As filed with the Securities and Exchange Commission on July 8, 2008
Registration No. 333-152006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
AMEDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 

UFOOD RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)

Nevada
5812
20-4463582
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
 
255 Washington Street, Suite 100
Newton, MA 02458
(617) 787-6000
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)

George Naddaff, Chief Executive Officer
UFood Restaurant Group, Inc.
255 Washington Street, Suite 100
Newton, MA 02458
(617) 787-6000
(Name, address including zip code, and
telephone number, including area code, of agent for service)

Copy to:

Adam S. Gottbetter, Esq.
Gottbetter & Partners, LLP
488 Madison Avenue, 12th Floor
New York, NY 10022
(212) 400-6900

Approximate date of commencement of proposed sale to the public: From time to time after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
 
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to
be Registered
  
Amount to be
Registered(1)(2)
  
Proposed Maximum
Offering Price
Per Unit(3)
  
Proposed Maximum
Aggregate
Offering Price(3)
  
Amount of
Registration Fee
  
Common stock, par value $0.001 per share
    
26,035,260 shares
  
$
1.35
 
$
35,147,601
 
$
1,381.30
(4)
 
(1)
Consists of (i) 15,659,059 issued and outstanding shares of common stock and (ii) 10,376,201 shares of common stock issuable upon exercise of warrants.

(2)
Pursuant to Rule 416 under the Securities Act of 1933, as amended, the number of shares of common stock registered hereby is subject to adjustment to prevent dilution resulting from stock splits, stock dividends or similar transactions.

(3)
Estimated solely for the purpose of determining the amount of the registration fee, based on the average of the high and low sale prices of the common stock as reported by the OTC Bulletin Board on June 26, 2008, in accordance with Rule 457(c) under the Securities Act of 1933.
   
(4) Paid in connection with the initial filing of this registration statement.
 
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 

The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion, dated July 8, 2008

UFood logo

UFOOD RESTAURANT GROUP, INC.

Prospectus

26,035,260 shares of common stock

This prospectus relates to the offering by the selling stockholders of UFood Restaurant Group, Inc., of up to 26,035,260 shares of our common stock, par value $0.001 per share. These shares include (i) 15,659,059 issued and outstanding shares of common stock and (ii) 10,376,201 shares of our common stock issuable upon exercise of warrants. We are registering the offer and sale of the common stock to satisfy registration rights we have granted to the selling stockholders. We will not receive any proceeds from the sale of the common stock by the selling stockholders.

The selling stockholders have advised us that they will sell the shares of our common stock from time to time in the open market, in privately negotiated transactions or a combination of these methods, at market prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices.

Our common stock is traded on the OTC Bulletin Board under the symbol “UFFC.OB”. On July 7, 2008, the closing price of our common stock was $1.50 per share.

Investing in our common stock involves risks. Before making any investment in our securities, you should read and carefully consider risks described in the “Risk Factors” section beginning on page 5 of this prospectus.

You should rely only on the information contained in this prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with different information. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus is only accurate on the date of this prospectus, regardless of the time of any sale of securities.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus is dated      , 2008.

 
TABLE OF CONTENTS

   
PAGE
     
SUMMARY
  
3
     
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
5
     
RISK FACTORS
  
5
     
SELLING STOCKHOLDERS
  
17
     
USE OF PROCEEDS
  
28
     
DETERMINATION OF OFFERING PRICE
  
29
     
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  
29
     
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
  
30
     
DESCRIPTION OF BUSINESS
  
47
     
PROPERTIES
  
53
     
LEGAL PROCEEDINGS
  
54
     
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
  
55
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
57
     
EXECUTIVE COMPENSATION
  
59
     
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
62
     
PLAN OF DISTRIBUTION
  
63
     
DESCRIPTION OF SECURITIES
  
65
     
LEGAL MATTERS
  
68
     
EXPERTS
  
68
     
WHERE YOU CAN FIND MORE INFORMATION
  
68
     
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
  
69
     
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
69
     
FINANCIAL STATEMENTS
  
F-1
 

SUMMARY

This summary highlights those aspects of the offering that we deem most significant to potential investors. Potential investors should read the entire prospectus carefully, including the more detailed information regarding our business provided below in the “Description of Business” section, the risks of purchasing our common stock discussed under the “Risk Factors” section, and our financial statements and the accompanying notes.

