Marc N. Geman - Mr. Geman is
our Chief Executive Officer and Chairman of the Board of Directors of our
Company. Mr. Geman has held these positions since our formation in January 2003.
From 1994 to 1998, he was president of Pretzelmaker Holdings, Inc., a national
franchisor of soft pretzels. From May 2001 to May 2003, Mr. Geman was the Chief
Executive Officer and a director of Bayview Technology Group, LLC (“Bayview”), a
company that manufactured and developed energy-efficient products. From May 2003
until October 2003, Mr. Geman was the Chairman of Bayview. From July 2003 until
December 2004, he was a consultant to the purchaser of Bayview. Mr. Geman was a
founder and Chief Executive Officer of Portfolio Management Consultants, Inc.,
an investment advisory firm managing assets for high net worth individuals from
1990 to 1995. Mr. Geman has been a licensed attorney since 1973.





Anthony S. Walker - Mr. Walker
is our Chief Operating Officer and has been a director since our inception in
January 2003. Together with Mr. Morrison, he is a co-founder of the concept that
in August 1999 started operating Spicy Pickle Restaurants in Denver, Colorado.
From 1996 until 1999, Mr. Walker was a chef at the Barolo Grill, a fine dining
restaurant in Denver, Colorado. Mr. Walker has been recognized in magazines such
as The New York Times, Cucina Italiana and Nations Restaurant News.




Kevin Morrison - Mr. Morrison
is our Chief Culinary Officer; he has held a senior management position since
our inception in January 2003. In 1999, Mr. Morrison co-founded the Spicy Pickle
concept with Mr. Walker and opened the first Spicy Pickle restaurant in 1999, in
Denver, Colorado. From 1995 through 2000, Mr. Morrison also owned and operated a
wholesale food distribution business, Red Tomato Specialty Produce. Mr. Morrison
also has served as chef di cuisine of Vinci Restaurant in Chicago and sous chef
at the Barolo Grill in Denver.




ArnoldTinter - Mr. Tinter has been
our Chief Financial Officer since September 1, 2006. From 1990 to the present,
he has been the president of Corporate Finance Group, a company involved in
financial consulting in the areas of strategic planning, mergers and
acquisitions and capital formation. From May 2001 to May 2003, he served as
Chief Financial Officer of Bayview Technology Group, LLC, a privately held
company that manufactured and distributed energy-efficient products. From May
2003 to October 2004, he served as that company’s Chief Executive Officer. Mr.
Tinter is a Certified Public Accountant.




Raymond J.
BonAnno - Mr. BonAnno has served as a member of our Board of Directors
since April 2006. He has spent more than 30 years in the automotive carrier
truck industry. Mr. BonAnno was Director of Operations, Baker Driveaway Co.,
Inc. (1973-1975) and at E & L Transport, Inc. (1975-1977). In 1977, he was
recruited by Ryder Systems, Inc. to be General Manager - Cadillac Division
(1977-1982). With Ryder, he held assignments of increasing responsibility for 23
years until his departure in 1990. Mr. BonAnno has a BBA degree in finance from
the University of Notre Dame (1963) and an MBA, Advanced Management Program from
Michigan State University (1983). Mr. BonAnno is the recipient of the
Ernst & Young LLP’s Rocky Mountain Entrepreneur of the Year award for 2007.
In 1990, Mr. BonAnno purchased an interest in Fleet Car Carriers and now he and
his family own that company. Mr. BonAnno currently serves on the University of
Notre Dame Advisory Council for the College of Arts and Letters, the Board of
Advisors for the University of Detroit Jesuit High School and Academy






53




and the
Advisory Board for the Alliance Real Estate Investment Fund. Mr. BonAnno also
serves as a member of the Board of Directors of the Colorado Capital Bank,
Cherry Creek Branch, and the Agents Title Insurance Company.





Presley Reed - Dr. Presley
Reed has served as a member of our Board of Directors since April 2006 and is
founder and Chairman of Reed Group with offices in Colorado and New York; Dr.
Reed has held such position for many years. Dr. Reed is the Editor-in-Chief
ofThe Medical Disability
Advisor: Workplace Guidelines for Disability Duration. Dr. Reed is an
expert in disability management, workplace absence and productivity, workers'
compensation, and occupational health. He is Board Certified by the American
Board of Psychiatry and Neurology. He is a Fellow of the American College
of Occupational and Environmental Medicine and is a former chair of its
Committee on Occupational Mental Health. He is a Fellow of the
American Academy of Disability Evaluating Physicians. He served as Founding
Chairman of the American Board of Independent Medical Examiners and is a
Certified Independent Medical Examiner. Dr. Reed received his BS in Medical Arts
from the University of Kentucky and his medical degree from the University of
Tennessee. He completed his residency in psychiatry at Tulane in New Orleans,
and at Denver General Hospital.




