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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 28, 2008
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 333-136167
 UFOOD RESTAURANT GROUP, INC.
  Nevada
    
    20-4463582(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
     Title of each class
    
    Name of each exchange on which registeredNone
    
    None
    o Yes þ No
 o Yes þ No
 Yes o No þ
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 Yes o No þ




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##### 



PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    10Item 2. Properties
    
    
    25Item 3. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
And Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    29Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    29Item 7A. Quantitive and Qualitive Disclosures about Market Risk
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    71Item 9A. Controls and Procedures
    
    
    71Item 9B Other Information
    
    
    72PART IIIItem 10. Directors, Executive Officers and
Corporate Governance
    
    
    73Item 11. Executive Compensation
    
    
    73Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    73Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    73Item 14. Principal Accounting Fees and Services
    
    
    73PART IVItem 15 Exhibits
    
    
    74Signatures
    
    
    75Exhibit 21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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PART I
 
 Item 1. Business.
  Accounting and Reporting by Development Stage Enterprises.
   
  3




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Segment Data
     4




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
    
    Healthy life style enthusiast (eating healthier fits squarely into their way of life)
 
    
    Feel Gooder (eating at UFood makes them feel good about themselves)
 
    
    Convenience-only (convenience trumps all decision factors when selecting where to dine)
 
    
    People with restricted diets
 
    
    Magic Bullet (people who seek to have it all at little cost and no effort)
  
 
   5




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6




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
    
    Dallas-Fort Worth International Airport and other airports in Texas
 
    
    Naples, FL
 
    
    Sacramento, CA
 
    
    San Jose, CA
 
    
    Chicago, IL
 
    
    Five-State Region (MT, CO, UT, WY, ID)
 
   7




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
    
    Better Burger (New York City)
 
    
    Energy Kitchen (New York City)
 
    
    The Pump (New York City)
 
    
    Topz (California)
 
    
    Evos (California, Florida, Nevada, North Carolina)
 
    
    b. good (Boston)
 
    
    Soma Grill (Arizona)
 
    
    Healthy Bites (Florida)
 
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Item 1A. Risk Factors.
 Risks Related to Our Company and Our Business
 We have a limited operating history and are subject to all of the risks inherent in the expansion
of an early-stage business.
  We have not been profitable to date and expect our operating losses to continue for the foreseeable
future; we may never be profitable.
  10




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There are risks inherent in expansion of operations, including our ability to sell franchises,
generate profits from new restaurants, find suitable sites and develop and construct stores in a
timely and cost-effective way.
 
 
    
    the availability of suitable sites for new stores;
 
    
    our and our franchisees ability to negotiate acceptable lease or purchase terms for
new locations, obtain adequate financing, on favorable terms, requires to construct,
build-out and operate new stores and meet construction schedules, and hire and train and
retain qualified store managers and personnel;
 
    
    managing construction and development costs of new stores at affordable levels;
 
    
    the establishment of brand awareness in new markets; and
 
    
    the ability of our Company and our area developers to manage this anticipated
expansion.
  11




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
    
    labor disputes;
 
    
    shortages of materials or skilled labor;
 
    
    requirements to use union labor;
 
    
    energy prices;
 
    
    adverse weather;
 
    
    unforeseen engineering problems;
 
    
    environmental problems;
 
    
    construction or zoning problems;
 
    
    local government regulations;
 
    
    modifications in design; and
 
    
    other unanticipated increases in costs.
   12




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Our business plan is dependent on the franchising model; therefore, our success will generally
depend on the success of our franchisees and the profitability of their stores.
 Our past and future operating losses may make it more difficult for us to attract new franchisees.
  We may be subject to general risk factors affecting the restaurant industry, including current
economic climate, costs of labor, food prices, gasoline prices and the unemployment levels.
  
    
    adverse changes in national, regional or local economic or market conditions;
 
    
    increased costs of labor (including increases in the minimum wage);
 
    
    increased costs of food products;
 
    
    availability of, and ability to obtain, adequate supplies of ingredients that meet
our quality standards;
 
    
    increased energy costs;
 
    
    management problems;
 
    
    increases in the number and density of competitors;
 
    
    limited alternative uses for properties and equipment;
 
    
    changing consumer tastes, habits and spending priorities;
  13




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
    
    changing demographics;
 
    
    the cost and availability of insurance coverage;
 
    
    uninsured losses;
 
    
    changes in government regulation;
 
    
    changing traffic patterns;
 
    
    weather conditions; and
 
    
    local, regional or national health and safety matters.
  There is intensive competition in our industry, and we will be competing with national and regional
chains and independent restaurant operators.
  Our business has been adversely affected by declines in discretionary spending and may be affected
by changes in consumer preferences.
   14




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Increases in costs, including food, labor and energy prices, will adversely affect our results of
operations.
 Our stores are concentrated in a small geographic area.
  The growth of our Company is dependent on the skills and expertise of management and key personnel.
   15




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Our food service business and the restaurant industry are subject to extensive government
regulation.
   