As used in this prospectus, “UFood,” “the Company,” “we,” “us” and “our” refer to UFood Restaurant Group, Inc., a Nevada corporation, and its wholly-owned subsidiaries taken as a whole, unless otherwise stated or the context clearly indicates otherwise. “KnowFat” refers to the operations of KnowFat Franchise Company, Inc., a Delaware company, prior to the December 18, 2007, merger, discussed below, which resulted in KnowFat Franchise Company, Inc., becoming a wholly-owned subsidiary of ours.

Our Company

We are a franchisor and operator of fast-casual food service restaurants and nutritional product retail stores that capitalize on the growing trend toward healthier living and eating and on the increased consumer demands for restaurant fare that offers great-tasting food with healthy attributes. We use high quality ingredients and healthy cooking techniques to ensure that our menu items taste great and are “better for you” than ordinary quick serve food. Guests order at a counter and wait three to five minutes for their meals to be prepared. At UFood Grill, we bake, grill or steam our menu offerings; we never fry our food. All of the meat we serve is all-natural and hormone-free. Our sauces, cheeses and salad dressings are reduced-fat. We serve whole-grain breads and side dishes and, where we can do so while still charging our customers a reasonable price, organic meats and vegetables (meeting U.S. Food and Drug Administration standards for “organic”). The food is served on ceramic plates with metal utensils and is either taken to the table by each guest or delivered to the table by a UFood server. Great taste and an overall pleasing dining experience for an individual customer is the focus of UFood’s mission and concept.

We were incorporated in the State of Nevada on February 8, 2006, as Axxent Media Corporation. Prior to December 18, 2007, we were a development stage company as defined by Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. As Axxent Media Corporation, our business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, we changed our name to UFood Franchise Company, and on September 25, 2007, we changed our name to UFood Restaurant Group, Inc.

On December 18, 2007, a wholly-owned subsidiary of our Company merged with and into KnowFat Franchise Company, Inc., with KnowFat surviving the merger as our wholly-owned subsidiary. Following the merger, we continued KnowFat’s business operations. KnowFat was founded in 2004 to capitalize on the popularity of a chain of fast-casual concept restaurants operating under the trade name “Lo Fat Know Fat” in the greater Boston area, as well as the growing trend in the United States towards healthier living and eating. After operating for three years as KnowFat! Lifestyle Grille, while continuously modifying and improving the concept, management decided that future locations will operate under the name UFood Grill.
 
Our operations currently consist of four company-owned restaurants and four franchise-owned locations in Boston, Naples, Florida, and Sacramento, California. Two of the franchise-owned locations are operated by the Company pursuant to management services agreements. To date in 2008, we have entered into franchise and development agreements to open 46 UFood Grill outlets comprising five UFood Grill units in the Chicago metropolitan area, 38 UFood Grill units in a five-state area composed of Colorado, Utah, Montana, Idaho and Wyoming and three units at airports in Texas. We have previously sold franchise development agreements for Houston, Naples, Sacramento and San Jose. In May 2008, we terminated a 2005 franchise agreement with our franchisee operator in Dade and Broward Counties, Florida, covering 24 franchise locations because the franchisee did not meet the opening timeline specified in the agreement, and we have reclaimed the franchise territory. We currently have 75 franchise locations under development. One of our company-operated restaurants and two of our franchise-operated locations operate under the name UFood Grill. We expect to convert the remaining five KnowFat! Lifestyle Grille units to UFood Grill outlets over the next several months.

Prior to the merger with KnowFat, our headquarters were located in Vancouver, British Columbia, Canada. Following the merger, our headquarters were relocated to Newton, Massachusetts.
 
3

For the three months ended March 30, 2008, our revenues were $1.326 million, with a net loss of $1.783 million. For the year ended December 30, 2007, our revenues were $4.905 million, with a net loss of $5.451 million.

Corporate Information

Our principal executive offices are located at 255 Washington Street, Suite 100, Newton, Massachusetts 02458. Our telephone number is (617) 787-6000. Our website address is www.ufoodgrill.com. Information contained on our website is not deemed part of this prospectus.