There are
no family relationships among the directors and executive officers. Except as
set forth below, none of the directors or executive officers has, during the
past five years:





(a)
            had
      any petition under the federal bankruptcy laws or any state insolvency law
      filed by or against, or a receiver, fiscal agent or similar officer
      appointed by a court for the business or property of, such person, or any
      partnership in which he was a general partner at or within two years
      before the time of such filing, or any corporation or business association
      of which he was an executive officer at or within two years before the
      time of such filing;(b)
            been
      convicted in a criminal proceeding or subject to a pending criminal
      proceeding;(c)
            been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction or any
      federal or state authority, permanently or temporarily enjoining, barring,
      suspending or otherwise limiting his involvement in any type of business,
      securities, futures, commodities or banking activities;
  or(d)
            been
      found by a court of competent jurisdiction (in a civil action), the SEC or
      the Commodity Futures Trading Commission to have violated a federal or
      state securities or commodities law, and the judgment has not been
      reversed, suspended, or vacated.







Section 16(a) Beneficial Ownership Reporting
Compliance





Section 16(a)
of the Exchange Act requires our executive officers and directors and persons
who own more than ten percent (10%) of our common stock to file reports of
ownership and changes in ownership with the SEC and any exchange on which the
common stock is listed for trading and to furnish us with copies of all Section
16(a) reports filed. Based solely on our review of such reports and written
representations of certain of such persons furnished to us during or with
respect to the last fiscal year, the following table sets forth reports that
were not filed on a timely basis during the most recently completed fiscal
year:


.


Reporting
      Person
              Date
      Report Due
              Date
      Report FiledMarc
      Geman
              01/10/2008
              02/22/2008Marc
      Geman
              02/25/2008
              02/26/2008Marc
      Geman
              03/19/2008
              03/31/2008Anthony
      Walker
              03/19/2008
              06/03/2008Anthony
      Walker
              05/30/2008
              06/03/2008





Code
of Business Ethics





We have a
Code of Business Ethics that governs all of our employees, including our CEO,
CFO, principal accounting officer or persons performing similar
functions.  We will provide a copy of our code free of charge to any
person upon written request to us at the following address: 90 Madison Street,
Suite 700, Denver, CO 80206 Attn: Corporate Secretary.





54


Audit
Committee Financial Expert





Our Board
of Directors has determined that there is no Audit Committee financial expert
serving on our Audit Committee. As we are not a listed issuer as that term is
defined in Rule 10A-3 under the Exchange Act, we are not required to have a
financial expert serving on our Audit Committee.








Item
11.  Executive Compensation





The
following table sets forth, for the last two fiscal years, the compensation
earned for the services rendered in all capacities by our Chief Executive
Officer (principal executive officer) and the Company’s two most highly
compensated executive officers who earned more than $100,000. The individuals in
the table are referred to herein as the "named executive officers."





SUMMARY COMPENSATION
TABLE


Name
      and principal position
                              Year
                              Salary
      ($)
                              Bonus
      ($)
                              Option
      awards ($)
                                (1)
                              Total ($)Marc
      Geman
                                Chief
      Executive Officer
                              2008
                                2007
                              353,043
                                150,000
                              -
                                73,000
                              91,716
                                95,561
                              444,759
                                318,561Arnold
      Tinter
                                Chief
      Financial Officer
                              2008
                                2007
                              196,135
                                135,000
                              -
                                25,000
                              63,991
                                101,837
                              260,126
                                261,837Anthony
      Walker
                                Chief
      Operating Officer
                              2008
                                2007
                              147,101
                                100,000
                              10,000
                              51,708
                                48,843
                              198,809
                                158,843