    
    Establish general standards, specifications and requirements for the construction,
design and maintenance of the store premises;
 
    
    regulate matters affecting the health, safety and welfare of our customers, such as
general health and sanitation requirements for restaurants, employee practices concerning
the storage, handling, cooking and preparation of food, special health, food service and
licensing requirements, restrictions on smoking, exposure to tobacco smoke or other
carcinogens or reproductive toxicants and saccharin and availability of and requirements
for public accommodations, including restrooms;
 
    
    set standards pertaining to employee health and safety;
 
    
    set standards and requirements for fire safety emergency preparedness; regulate the
proper use, storage and disposal of waste, insecticides, and other hazardous materials;
 
    
    establish general requirements or restrictions on advertising containing false or
misleading claims, or health and nutrient claims on menus or otherwise, such as low
calorie or fat free, and
 
    
    establish requirements concerning withholdings and employee reporting of taxes on tips.
 
   16




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We have not conducted a comprehensive review of all the potential environmental liabilities at our
properties.
 Our success and competitive position depends on our ability to protect our proprietary intellectual
property.
   17




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Our plan to rapidly increase the number of stores may make future results unpredictable, as our
success will depend on acceptance of our products in new markets.
  New stores, once opened, may not be profitable, and the increases in average store sales and
company store sales that we have experienced in the past may not be indicative of future results.
  
    
    sales performance of new stores
 
    
    competition, either from competitors in the restaurant industry or our own stores;
 
    
    changes in consumer preferences and discretionary spending;
 
    
    consumer understanding and acceptance of UFood stores;
 
    
    road construction and other factors limiting access to new stores;
 
    
    general economic conditions, which can affect store traffic, local labor costs and
prices we pay for ingredients and other supplies; and
 
    
    changes in government regulation.
 Expansion into new markets may present increased risks due to our unfamiliarity with those areas.
  We may not persuade customers of the benefits of paying higher prices for higher-quality food.
   18




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Additional instances of avian flu or mad cow disease or other food-borne illnesses could
adversely affect the price and availability of chicken, beef or other meat, cause the temporary
closure of some stores and result in negative publicity, thereby resulting in a decline in sales.
  Our franchisees could take actions that harm our reputation and reduce our royalty revenues.
 We could be party to litigation that could adversely affect us by distracting management,
increasing expenses or subjecting us to material money damages and other remedies.
  Unfavorable publicity or consumer perception of our nutritional products and any similar products
distributed by other companies could cause fluctuations in our operating results and could have a
material adverse effect on our reputation, the demand for our products and our ability to generate
revenues.
   19




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We may incur material product liability claims, which could increase our costs and adversely affect
our reputation, revenues and operating income.
 We will need to raise additional capital to meet our business requirements in the future, and such
capital raising may be costly or difficult to obtain and could dilute current stockholders
ownership interests.
  
    
    pursuing growth opportunities, including more rapid expansion;
 
    
    opening additional Company-owned stores beyond the four we currently operate
 
    
    acquiring complementary businesses
 
    
    making capital improvements to improve our infrastructure;
 
    
    hiring qualified management and key employees;
  20




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
    
    research and development of new products;
 
    
    increased advertising and marketing expenses;
 
    
    responding to competitive pressures;
 
    
    complying with regulatory requirements such as licensing and registration; and
 
    
    maintaining compliance with applicable laws.
 
 The failure of our subsidiary to satisfy its obligations under an existing credit facility could
result in a foreclosure on our assets.     Compliance with the reporting requirements of federal securities laws can be expensive.
  21




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Applicable regulatory requirements, including those contained in and issued under the
Sarbanes-Oxley Act, 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 obtain or
retain listing of our common stock.
 
 We are a holding company that depends on cash flow from our subsidiaries to meet our obligations
and pay dividends; our subsidiary is restricted from making distributions to us.
  We have reported a material weakness in our internal control over financial reporting as of
December 28, 2008. If we fail to maintain an effective system of internal controls, including
internal controls over financial reporting, we may not be able to accurately report our financial
results or detect fraud. Consequently, investors could lose confidence in our financial reporting
and this may decrease the trading price of our stock.
  22




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We may be exposed to potential risks resulting from new requirements under Section 404 of the
Sarbanes-Oxley Act.
 
 Risks Related to Our Securities

There is not now, and there may not ever be, an active market for our common stock.     We cannot assure you that our common stock will become liquid or that it will be listed on a
securities exchange.
  23




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Applicable SEC rules governing the trading of penny stocks limits the trading and liquidity of
our common stock, which may affect the trading price of the common stock.
  The price of our common stock may become volatile due to our operating results, products offered by
our competitors and stock market conditions, which could lead to losses by investors and costly
securities litigation.
  
    
    actual or anticipated variations in our operating results;
 
    
    announcements of developments by us or our competitors;
 
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
 
    
    adoption of new accounting standards affecting our industry;
 
    
    additions or departures of key personnel;
 
    
    introduction of new products by us or our competitors;
 
    
    sales of our common stock or other securities in the open market; and
 
    
    other events or factors, many of which are beyond our control.
  We do not anticipate dividends to be paid on the common stock, and investors may lose the entire
amount of their investment.
   24




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Securities analysts may not initiate coverage or continue to cover our common stock, and this may
have a negative impact on its market price.
  You may experience dilution of your ownership interests because of the future issuance of
additional shares of common stock.
  
 Item 2. Properties.
  
 Year ending December 31,2009
    
    $
    626,0002010
    
    
    602,0002011
    
    
    616,0002012
    
    
    633,0002013
    
    
    641,000Thereafter
    
    
    629,000$
    3,747,000
  25




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Item 3. Legal Proceedings.
      