The Offering

Common stock currently outstanding
34,812,395 shares (1)
Common stock offered by the Company
None
Common stock offered by the selling stockholders
26,035,260 shares(2)
Common stock outstanding after the offering
45,188,655 shares (3)
Use of proceeds
We will not receive any of the proceeds from the sales of our common stock offered by this prospectus.
OTC Bulletin Board symbol
UFFC.OB
 
(1)
As of May 28, 2008.
(2)
Includes 10,376,201 shares of common stock issuable upon exercise of warrants held by the selling stockholders.
(3)
Assumes the full exercises of the warrants held by the selling stockholders to acquire 10,376,201 shares of common stock and assumes all our other outstanding options and warrants are not exercised.

Summary Financial Information

The following tables summarizes historical financial data regarding our business and should be read together with the information in the section titled “Management’s Discussion and Analysis of Financial Condition” and our Consolidated Financial Statements and the related notes included in this prospectus.
   
Year Ended
  
Three Months Ended (unaudited)
  
   
December 30,
2007
  
December 31,
2006
  
March 30,
2008
  
April 1,
2007
  
Statement of Operations Data 
                  
                   
Revenues
  
$
4,904,883
  
$
3,691,694
  
$
1,325,566
  
$
1,329,635
  
Total costs and expenses
    
9,912,012
    
7,710,553
    
3,097,877
    
2,202,801
  
Net loss
  
$
(5,451,414
)
$
(4,125,613
)
$
(1,783,038
)
$
(945,002
)
Weighted average shares outstanding, basic and fully diluted
    
9,433,081
    
7,919,388
    
31,047,693
    
7,961,133
  
Net loss per common share, basic and fully diluted
  
$
(0.68
)
$
(0.60
)
$
(0.06
)
$
(0.15
)
                           
Statement of Cash Flows Data
                          
                           
Net cash used in operating activities
  
$
3,134,984
  
$
3,539,743
  
$
1,685,001
  
$
911,651
  
Cash and cash equivalents (end of period)
    
3,352,201
    
1,840,090
    
4,016,747
    
472,136
  
 
4
 

Balance Sheet Data
  
At
December 30,
2007
  
 
December 31,
2006
  
At (unaudited)
March 30,
2008
  
 
April 1,
2007
  
                   
Current assets
  
$
4,762,989
  
$
2,172,801
  
$
5,797,156
  
$
1,006,654
  
Total assets
    
8,583,546
    
6,067,522
    
9,526,140
    
4,727,134
  
Current liabilities
    
3,597,594
    
3,387,458
    
3,826,758
    
3,136,751
  
Total liabilities
    
4,563,448
    
7,777,241
    
4,717,003
    
7,381,286
  
Total stockholders’ equity (deficit)
    
4,020,098
    
(1,709,719
)
  
4,809,137
    
(2,654,154
)
 
NOTE REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this prospectus and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, of our annual growth, operating results, future earnings, plans and objectives, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. In some cases, you can identify such forward-looking statements by words such as “estimate,” “project,” “intend,” “forecast,” “future,” “anticipate,” “plan,” “anticipates,” “target,” “planning,” “positioned,” “continue,” “expect,” “believe,” “will,” “will likely,” “should,” “could,” “would,” “may” or the negative of such terms and other comparable terminology that are not statements of historical fact. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this prospectus and in our other public filings with the Securities and Exchange Commission. It is routine for internal projections and expectations to change as the year or each quarter of the year progresses, and therefore it should be clearly understood that all forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this prospectus or other periodic reports are made only as of the date made and may change. We do not undertake any obligation to update or publicly release the result of any revision to these forward-looking statements to reflect events or circumstances occurring after the date they are made or to reflect the occurrence of unanticipated events.

RISK FACTORS

An investment in shares of our common stock is highly speculative and involves a high degree of risk. We face a variety of risks that may affect our operations or financial results and many of those risks are driven by factors that we cannot control or predict. The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect our operations or financial results. Only those investors who can bear the risk of loss of their entire investment should participate in this offering. Prospective investors should carefully consider the following risk factors in evaluating an investment in our common stock.

Risks Related to Our Company and Our Business

We have a limited operating history.

KnowFat was formed approximately four years ago, and we have a short operating history upon which an investor can evaluate our performance. Our proposed operations are subject to all of the risks inherent in the expansion of an early-stage business enterprise, including higher-than-expected expenses and uncertain revenues. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the expansion of an early-stage business and the competitive environment in which we operate. We have had no profits to date, and there can be no assurance of future profits. As a result of the expansion-stage nature of our business and the fact that we will incur significant expenses in connection with our activities, we can be expected to sustain operating losses for the foreseeable future.
 