(1)
                  The
      value of the options granted during 2008 was estimated on the grant date
      using the Black-Scholes option-pricing model with the following weighted
      average assumptions:  expected volatility of 43.18%, expected
      term of 2.5 years, risk-free interest rate of 2.4% and no expected
      dividend yield.  The value of the options granted during 2007
      was estimated with the following weighted average
      assumptions:  expected volatility of 41.66%, expected term of
      2.5 years, risk-free interest rate of 5.9% and no expected dividend
      yield.(2)
                  Under
      Mr. Geman’s employment agreement, his salary increased to $360,000 per
      annum effective January 1, 2008.  Subsequent to December 31,
      2008 Mr. Geman agreed to reduce his salary to $250,000 per annum until
      such time as economic conditions improve.  The bonus awarded in
      2007 was granted by the Compensation Committee of the Board of
      Directors.  Mr. Geman receives no compensation for his services
      as a director.(3)
                  From
      January 2007 to July 2007, Mr. Tinter was compensated as an independent
      contractor at the rate of $5,000 per month.  Subsequent to July
      1, 2007, Mr. Tinter became a full-time employee of our Company and under a
      verbal agreement received $12,500 per month as compensation through
      December 31, 2007 and $200,000 per annum through December 31,
      2008.  Subsequent to December 31, 2008 Mr. Tinter agreed to
      reduce his salary to $162,500 per annum until such time as economic
      conditions improve.  The bonus awarded in 2007 was granted by
      the Compensation Committee of the Board of Directors.(4)
                  Under
      Mr. Walker’s employment agreement, his salary increased to $150,000 per
      annum effective January 1, 2008.  Subsequent to December 31,
      2008 Mr. Walker agreed to reduce his salary to $100,000 per annum until
      such time as economic conditions improve.  The bonus awarded in
      2007 was granted by the Compensation Committee of the Board of
      Directors.  Mr. Walker receives no compensation for his services
      as a director.





The value
of option awards are the dollar amount recognized for financial statement
reporting purposes.


55








The
following table sets forth, at December 31, 2008, information concerning
unexercised options for each named executive officer.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END


Name
                              Number
      of securities underlying unexercised options
                                (#)
                                exercisable
                              Number
      of securities underlying unexercised options
                                (#)
                                unexercisable
                              Equity
      incentive plan awards:
                                Number
      of securities underlying unexercised unearned options
                                (#)
                              Option
      exercise price
                                ($)
                              Option
      expiration dateMarc
      Geman
                              500,000
      (1)
                                500,000
      (2)
                                340,000
      (3)
                                -
                              -
                                -
                                -
                                150,000
      (4)
                              -
                                -
                                -
                              0.6325
                                1.2600
                                0.900
                                0.725
                              9/20/12
                                12/14/12
                                3/17/13
                                8/6/13Arnold
      Tinter
                              125,000
      (5)
                                400,000
      (1)
                                500,000
      (2)
                                200,000
      (3)
                              75,000
      (5)
                                
                                
                                -
                                100,000
      (4)
                              -
                                -
                                -
                              0.2500
                                0.5750
                                1.1500
                                0.820
                                0.655
                              1/25/12
                                9/20/12
                                12/14/12
                                3/17/13
                                8/6/13Anthony
      Walker
                              300,000
      (1)
                                180,000
      (3)
                              100,000
      (4)
                              -
                              0.6325
                                0.900
                                0.725
                              9/20/12
                                3/17/13
                                8/6/13





(1)
            Options
      vested September 20, 2007.(2)
            Options
      vested June 14, 2008.(3)
            Options
      vested September 17, 2008.(4)
            Options
      vested February 6, 2009(5)
            50,000
      options vested January 25, 2007, 75,000 options vest January 25, 2008 and
      75,000 options vested January 25,
2009.





There are
no plans that provide for the payment of retirement benefits, or benefits that
will be paid primarily following retirement, including but not limited to
tax-qualified defined benefit plans, supplemental executive retirement plans,
tax-qualified defined contribution plans and nonqualified defined contribution
plans.





Other
than as discussed below in “Executive Compensation – Employment Agreements,”
there are no contracts, agreements, plans or arrangements, written or unwritten,
that provide for payment to a named executive officer at, following, or in
connection with the resignation, retirement or other termination of a named
executive officer, or a change in control of our company or a change in the
named executive officer's responsibilities following a change in control, with
respect to each named executive officer.


56








The
following table sets forth, for the year ended December 31, 2008, the
compensation earned for the services rendered in all capacities by our
directors.