 Item 4. Submission of Matters to a Vote of Security Holders.
   26




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
  www.nasdaq.com
 Quarter Ended
    
    High
    
    
    LowDecember 30, 2007
    
    $
    1.87
    
    
    $
    0.52March 30, 2008
    
    $
    1.52
    
    
    $
    0.95June 29, 2008
    
    $
    2.10
    
    
    $
    1.15September 28, 2008
    
    $
    1.65
    
    
    $
    0.625December 28, 2008
    
    $
    0.67
    
    
    $
    0.18
 Dividends
 Long-Term Debt
  27




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Securities Authorized for Issuance under Equity Compensation Plans
 Stock-Based Compensation
  Number ofsecuritiesremainingavailable forfuture issuanceNumber of
    
    
    
    
    
    
    under equitysecurities to be
    
    
    
    
    
    
    compensationissued upon
    
    
    Weighted-average
    
    
    plans (excludingexercise of
    
    
    exercise price of
    
    
    securitiesoutstanding
    
    
    outstanding options,
    
    
    reflected inPlan Category
    
    options
    
    
    warrants and rights
    
    
    column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    3,110,622
    
    
    $
    1.02
    
    
    
    3,194,080Equity compensation
plans not approved
by security holders
    
    
    1,387,090
    (1)
    
    $
    1.19
    
    
    
    0Total
    
    
    4,497,712
    
    
    $
    1.08
    
    
    
    3,194,080
 (1)
    
    The options to purchase 1,000,000 shares shown in the table were not granted pursuant to a
compensation plan, but instead represent non-qualified stock options granted to our chief
executive officer, George Naddaff, by our board of Directors on May 1, 2008. The options
granted to Mr. Naddaff were fully vested. On the same day, the Board of Directors also granted
non-qualified options to purchase 300,000 shares to our chief operating officer, Charles
Cocotas. The stock options granted to Mr. Cocotas will vest monthly over the remaining period
of his employment agreement and expire ten years from the date of the grant. The remaining
balance of 87,090 options was granted to Mr. Cocotas by our Board of Directors on December 6,
2007, fully vested.   28




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Item 6. Selected Financial Data.
  
 Item 7.

    Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
     Critical Accounting Policies & Estimates
    29




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Accounting for Franchise Fee Income
   Business Combinations Goodwill and Other Intangible Assets.
   30




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Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of,
  Accounting for Leases
  31




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Share-based Payment
   Year EndedDecember 30,
    
    
    December 31,2008
    
    
    2007Revenues:Store sales
    
    
    93.8
    %
    
    
    92.6
    %Franchise royalties and fees
    
    
    5.8
    
    
    
    6.7Other revenue
    
    
    0.4
    
    
    
    0.7100.0
    %
    
    
    100.0
    %Costs and expenses:Store operating expenses (1):Food and paper cost
    
    
    34.5
    %
    
    
    35.4
    %Cost of goods sold
    
    
    9.3
    
    
    
    18.9Labor
    
    
    31.9
    
    
    
    30.9Occupancy
    
    
    12.1
    
    
    
    9.0Other store operating expenses
    
    
    18.2
    
    
    
    17.5General and administrative expenses
    
    
    116.5
    
    
    
    71.8Advertising, marketing and promotion expenses
    
    
    15.2
    
    
    
    13.7Depreciation and amortization
    
    
    8.6
    
    
    
    8.8Loss on disposal of assets, Impairment of Goodwill and
Long-lived assets
    
    
    35.7
    
    
    
    13.6Total costs and expenses
    
    
    270.8
    
    
    
    202.1Operating loss
    
    
    (170.8
    )
    
    
    (102.1
    )Other income (expense):Interest income
    
    
    1.4
    
    
    
    0.3Interest expense
    
    
    (1.3
    )
    
    
    (7.9
    )Other expense, net
    
    
    1.2
    
    
    
    (1.5
    )Other income (expense), net
    
    
    1.3
    
    
    
    (9.1
    )Loss before income taxes
    
    
    (169.6
    )
    
    
    (111.2
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    
    (169.6
    %)
    
    
    (111.2
    %)
 (1)
    
    Food and paper costs are shown as a percentage of food sales. The cost of nutritional
products, labor, occupancy and other store operating expenses are shown as a
percentage of total store sales.  32




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Year EndedDecember 30,
    
    
    December 31,2008
    
    
    2007Company-owned locations:Locations at the beginning of the year
    
    
    4
    
    
    
    5Locations opened
    
    
    
    
    
    
    1Locations closed
    
    
    
    
    
    
    (1
    )Locations sold
    
    
    
    
    
    
    (1
    )Locations transferred
    
    
    
    
    
    
    Locations at the end of the year
    
    
    4
    
    
    
    4Franchise-operated locations:Locations at the beginning of the year
    
    
    4
    
    
    
    4Locations opened
    
    
    3
    
    
    
    2Locations closed
    
    
    (1
    )
    
    
    (2
    )Locations sold
    
    
    
    
    
    
    Locations transferred
    
    
    
    
    
    
    Locations at the end of the year
    
    
    6
    
    
    
    4System-wide locationsLocations at the beginning of the year
    
    
    8
    
    
    
    9Locations opened
    
    
    3
    
    
    
    3Locations closed
    
    
    (1
    )
    
    
    (3
    )Locations sold
    
    
    
    
    
    
    (1
    )Locations transferred
    
    
    
    
    
    
    Locations at the end of the year
    
    
    10
    
    
    
    8
        33




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for Costs Associated with Exit or Disposal Activities
       36