5
 
We have not been profitable to date and expect our operating losses to continue for the foreseeable future.
 
We have incurred annual operating losses and generated negative cash flows since our inception and have financed our operations principally through equity investments and borrowings. At this time, our ability to generate sufficient revenues to fund operations is uncertain. For the fiscal year ended December 30, 2007, we had revenue of $4,904,883 and incurred an operating loss of $5,007,129. For the fiscal year ended December 31, 2006, we had revenue of $3,691,694 and incurred an operating loss of $4,018,859. Our total accumulated deficit through December 30, 2007, was $14,842,239. For the three months ended March 30, 2008, we had revenue of $1,325,566 and incurred an operating loss of $1,772,311. For the three months ended April 1, 2007, we had revenue of $1,329,635 and incurred an operating loss of $873,166. Our total accumulated deficit through March 30, 2008 was $16,645,277.
 
As a result of our brief operating history, revenue is difficult to predict with certainty. Current and projected expense levels are based largely on estimates of future revenue. We expect expenses to increase in the future as we expand our sales, marketing and administrative activities and incur the expenses of being a public company. As a result, we expect to incur additional losses for at least the next 18 months. We cannot assure you that we will be profitable in the future or generate future revenues. Accordingly, the extent of our future losses and the time required to achieve profitability, if ever, is uncertain. Failure to achieve profitability could materially and adversely affect the value of our Company and our ability to effect additional financings. The success of the business depends on our ability to increase revenues to offset expenses. If our revenues fall short of projections, our business, financial condition and operating results will be materially adversely affected.
 
There are risks inherent in expansion of operations. 

We cannot project with certainty, nor do we make any representations regarding, the number of franchises we will be able to sell or the number of new restaurants we and our franchisees will open in accordance with our present plans and within the timeline or the budgets that we currently project. Our failure to sell the projected number of franchises would adversely affect our ability to execute our business plan by, among other things, reducing our revenues and profits and preventing us from realizing our strategy of being the first major franchiser of retail outlets offering a combination of food service featuring low-fat, low-carbohydrate and low-calorie food items, selected beverages and nutritional products to the general public. Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins consistent with those currently operated by us and our franchisees or that our restaurants will be operated profitably.

We will rely primarily upon area developers to open and operate franchise units. The number of openings and the performance of new stores will depend on various factors, including:

 
·
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, required 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.

Competition for suitable store sites in target markets is intense, and lease costs are increasing (particularly for urban locations). Not all of these factors are within our control or the control of our franchisees, and there can be no assurance that we will be able to accelerate our growth or that we will be able to manage the anticipated expansion of our operations effectively.
 
6

We will depend on contractors and real estate developers to construct our stores. Many factors may adversely affect the cost and time associated with the development and construction of our stores, including:

 
·
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.

Any of these factors could give rise to delays or cost overruns, which may prevent us from developing additional stores within our anticipated budgets or time periods or at all. Any such failure could cause our business, results of operations and financial condition to suffer.
 
Our business plan is dependent on the franchising model. 

Because royalties from franchisees’ sales are a principal component of our revenue base, our success is dependent upon our ability to attract highly qualified franchisees and the ability of our franchisees to promote and capitalize upon UFood’s concept. 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 reasonable financing and restaurants do not open, our royalties from those restaurants will not exist. Even if we are successful in selling franchise units, the contemplated expansion may entail difficulty in maintaining quality standards, operating controls and communications, and in attracting qualified restaurant operators. Locations for units will be based on theoretical projections of market demand with no assurance that such locations will prove successful. As a result, franchise units may not attain desired levels of revenues or may attain them more slowly than projected, and this would adversely affect our results of operations. Since we are dependent on franchisee royalties, we are also at risk for the non-performance by our franchisees of their payment and other obligations under our franchise agreements. For example, in May 2008, we terminated a 2005 franchise agreement with our franchisee operator in Dade and Broward Counties, Florida, covering 24 unopened franchise locations because the franchisee did not meet the opening timeline specified in the agreement, and we have reclaimed the franchise territory. In 2007, we terminated two franchise agreements, one of which covered one operating and four unopened locations in the Minneapolis, Minnesota, area and the other of which covered one operating location in Massachusetts; both agreements were terminated after the stores ceased operations. Similar defaults or failures by other franchisees could materially adversely affect our growth plans and our business, financial condition and operating results.