DIRECTOR
COMPENSATION


Name
                            Fees
      earned or paid in cash
                              ($)
                            Stock
      awards
                              ($)
                            Option
      awards
                              ($)
                            Non-equity
      incentive plan compensation
                              ($)
                            Nonqualified
      deferred compensation earnings
                              ($)
                            All
      other compensation
                              ($)
                            Total
                              ($)Raymond
      BonAnno (1)
                            -
                            -
                            24,205
                            -
                            -
                            -
                            24,205Presley
      Reed (2)
                            -
                            -
                            24,205
                            -
                            -
                            -
                            24,205





(1)
            During
      the year ended December 31, 2008, Mr. BonAnno was awarded options to
      purchase 500,000 shares of common stock, all of which were outstanding,
      vested and exercisable at December 31, 2008.  The exercise price
      of the options is $.185 per share.  The options expire November
      24, 2013.(2)
            During
      the year ended December 31, 2008, Mr. Reed was awarded options to purchase
      500,000 shares of common stock, all of which were outstanding, vested and
      exercisable at December 31, 2008.  The exercise price of the
      options is $.185 per share.  The options expire November 24,
      2013





The value
of option awards are the dollar amount recognized for financial statement
reporting purposes.  The value of the options granted during 2008 was
estimated on the grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions:  expected volatility of
43.18%, expected term of 2.5 years, risk-free interest rate of 2.4% and no
expected dividend yield.





Employment
Agreements





We have
an employment agreement with our Chief Executive Officer, Marc Geman. His base
salary is currently $360,000 per annum. The term is for three years and ends on
August 13, 2009. If Mr. Geman is terminated without cause or resigns with good
reason (as defined in his agreement, which good reason includes a change in
control), then he receives a lump sum payment of his salary for a 12-month
period as severance.





We have
an employment agreement with our Chief Operating Officer, Anthony Walker. His
base salary is currently $150,000 per annum.  The term is for two
years and ended on August 13, 2008, and we are continuing even though there is
no formal agreement.  If Mr. Walker is terminated without cause or
resigns with good reason (as defined in his agreement, which good reason
includes a change in control), then he receives a lump sum payment of his salary
for a 12-month period as severance.





We have
an employment agreement with our Chief Culinary Officer, Kevin Morrison. His
base salary is currently $150,000 per annum. The term is for two years and ended
on August 13, 2008, and we are continuing even though there is no formal
agreement.  If Mr. Morrison is terminated without cause or resigns
with good reason (as defined in his agreement, which good reason includes a
change of control), then he receives a lump sum payment of his salary for a
12-month period as severance.








Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters





The
following table sets forth certain information regarding beneficial ownership of
our capital stock as of March 16, 2009 by (i) each person known by us to be the
beneficial owner of more than five percent of the outstanding common stock, (ii)
each director, (iii) each named executive officer, and (iv) all directors and
executive officers as a group.





The
number of shares beneficially owned is determined under the rules promulgated by
the SEC, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under those rules, beneficial ownership
includes any shares as to which the person has sole or shared voting power or
investment power and any






57




shares
that the person has the right to acquire within 60 days of the date hereof,
through the exercise or conversion of any stock option, convertible security,
warrant or other right. Including those shares in the table does not, however,
constitute an admission by the named shareholder that the shareholder is a
direct or indirect beneficial owner of those shares.





Unless
otherwise indicated, each person named in the table has sole voting power and
investment power (or shares that power with that person's spouse) with respect
to all shares of capital stock listed as owned by that person. Unless otherwise
indicated, the address of each of the following persons is 90 Madison Street,
Suite 700, Denver, Colorado 80206. All percentages of common stock
beneficially owned by the listed persons are based upon 54,387,347 shares of
common stock outstanding at March 16, 2009, and shares of common stock subject
to options, warrants and convertible securities within 60 days of the date
hereof are deemed to be outstanding for computing the percentage of the person
holding such options, warrants or convertible securities but are not deemed to
be outstanding for computing the percentage of any other person.