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EstimatedCapital Requiredto Fund theCompanysOperating Planfrom Dec. 28, 2008to Dec 31,2010(Millions)Capital Required to Fund the Companys Operating Plan (millions):Operating activities (excluding marketing & promotion services
shown below)
    
    $
    4.4Other capital expenditures
    
    
    0.1Marketing and promotion services
    
    
    0.7Debt repayment
    
    
    0.8Estimated capital required through December 30, 2010
    
    $
    6.0
 
     37




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i.e.
  38




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Less Than
    
    
    1 Year to
    
    
    4 Years to
    
    
    More thanTotal
    
    
    1 Year
    
    
    3 Years
    
    
    5 Years
    
    
    5 YearsLong-term debt
    
    $
    1,233,396
    
    
    $
    883,684
    (1)
    
    $
    349,712
    
    
    $
    
    
    
    $
    Capital leases
    
    
    148,344
    
    
    
    61,725
    
    
    
    86,619
    
    
    
    
    
    
    
    Operating leases
    
    
    3,747,000
    
    
    
    626,000
    
    
    
    1,218,000
    
    
    
    1,274,000
    
    
    
    629,000Scheduled interest payments(2)
    
    
    29,943
    
    
    
    18,608
    
    
    
    6,335
    
    
    
    
    
    
    
    
 (1)
    
    During the twelve months ended December 28, 2008, we repaid $1,303,713
of our long-term debt including $812,054 paid in April 2008 to
extinguish the note payable issued in connection with the acquisition
of the Boston Downtown Crossing restaurant and store. Long-term debt
due in less than 1 year includes $450,000 that becomes due upon the
sale of our Landmark Center restaurant and store. We currently have no
plans to sell our Landmark Center unit.(2)
    
    Interest on the term note payable to T.D. Banknorth, N.A. is payable
monthly at the banks prime rate (3.25% per annum at December 28,
2008). Future interest on the T.D. Banknorth note was calculated using
an assumed rate of 3.25%.     39




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Fair Value Measurements,
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 Recent Accounting Pronouncements
 Business Combinations.
 Non-controlling Interests in Consolidated Financial
Statements, an Amendment of ARB 51.
  40




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##### Table of Contents



Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133
 
 Item 7A.
Quantitive and Qualitive Disclosures About Market Risk.
 N/A
 
 Item 8.
Financial Statements and Supplementary Data.
  Report of Independent Registered Public Accounting Firm
    
    
    42Consolidated Balance Sheets as of December 28, 2008 and
December 30, 2007
    
    
    43  44Consolidated Statements of Operations for the Fiscal Years
Ended December 28, 2008 and December 30, 2007
    
    
    45Consolidated Statements of Stockholders Equity (Deficit) for the
Fiscal Years Ended December 28, 2008 and December 30, 2007
    
    
    46Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 28, 2008 and December 30, 2007
    
    
    47Notes to Consolidated Financial Statements
    
    
    48  70
  41




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2008
    
    
    2007Current assets:Cash and cash equivalents
    
    $
    787,551
    
    
    $
    3,352,201Restricted cash
    
    
    417,490
    
    
    
    1,083,612Accounts receivable
    
    
    152,373
    
    
    
    93,534Inventories
    
    
    141,807
    
    
    
    193,359Prepaid expenses and other current assets
    
    
    79,657
    
    
    
    40,2831,578,878
    
    
    
    4,762,989Property and equipment:Equipment
    
    
    925,329
    
    
    
    874,853Furniture and fixtures
    
    
    155,744
    
    
    
    156,207Leasehold improvements
    
    
    1,782,919
    
    
    
    2,301,571Website development costs
    
    
    49,389
    
    
    
    80,7362,913,381
    
    
    
    3,413,367Accumulated depreciation and amortization
    
    
    1,172,984
    
    
    
    699,3051,740,397
    
    
    
    2,714,062Other assets:Goodwill
    
    
    211,363
    
    
    
    977,135Other
    
    
    112,028
    
    
    
    129,360323,391
    
    
    
    1,106,495Total assets
    
    $
    3,642,666
    
    
    $
    8,583,546
   43




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2008
    
    
    2007Current liabilities:Current portion of long-term debt
    
    $
    883,684
    
    
    $
    1,874,993Current portion of capital lease obligations
    
    
    61,725
    
    
    
    51,582Accounts payable
    
    
    614,556
    
    
    
    727,293Franchisee deposits
    
    
    700,000
    
    
    
    504,500Accrued expenses and other current liabilities
    
    
    404,908
    
    
    
    439,2262,664,873
    
    
    
    3,597,594Long-term liabilities:Long-term debt
    
    
    349,712
    
    
    
    730,691Capital lease obligations
    
    
    86,619
    
    
    
    83,005Other noncurrent liabilities
    
    
    225,264
    
    
    
    152,158661,595
    
    
    
    965,854Total liabilities
    
    
    3,326,468
    
    
    
    4,563,448Commitments and contingenciesStockholders equity:Common stock, $0.001 par value, 300,000,000 shares
authorized, 34,818,490 and 29,241,158 shares
issued and outstanding
    
    
    34,818
    
    
    
    29,241Additional paid-in capital
    
    
    24,998,924
    
    
    
    18,833,096Accumulated deficit
    
    
    (24,717,544
    )
    
    
    (14,842,239
    )316,198
    
    
    