There are general risk factors affecting the restaurant industry. 

If we grow as anticipated, our Company and our franchisees may be affected by risks inherent in the restaurant industry, including:

 
·
adverse changes in national, regional or local economic or market conditions;

 
·
increased costs of labor (including increases in the minimum wage);
 
7
 
 
·
increased costs of food and nutritional 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;

 
·
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.

Our Company and our franchisees may be the subject of litigation based on discrimination, personal injury or other claims. We can be adversely affected by publicity resulting from food quality, illness, injury or other health concerns or operating issues resulting from one restaurant or a limited number of restaurants in our system. None of these factors can be predicted with any degree of certainty, and any one or more of these factors could have a material adverse effect on our Company.

There is intensive competition in our industry.

The restaurant industry and the nutritional products business are both intensely competitive. There are several healthy-food themed restaurants, most of which have fewer than six units. Moreover, the retail food industry in general, which is highly competitive and includes highly sophisticated national and regional chains, has begun to offer “healthier” alternatives to its typical menu offerings. We operate in the fast-casual sector of the retail food industry. This sector is highly competitive with respect to, among other things, taste, price, food quality and presentation, service, location and the ambiance and condition of each restaurant. In addition, there are a number of nutritional products retail stores and franchises across the United States, some of which are very large. Some of these restaurants, stores and franchises have substantial financial resources, name recognition and reputations. While we believe our products and services are sufficiently different from those of major restaurants and food-service establishments, we will be required to compete with national and regional chains and with independent operators for market share, access to desirable locations and recruitment of personnel. Many of our competitors have existed longer and have a more established market presence with substantially greater financial, marketing, personnel and other resources than us. No assurances can be given that we will have the financial resources, distribution ability, depth of key personnel or marketing expertise to compete successfully in these markets.

Our business is affected by changes in consumer preferences and discretionary spending. 

Our success depends, in part, upon the popularity of our food products and our ability to develop new menu items that appeal to consumers. Shifts in consumer preferences away from our restaurants or cuisine, our inability to develop new menu items that appeal to consumers or changes in our menu that eliminate items popular with some consumers could harm our business. Also, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns or during periods of uncertainty like that which followed the 2001 terrorist attacks on the United States and the possibility of further terrorist attacks. A continuing decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, business and financial condition.
 
8
 
Increase in costs will adversely affect our results of operations. 

Our profitability is dependent on our ability to anticipate and react to changes in our operating costs, including food, labor, occupancy (including utilities and energy), insurance and supplies costs. Various factors beyond our control, including climatic changes and government regulations, may affect food costs. Specifically, our dependence on frequent, timely deliveries of fresh meat and produce subject us to the risks of possible shortages or interruptions in supply caused by adverse weather or other conditions which could adversely affect the availability and cost of any such items. In the past, we have been able to recover some of our higher operating costs through increased menu prices. There have been, and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit our ability to recover such cost increases in their entirety. The recent volatility in certain commodity markets, such as those for energy, grains and dairy products, which have experienced significant increases in prices, may have an adverse effect on us in the latter half of fiscal 2008 and beyond. The extent of the impact may depend on our ability to increase our menu prices and the timing thereof.

Our stores are concentrated in a small geographic area. 

Six of our stores are located in the greater Boston area. A downturn in the regional economy or other significant adverse events in the greater Boston area could have a material adverse effect on our financial condition and results of operations.

We are dependent on management and key personnel. 

During the upcoming stages of our Company’s growth, we will be entirely dependent upon the management skills and expertise of our management and key personnel, including George Naddaff, our current Chairman and Chief Executive Officer, and Charles A. Cocotas, our current President and Chief Operating Officer. We would be materially adversely affected in the event that the services of these individuals or other management or key personnel for any reason ceased to be available and adequate replacement personnel were not found. We have obtained key-man insurance on the life of George Naddaff. Such insurance may be cancelled if premiums are not paid when due. If the current policy is cancelled and when it expires, similar insurance may not be available in the future on terms acceptable to us, and there can be no assurance we will be able to secure such insurance.