Title of Class
            Name and Address of Beneficial
      Owner
            
            Amount
      and Nature of Beneficial
      Ownership
            Percent of ClassCommon
      Stock
            Marc
      Geman (1)
            
            7,492,264
            13.41
            %Common
      Stock
            Anthony
      Walker (2)
            
            6,674,036
            12.14
            %Common
      Stock
            Kevin
      Morrison (3)
            
            5,665,100
            10.36
            %Common
      Stock
            Raymond
      BonAnno (4)
            
            3,185,525
            5.77
            %Common
      Stock
            Presley
      Reed (5)
            
            5,541,784
            9.71
            %Common
      Stock
            Arnold
      Tinter (6)
            
            1,400,000
            2.51
            %Common
      Stock
            EWM
      Investments (7)
            
            4,122,300
            7.58
            %Common
      Stock
            All
      Directors and Executive Officers as a Group (6 persons)
            
            29,958,709
            52.84
            %Preferred
      Stock
            Raymond
      BonAnno
            
            12
            1.70
            %Preferred
      Stock
            Presley
      Reed
            
            120
            17.02
            %


_________________




(1)
                        Includes
      1,490,000 shares based on options exercisable within 60
    days.(2)
                        Includes
      580,000 shares based on options exercisable within 60
  days.(3)
                        Includes
      300,000 shares based on options exercisable within 60
  days.(4)
                        Includes
      2,360,445 shares owned of record by the BonAnno Family Partnership;
      Raymond BonAnno has voting and dispositive power over such shares, 15,080
      owned by Raymond BonAnno and Joan BonAnno, 120,000 shares based on
      conversion of Series A Preferred Stock owned jointly by Mr. BonAnno and
      his wife, 90,000 shares based on exercise of warrants jointly owned by Mr.
      BonAnno and his wife, and 600,000 shares based on options exercisable
      within 60 days.(5)
                        Includes
      1,695,376 shares owned jointly by Presley and Patricia Reed, 1,146,408
      shares owned by the Presley Reed 1999 Family Trust, of which Patricia
      Reed, Mr. Reed’s wife, is the beneficiary, 1,200,000 shares based on
      conversion of Series A Preferred Stock owned jointly by Mr. Reed and his
      wife, 900,000 shares based on exercise of warrants jointly owned by Mr.
      Reed and his wife, and 600,000 shares based on options exercisable within
      60 days.(6)
                        Includes
      1,025,000 shares based on options exercisable within 60
    days.(7)
                        Ernest
      Moody has sole voting and dispositive power over the shares owned of
      record by EWM
Investments.





58





Equity
Compensation Plan Information





The
following table provides information as of December 31, 2008 with respect to our
2006 Stock Option Plan, the only compensation plan under which our equity
securities are authorized for issuance, which plan was approved by our
shareholders in 2006.





Plan
      category
                      Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                      Weighted-average
      exercise price of outstanding options, warrants and rights
                      Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
                      6,146,250
                      $0.646
                      1,353,750Equity
      compensation plans not approved by security holders
                      None
                      
                      NoneTotal
                      6,146,250
                      $0.646
                      1,353,750





Change
in Control





To the
knowledge of management, there are no present arrangements that may result in a
change of control of the Company.








Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





On
December 14, 2007, Raymond BonAnno and Presley Reed, two of our directors, Keith
and Angela Oxenreider, the son-in-law and daughter of director Raymond BonAnno,
and R. James BonAnno, Jr., the son of director Raymond BonAnno, participated in
the transaction pursuant to which we sold an aggregate of 705 shares of Series A
Preferred Stock and warrants to purchase an aggregate of 5,287,500 shares of
common stock for an aggregate purchase price of $5,992,500. Mr. BonAnno and his
wife purchased 12 shares of Series A Preferred Stock and warrants to purchase
90,000 shares of common stock for $102,000. Mr. Reed and his wife purchased 120
shares of Series A Preferred Stock and warrants to purchase 900,000 shares of
common stock for $1,020,000. Mr. and Mrs. Oxenreider purchased 12 shares of
Series A Preferred Stock and warrants to purchase 90,000 of common stock for
$102,000. Mr. BonAnno, Jr. purchased 12 shares of Series A Preferred Stock and
warrants to purchase 90,000 of common stock for $102,000.





In
December 2008 Raymond BonAnno and Presley Reed, two of our directors granted the
Company a line of credit which expires January 31, 2010.  The line of
credit is for an aggregate of $550,000 and bears interest at a rate of one
percent above the prime rate and is secured by certain assets of the
Company.  At December 31, 2008 the interest rate on the borrowings was
4.25% and balance outstanding was $100,000.