    4,020,098Total liabilities and stockholders equity
    
    $
    3,642,666
    
    
    $
    8,583,546
   44




---



##### Table of Contents



2008
    
    
    2007Revenues:Store sales
    
    $
    5,462,915
    
    
    $
    4,543,194Franchise royalties and fees
    
    
    335,860
    
    
    
    326,733Other revenue
    
    
    25,267
    
    
    
    34,9565,824,042
    
    
    
    4,904,883Costs and expenses:Store operating expenses:Food and paper costs
    
    
    1,615,417
    
    
    
    1,154,251Cost of Goods sold
    
    
    509,775
    
    
    
    856,978Labor
    
    
    1,743,831
    
    
    
    1,405,662Occupancy
    
    
    658,672
    
    
    
    410,061Other store operating expenses
    
    
    992,350
    
    
    
    796,804General and administrative expenses
    
    
    6,785,620
    
    
    
    3,520,392Advertising, marketing and promotion expenses
    
    
    887,259
    
    
    
    671,440Depreciation and amortization
    
    
    500,153
    
    
    
    429,586Impairment of goodwill
    
    
    765,772
    
    
    
    Impairment of long-lived assets
    
    
    1,249,150
    
    
    
    Loss on disposal of assets
    
    
    65,524
    
    
    
    666,838Total costs and expenses
    
    
    15,773,523
    
    
    
    9,912,012Operating loss
    
    
    (9,949,481
    )
    
    
    (5,007,129
    )Other income (expense):Interest income
    
    
    80,825
    
    
    
    18,627Interest expense
    
    
    (76,602
    )
    
    
    (387,757
    )Other expense
    
    
    69,953
    
    
    
    (75,155
    )Other income (expense), net
    
    
    74,176
    
    
    
    (444,285
    )Loss before income taxes
    
    
    (9,875,305
    )
    
    
    (5,451,414
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (9,875,305
    )
    
    $
    (5,451,414
    )Basic and diluted earnings (loss) per share
    
    $
    (0.29
    )
    
    $
    (0.68
    )
   45




---



##### Table of Contents



UFOOD RESTAURANT GROUP, INC.
and SUBSIDIARY
 
 
 Series B Convertible
    
    
    Series A Convertible
    
    
    Common Stock
    
    
    Additional Paid-in
    
    
    AccumulatedShares
    
    
    Value
    
    
    Shares
    
    
    Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalances, January 1, 2007
    
    
    1,407,416
    
    
    
    431,187
    
    
    
    1,576,040
    
    
    
    525,439
    
    
    
    4,208,745
    
    
    
    4,209
    
    
    
    6,720,271
    
    
    
    (9,390,825
    )
    
    
    (1,709,719
    )Dividends accrued on mandatory redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (244,886
    )
    
    
    
    
    
    
    (244,886
    )Accrued preferred stock dividends
    
    
    
    
    
    
    395,770
    
    
    
    
    
    
    
    300,709
    
    
    
    
    
    
    
    
    
    
    
    (696,479
    )
    
    
    
    
    
    
    Conversion of preferred stock
    
    
    (1,407,416
    )
    
    
    (826,957
    )
    
    
    (1,576,040
    )
    
    
    (826,148
    )
    
    
    3,710,642
    
    
    
    3,710
    
    
    
    4,965,093
    
    
    
    
    
    
    
    3,315,698Conversion of promissory notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,248,868
    
    
    
    6,249
    
    
    
    2,650,560
    
    
    
    
    
    
    
    2,656,809Stock issued for marketing and promotional services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,371,157
    
    
    
    1,371
    
    
    
    313,629
    
    
    
    
    
    
    
    315,000Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,746
    
    
    
    42
    
    
    
    249,250
    
    
    
    
    
    
    
    249,292Cancellation and re-issuance of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,158
    
    
    
    
    
    
    
    75,158Reverse acquisition recapitalization adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,500,000
    
    
    
    7,500
    
    
    
    (7,500
    )
    
    
    
    
    
    
    Issuance of Units (net of issuance costs of $1,345,840)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,160,000
    
    
    
    6,160
    
    
    
    4,808,000
    
    
    
    
    
    
    
    4,814,160Net loss for year ended December 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,451,414
    )
    
    
    (5,451,414
    )Balances, December 30, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    29,241,158
    
    
    $
    29,241
    
    
    $
    18,833,096
    
    
    $
    (14,842,239
    )
    
    $
    4,020,098Issuance of Units (net of issuance costs of $691,154)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,781,000
    
    
    
    4,781
    
    
    
    4,083,542
    
    
    
    
    
    
    
    4,088,323Stock issued for marketing and promotional services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    740,000
    
    
    
    740
    
    
    
    1,030,510
    
    
    
    
    
    
    
    1,031,250Stock issued for franchise sales commission
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,332
    
    
    
    56
    
    
    
    54,984
    
    
    
    
    
    
    
    55,040Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    996,792
    
    
    
    
    
    
    
    996,792Net loss for year ended December 28, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,875,305
    )
    
    
    (9,875,305
    )Balances, December 28, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    34,818,490
    
    
    $
    34,818
    
    
    $
    24,998,924
    
    
    $
    (24,717,544
    )
    
    $
    316,198
  46




---



##### Table of Contents



2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (9,875,305
    )
    
    $
    (5,451,414
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    500,154
    
    
    
    429,586Amortization of deferred financing costs
    
    
    15,871
    
    
    