Director
Independence





The
following members of the Company’s Board of Directors are independent directors
as that term is defined by NASDAQ Rule 4200(a)(15): Raymond BonAnno and Presley
Reed.  Neither member of the Company’s Audit Committee, whose members
are Marc Geman and Raymond BonAnno, meets the Audit Committee independence
requirements of NASDAQ Rule 4350(d).





59





Item
14.  Principal Accounting Fees and Services.







The
following table sets forth fees billed to us by Eide Bailly, LLP and Gordon,
Hughes & Banks, LLP, our registered public accounting firms, during the
fiscal years ended December 31, 2008 and December 31, 2007
respectively for (i) services rendered for the audit of our annual
financial statements and the review of our quarterly financial statements;
(ii) services rendered that are reasonably related to the performance of
the audit or review of our financial statements and that are not reported as
Audit Fees; (iii) services rendered in connection with tax compliance, tax
advice and tax planning, and (iv) all other services rendered.


December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Audit
      Fees
                      
                      $
                      37,611
                      
                      
                      $
                      40,820Audit-Related
      Fees
                      
                      
                      --
                      
                      
                      
                      --Tax
      Fees
                      
                      
                      --
                      
                      
                      
                      --All
      Other Fees (audit of acquired subsidiary)
                      
                      
                      31,159
                      
                      
                      
                      --Total
      fees
                      
                      $
                      68,770
                      
                      
                      $
                      40,820





60


PART
IV





Item
15.  Exhibits, Financial Statements Schedules.





(a)
Documents filed as a part of this report





(1) Financial
Statements





The
Consolidated Financial Statements of Spicy Pickle Franchising, Inc. and its
subsidiaries and the Independent Registered Public Accounting Firm’s report
dated March 24 2008, are incorporated by reference to Item 8 of this
report.





(2) Financial Statement
Schedules





Not
required.








(b)
Exhibits




Exhibit
      Number
                
                Exhibit
      Description2.1
                
                Asset
      Purchase Agreement between SPBG Franchising, Inc. and Bread Garden
      Franchising, Inc. dated September 30, 2008 (1)3.1
                
                Amended
      Articles of Incorporation of the Registrant (2)3.2
                
                Bylaws
      (3)4.1
                
                Certificate
      of Designation of Series A Variable Rate Convertible Preferred Stock
      (4)10.1
                
                Employment
      Agreement - Marc Geman (3)*10.2
                
                Employment
      Agreement - Anthony Walker (3)*10.3
                
                Employment
      Agreement - Kevin Morrison (3)*10.4
                
                2006
      Stock Option Plan (3)10.5
                
                Promissory
      Note to Spicy Pickle, LLC (3)10.6
                
                Securities
      Purchase Agreement dated as of December 14, 2007 (5)10.7
                
                Form
      of Warrant (6)10.8
                
                Registration
      Rights Agreement dated as of December 14, 2007 (7)10.9
                
                Lock-Up
      Agreement of Marc Geman (8)10.10
                
                Form
      of Lock-Up Agreement executed by other officers and directors
      (9)10.11
                
                Amendment
      No. 1 to Securities Purchase Agreement (10)16.1
                
                Letter
      from Gordon, Hughes & Banks, LLP (11)21.1
                
                List
      of Subsidiaries (12)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
      Officer (12)31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
      Officer (12)32.1
                
                Section
      1350 Certification of Chief Executive Officer (12)32.2
                
                Section
      1350 Certification of Chief Financial
  Officer (12)




(1)
                              Incorporated
      by reference to the exhibit of the same number to the registrant’s Current
      Report on Form 8-K filed on October 2, 2008.(2)
                              Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Amendment No. 1 to Registration Statement on Form SB-2 filed on December
      12, 2006.(3)
                              Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Registration Statement on Form SB-2 filed on October 26,
    2006.(4)
                              Incorporated
      by reference to the exhibit of the same number to the registrant’s Current
      Report on Form 8-K filed on December 19,
2007.