    20,001Provision for doubtful accounts
    
    
    29,949
    
    
    
    29,229Impairment of goodwill
    
    
    765,772
    
    
    
    Impairment of long lived assets
    
    
    1,249,150
    
    
    
    Adjustment to warrant exercise prices
    
    
    
    
    
    
    75,155Stock-based compensation
    
    
    1,051,832
    
    
    
    249,292Loss on disposal of assets
    
    
    115,566
    
    
    
    666,838Non-cash promotion expenses
    
    
    1,031,250
    
    
    
    424,000Non-cash interest on bridge loans
    
    
    
    
    
    
    119,650Gain on extinguishment of debt
    
    
    (68,575
    )
    
    
    Increase (decrease) in cash from changes in assets and liabilities:Accounts receivable
    
    
    (88,788
    )
    
    
    (56,362
    )Inventories
    
    
    51,552
    
    
    
    3,373Prepaid expenses and other current assets
    
    
    (39,374
    )
    
    
    17,595Other assets and noncurrent liabilities
    
    
    41,343
    
    
    
    232,429Accounts payable
    
    
    (112,737
    )
    
    
    224,208Franchisee deposits
    
    
    195,500
    
    
    
    (143,000
    )Accrued expenses and other current liabilities
    
    
    (34,318
    )
    
    
    24,436Net cash used in operating activities
    
    
    (5,171,158
    )
    
    
    (3,134,984
    )Cash flows from investing activities:Proceeds from sale of assets
    
    
    
    
    
    
    150,000Acquisition of property and equipment
    
    
    (792,225
    )
    
    
    (992,447
    )Net cash used in investing activities
    
    
    (792,225
    )
    
    
    (842,447
    )Cash flows from financing activities:Proceeds from issuance of notes payable
    
    
    
    
    
    
    2,537,160Proceeds from issuance of common stock, net
    
    
    4,088,323
    
    
    
    4,814,160Payments on long-term debt
    
    
    (1,303,713
    )
    
    
    (715,094
    )Payments on capital lease obligations
    
    
    (51,999
    )
    
    
    (63,072
    )(Increase) decrease in restricted cash
    
    
    666,122
    
    
    
    (1,083,612
    )Net cash provided by financing activities
    
    
    3,398,733
    
    
    
    5,489,542Increase(Decrease) in cash and cash equivalents
    
    
    (2,564,650
    )
    
    
    1,512,111Cash and cash equivalents  beginning of year
    
    
    3,352,201
    
    
    
    1,840,090Cash and cash equivalents  end of year
    
    $
    787,551
    
    
    $
    3,352,201
   47




---



##### Table of Contents



1. Nature of Operations
   2. Summary of Significant Accounting Policies
 Basis of Presentation and Principles of Consolidation
   Fiscal Year
  Use of Estimates
   48




---



##### Table of Contents



Cash Equivalents
  Inventories
  Deferred Financing Costs
  Property and Equipment
  Leasehold improvements
    
    5 yearsEquipment
    
    5 yearsFurniture and fixtures
    
    5 yearsWebsite development costs
    
    3 years
  Goodwill and Other Intangible Assets
 Business Combinations Goodwill and Other Intangible Assets.
   49




---



##### Table of Contents



Impairment of Long-Lived Assets
 Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of,
 Key man insurance
  Income Taxes
 Accounting for Income Taxes.
 Accounting for Uncertainty in Income Taxes.
 Revenue Recognition
   51




---



##### Table of Contents



Accounting for Franchise Fee Income
      Accounting for Leases.
  Earnings Per Share,
    52




---



##### Table of Contents



Share-Based Payment
   Fair Value Measurements,
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 Recent Accounting Pronouncements
 Business Combinations.
  53




---



##### Table of Contents



Non-controlling Interests in Consolidated Financial
Statements, an Amendment of ARB 51.
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133
  3. Reverse Merger
     54




---



##### Table of Contents



Common Stock
    
    
    AdditionalShares
    
    
    Par Value
    
    
    Paid-in CapitalUFood shares
outstanding
immediately prior
to the Merger
    
    
    23,700,000
    
    
    $
    23,700
    
    
    $
    (23,700
    )UFood shares retired
    
    
    (16,200,000
    )
    
    
    (16,200
    )
    
    
    16,200Reverse acquisition
recapitalization
adjustment
    
    
    7,500,000
    
    
    $
    7,500
    
    
    $
    (7,500
    )
   55




---



##### Table of Contents



4. Disposal of Assets
  Accounting for Costs Associated with Exit or
Disposal Activities.
   5. Goodwill
     56




---



##### Table of Contents



FranchiseStore Operations
    
    
    OperationsSegment
    
    
    Segment
    
    
    TotalBalance as of January 1, 2007
    
    $
    1,269,325
    
    
    $
    136,000
    
    
    $
    1,405,325Goodwill written off in
connection with the closure of
one restaurant and the sale of
one restaurant
    
    
    (428,190
    )
    
    
    
    
    
    
    (428,190
    )Balance as of December 30, 2007
    
    
    841,135
    
    
    
    136,000
    
    
    
    977,135Goodwill written off in
connection with impairment
test
    
    
    (765,772
    )
    
    
    
    
    
    
    (765,772Balance as of December 28, 2008
    
    $
    75,363
    
    
    $
    136,000
    
    
    $
    211,363
    )
 6. Notes Payable
     57




---



##### Table of Contents



7. Long-Term Debt
  2008
    
    
    2007Term note payable to bank in monthly principal
installments of $29,167 commencing January 2007
through May 2010. Interest is payable monthly at
the banks prime rate (3.25% at December 31,
2008). The note is secured by substantially all
assets of the Company.
    
    $
    692,076
    
    
    $
    1,042,080Downtown Crossing acquisition note payable.
Interest accrues at 6% per annum and is payable
monthly, with certain limitations as defined in
the agreement. All unpaid amounts are due on or
before December 31, 2007, as defined in the
agreement. The note is secured by the assets
acquired.
    
    
    
    
    
    
    880,628Landmark Center acquisition promissory note with
no stated interest rate. Due upon the occurrence
of a sales event, as defined in the agreement.
The note agreement includes a restrictive
covenant requiring the Companys wholly-owned
subsidiary, KnowFat of Landmark Center, Inc., to
maintain net equity of not less than $450,000.
    
    
    450,000
    
    
    
    450,000Unsecured, non-interest bearing note payable.
This note payable is due on demand. Interest
imputed on the note using a discount rate of 5%
totaled $59,597, which is being amortized over
the term of the note.
    
    $
    51,787
    
    
    $
    152,099Indebtedness incurred in connection with the
acquisition of the two franchisee locations. No
stated interest rate; this note payable is due
on demand.
    
    
    2,137
    
    
    
    14,996Note payable to the Watertown landlord in
connection with the acquisition of the training
center in 2004. The note is payable in monthly
installments of $2,566 including interest at 5%
through April 2010.
    
    
    37,396
    
    
    
    65,8811,233,396
    
    
    
    2,605,684Less current portion
    
    
    883,684
    
    
    
    1,874,993Long-term debt
    
    $
    349,712
    
    
    $
    730,691
  58




---



##### Table of Contents



Year ending December 31,2009
    
    $
    883,6842010
    
    
    349,712$
    1,233,396
 8. Capital Lease Obligations
   Year ending December 31,2009
    
    $
    81,3332010
    
    
    64,8552011
    
    
    23,259Thereafter
    
    
    12,339181,786Less imputed interest
    
    
    33,442148,344Less current portion
    
    
    61,725Long-term portion of capital lease obligations
    
    $
    86,619
  9. Capital Stock
     59




---



##### Table of Contents



th
 Vesting Date
    
    Number of SharesJune 13, 2009
    
    
    152,351June 13, 2010
    
    
    152,351June 11, 2011
    
    
    76,175
            60




---



##### Table of Contents



Description
    
    Number of Warrants
    
    
    Exercise PriceNew Warrants
    
    
    607,226
    
    
    $
    1.00Placement Agent
warrants
    
    
    2,988,200
    
    
    $
    1.00Vendor Warrants
    
    
    2,916,666
    
    
    $
    1.25Investor Notes warrants
    
    
    2,040,088
    
    
    $
    1.25Investor Warrants
    
    
    5,470,500
    
    
    $
    1.25Total
    
    
    14,022,680
    61




---



##### Table of Contents



10. Stock-Based Compensation
    2008
    
    
    2007Expected term (years)
    
    
    6
    
    
    
    6Expected volatility
    
    
    45
    %
    
    
    45
    %Risk-free interest rate
    
    
    4.37
    %
    
    
    4.37
    %Expected annual dividend
    
    
    None
    
    
    None
   62




---



##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2007
    
    
    226,191
    
    
    $
    0.54
    
    
    
    8.4Granted
    
    
    148,461
    
    
    $
    0.66
    
    
    
    10.0Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (69,950
    )
    
    
    (0.36
    )
    
    
    8.4Outstanding at December 31, 2007
    
    
    304,702
    
    
    $
    0.61
    
    
    
    8.8
    
    
    $
    146,257Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    ForfeitedOutstanding at December 30, 2008
    
    
    304,702
    
    
    $
    0.61
    
    
    
    7.8
    
    
    $
    -0-Exercisable at December 30, 2008
    
    
    304,702
    
    
    $
    0.61
    
    
    
    7.8
    
    
    $
    -0-
     63




---



##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 18, 2008
    
    
    -0-
    
    
    $
    
    
    
    
    Granted
    
    
    1,950,000
    
    
    $
    1.00Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at December 30, 2007
    
    
    1,950,000
    
    
    $
    1.00
    
    
    
    10.0
    
    
    $
    175,500Granted
    
    
    897,920
    
    
    $
    1.22
    
    
    
    10.0Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (2,000
    )
    
    $
    1.22
    
    
    
    10.0Outstanding at December 28, 2008
    
    
    2,845,920
    
    
    $
    1.22
    
    
    
    8.8
    
    
    
    -0-Exercisable at December 28,2008
    
    
    1,402,266
    
    
    $
    1.13
    
    
    
    8.8
    
    
    $
    -0-
     11. Income Taxes
    64




---



##### Table of Contents



2008
    
    
    2007Deferred tax assetsFederal
    
    $
    8,192,000
    
    
    $
    4,923,000State
    
    
    1,495,000
    
    
    
    905,000Total deferred tax assets
    
    
    9,687,000
    
    
    
    5,828,000Valuation allowance
    
    
    (9,687,000
    )
    
    
    (5,828,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  2008
    
    
    2007FederalDeferredNet operating loss carryforward
    
    $
    2,370,000
    
    
    $
    1,678,000Other
    
    
    899,000
    
    
    