61




(5)
                    Incorporated
      by reference to Exhibit 10.1 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(6)
                    Incorporated
      by reference to Exhibit 10.2 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(7)
                    Incorporated
      by reference to Exhibit 10.3 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(8)
                    Incorporated
      by reference to Exhibit 10.4 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(9)
                    Incorporated
      by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
      Current Report on Form 8-K filed on December 27, 2007.(10)
                    Incorporated
      by reference to Exhibit 10.1 to the registrant’s Current Report on Form
      8-K filed May 23, 2008.(11)
                    Incorporated
      by reference to the exhibit of the same number to the registrant’s Current
      Report on Form 8-K filed on November 5, 2008.(12)
                    Filed
      herewith.*
                    Indicates
      a management contract or compensatory plan or
  arrangement.











62





SIGNATURES





In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.




SPICY PICKLE FRANCHISING,
      INC.Date: 
      March 30, 2009
                  By:
                  /s/ Marc
      GemanMarc
      Geman, Chief Executive Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
                                                
                                                Title
                                                
                                                Date/s/
      Marc Geman
                                                
                                                Chief
      Executive Officer and Chairman of the Board (Principal Executive
      Officer)
                                                
                                                March
      30, 2009Marc
      Geman/s/
      Arnold Tinter
                                                
                                                Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
                                                
                                                March
      30, 2009Arnold
      Tinter/s/
      Anthony Walker
                                                
                                                Director
                                                
                                                March
      30, 2009Anthony
      Walker/s/
      Presley Reed
                                                
                                                Director
                                                
                                                March
      30, 2009Presley
      Reed/s/
      Raymond BonAnno
                                                
                                                Director
                                                
                                                March
      30, 2009Raymond
      BonAnno









63


EXHIBIT
INDEX





Exhibit
      Number
                
                Exhibit
      Description2.1
                
                Asset
      Purchase Agreement between SPBG Franchising, Inc. and Bread Garden
      Franchising, Inc. dated September 30, 2008 (1)3.1
                
                Amended
      Articles of Incorporation of the Registrant (2)3.2
                
                Bylaws
      (3)4.1
                
                Certificate
      of Designation of Series A Variable Rate Convertible Preferred Stock
      (4)10.1
                
                Employment
      Agreement - Marc Geman (3)10.2
                
                Employment
      Agreement - Anthony Walker (3)10.3
                
                Employment
      Agreement - Kevin Morrison (3)10.4
                
                2006
      Stock Option Plan (3)10.5
                
                Promissory
      Note to Spicy Pickle, LLC (3)10.6
                
                Securities
      Purchase Agreement dated as of December 14, 2007 (5)10.7
                
                Form
      of Warrant (6)10.8
                
                Registration
      Rights Agreement dated as of December 14, 2007 (7)10.9
                
                Lock-Up
      Agreement of Marc Geman (8)10.10
                
                Form
      of Lock-Up Agreement executed by other officers and directors
      (9)10.11
                
                Amendment
      No. 1 to Securities Purchase Agreement (10)16.1
                
                Letter
      from Gordon, Hughes & Banks, LLP (11)21.1
                
                List
      of Subsidiaries (12)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
      Officer (12)31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
      Officer (12)32.1
                
                Section
      1350 Certification of Chief Executive Officer (12)32.2
                
                Section
      1350 Certification of Chief Financial
  Officer (12)





(1)
            Incorporated
      by reference to the exhibit of the same number to the registrant’s Current
      Report on Form 8-K filed on October 2, 2008.(2)
            Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Amendment No. 1 to Registration Statement on Form SB-2 filed on December
      12, 2006.(3)
            Incorporated
      by reference to the exhibit of the same number to the registrant’s
      Registration Statement on Form SB-2 filed on October 26,
    2006.(4)
            Incorporated
      by reference to the exhibit of the same number to the registrant’s Current
      Report on Form 8-K filed on December 19, 2007.(5)
            Incorporated
      by reference to Exhibit 10.1 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(6)
            Incorporated
      by reference to Exhibit 10.2 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(7)
            Incorporated
      by reference to Exhibit 10.3 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(8)
            Incorporated
      by reference to Exhibit 10.4 to the registrant’s Current Report on Form
      8-K filed on December 19, 2007.(9)
            Incorporated
      by reference to Exhibit 10.5 to the registrant’s Amendment No. 1 to
      Current Report on Form 8-K filed on December 27, 2007.(10)
            Incorporated
      by reference to Exhibit 10.1 to the registrant’s Current Report on Form
      8-K filed May 23, 2008.(11)
            Incorporated
      by reference to the exhibit of the same number to the registrant’s Current
      Report on Form 8-K filed on November 5, 2008.(12)
            Filed
      herewith.