    61,0003,269,000
    
    
    
    1,739,000StateDeferredNet operating loss carryforward
    
    
    424,000
    
    
    
    317,000Other
    
    
    166,000
    
    
    
    (286,000
    )590,000
    
    
    
    31,000Tax benefit before adjustment to valuation allowance
    
    
    3,859,000
    
    
    
    1,770,000Adjustment to valuation allowance
    
    
    (3,859,000
    )
    
    
    (1,770,000
    )Net tax benefit
    
    $
    
    
    
    $
    
  2008
    
    
    2007Federal tax provision rate
    
    
    34
    %
    
    
    34
    %State tax provision, net of federal provision
    
    
    6
    %
    
    
    6
    %Change in valuation allowance
    
    
    (40
    %)
    
    
    (40
    %)
    
    
    
    
    65




---



##### Table of Contents



12. Concentration of Credit Risk
  13. Commitments and Contingencies
    Year ending December 31,2009
    
    $
    626,0002010
    
    
    602,0002011
    
    
    616,0002012
    
    
    633,0002013
    
    
    641,000Thereafter
    
    
    629,000$
    3,747,000
 Employment Agreements
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Legal matters
       67




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14. Supplemental Disclosures of Cash Flow Information:
 2008
    
    
    2007Cash paid during the year for interest
    
    $
    76,602
    
    
    $
    182,422Summary of non-cash investing and financing activitiesAccrued preferred stock dividends
    
    $
    
    
    
    $
    941,365Conversion of promissory notes into Common Stock
    
    $
    
    
    
    $
    2,656,809Conversion of preferred stock into Common Stock
    
    $
    
    
    
    $
    4,968,803Property and equipment acquired with capital lease
    
    $
    65,756
    
    
    $
    33,420
 15. Loss per share
  2008
    
    
    2007Net loss
    
    $
    (9,875,305
    )
    
    $
    (5,451,414
    )Preferred stock dividend requirements
    
    
    -0-
    
    
    
    (941,365
    )Net loss allocable to common stockholders
    
    $
    (9,875,305
    )
    
    $
    (6,392,779
    )Weighted average number of shares
outstanding  basic and diluted
    
    
    33,851,004
    
    
    
    9,433,081Basic and diluted loss per common share
    
    $
    (0.29
    )
    
    $
    (0.68
    )
  16. Segment Data
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2008
    
    
    2007Revenues:Store operations
    
    $
    5,462,915
    
    
    $
    4,543,194Franchise operations
    
    
    361,128
    
    
    
    361,689Total revenue
    
    $
    5,824,042
    
    
    $
    4,904,883Segment loss:Store operations
    
    $
    (2,781,278
    )
    
    $
    (999,385
    )Franchise operations
    
    
    (1,517,876
    )
    
    
    (522,137
    )Total segment loss
    
    $
    (4,299,154
    )
    
    $
    (1,521,522
    )Advertising, marketing and promotion
    
    $
    887,259
    
    
    $
    671,440Depreciation and amortization
    
    
    500,153
    
    
    
    429,586Unallocated general and administrative expenses
    
    
    4,262,055
    
    
    
    2,384,581Interest (income) expense
    
    
    (4,013
    )
    
    
    369,130Other (income) expenses, net
    
    
    (69,303
    )
    
    
    75,155Net loss
    
    $
    (9,875,305
    )
    
    $
    (5,451,414
    )Depreciation and amortization:Store operations
    
    $
    458,062
    
    
    $
    372,404Franchise operations
    
    
    42,091
    
    
    
    57,181Total depreciation and amortization
    
    $
    500,153
    
    
    $
    429,586Capital expenditures:Store operations
    
    $
    704,027
    
    
    $
    937,859Franchise operations
    
    
    153,954
    
    
    
    88,008Total capital expenditures
    
    $
    857,981
    
    
    $
    1,025,867Segment assets:Store operations
    
    $
    2,050,990
    
    
    $
    3,834,155Franchise operations
    
    
    1,591,676
    
    
    
    4,749,391Total segment assets
    
    $
    3,642,666
    
    
    $
    8,583,546
  69




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17. Subsequent Events
      70




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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
      Internal Control  Integrated Framework
   71




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Item 9B. Other Information
   72




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
   73




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PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 (a)
    
    The following documents are filed as part of this report:
 (1)
    
    Consolidated financial statements (included in Part II, Item 8):
       (2)
    
    Consolidated financial statement schedules
  (3)
    
    Exhibits included herein:
   74




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SIGNATURES
  UFOOD RESTAURANT GROUP, INC.Date: March 30, 2009
    By:
    /s/ George NaddaffGeorge NaddaffChairman and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ George Naddaff
    
    Chairman of the
Board and Chief
Executive Officer
(Principal
Executive Officer)
    
    March 30, 2009/s/ Charles A. Cocotas
    
    President and Chief
Operating Officer,
Director
    
    March 30, 2009/s/ Glenn E. Davis
    
    Chief Financial
Officer (Principal
Financial Officer)
    
    March 30, 2009Mark Giresi
    
    Director
    
    March 30, 2009/s/ Robert Grayson
    
    Director
    
    March 30, 2009/s/ Jeffrey Ross
    
    Director
    
    March 30, 2009
  75




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21
    
    Subsidiaries of the Registrant*31.1
    
    Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002*32.2
    
    Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002*
  76