Our food service business and the restaurant industry are subject to extensive government regulation. 

We are subject to extensive and varied federal, state and local government regulation, including regulations relating to public health and safety and zoning codes. We operate each of our stores in accordance with standards and procedures designed to comply with applicable codes and regulations. However, if we could not obtain or retain food or other licenses, it would adversely affect our operations. Although we have not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular store or group of stores.

Massachusetts, California and most other states and local jurisdictions have enacted laws, rules, regulations and ordinances which may apply to the operation of a UFood store, including those which:

 
·
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 and general emergency preparedness;
 
9
 
 
·
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.

In addition, some jurisdictions now require menu or other in-store disclosure of calorie and other nutritional information for each menu item.
 
In order to develop and construct more stores, we need to comply with applicable zoning, land use and environmental regulations. Federal and state environmental regulations have not had a material effect on our operations to date, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or even prevent construction and increase development costs for new stores. We are also required to comply with the accessibility standards mandated by the U.S. Americans with Disabilities Act, which generally prohibit discrimination in accommodation or employment based on disability. We may, in the future, have to modify stores, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. While these expenses could be material, our current expectation is that any such action will not require us to expend substantial funds.

We are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986 and various federal and state laws governing various matters including minimum wages, overtime and other working conditions. We pay a significant number of our hourly staff at rates consistent with but higher than the applicable federal or state minimum wage. Accordingly, increases in the minimum wage would increase our labor cost. We are also subject to various laws and regulations relating to our current and any future franchise operations.

We are also subject to various federal and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationships. Many state franchise laws impose restrictions on the franchise agreement, including the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew and the ability of a franchisor to designate sources of supply. The Federal Trade Commission, or the FTC, and some state laws also require that the franchisor furnish to prospective franchisees a franchise offering circular that contains prescribed information and, in some instances, require the franchisor to register the franchise offering.

We have not conducted a comprehensive review of all the potential environmental liabilities at our properties. 

We are subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling, release and disposal of hazardous or toxic substances. These environmental laws provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances. We cannot predict what environmental laws will be enacted in the future, how existing or future environmental laws will be administered or interpreted or the amount of future expenditures that we may need to make to comply with, or to satisfy claims relating to, environmental laws. While, during the period of their ownership, lease or operation, our stores have not been subject to any material environmental matters, we have not conducted a comprehensive environmental review of our properties or operations. We have not conducted investigations of our properties to identify contamination caused by third-party operations; in such instances, our landlords would be required to address the contamination. If the relevant landlord does not the identified contamination properly or completely, then under certain environmental laws, we could be held liable as an owner and operator to address any remaining contamination. Any such liability could be material.
 
Our success and competitive position depends on our ability to protect our proprietary intellectual property. 

We own certain common law trademark rights and a number of federal trademark and service mark registrations. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We therefore devote what we believe to be appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which may cause us to incur significant litigation costs and could harm our image or our brand or competitive position. To date, we have not been notified that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition. As a franchisor, we will grant our franchisees a limited license to use our trademarks and service marks. The general public could incorrectly identify our franchisees as controlled by us. In the event that a court determines the franchisee is not adequately identified as a franchisee, we could be held liable for the misidentified franchisee’s debts, obligations and liabilities.
 
10

The planned rapid increase in the number of stores may make future results unpredictable.

We plan to significantly increase the number of our stores in the next three years. This growth strategy and the substantial investment associated with the development of each new store may cause operating results to fluctuate and be unpredictable or adversely affect profits. Our future results depend on various factors, including successful selection of new markets and store locations, market acceptance of the UFood experience, consumer recognition of the quality of our food and nutritional products and willingness to pay our prices (which in some instances reflect higher ingredient costs), the quality of operations and general economic conditions. In addition, as has happened when other fast-casual restaurant concepts have tried to expand nationally, we may find that the UFood concept has limited or no appeal to customers in new markets or we may experience a decline in the popularity of UFood restaurants. Newly opened stores may not succeed, future markets and stores may not be successful and, even if we are successful, our average store sales may not increase at historical rates.

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.

Our ability to operate new stores profitably and increase average store sales and company store sales will depend on many factors, some of which are beyond our control, including:

 
·
initial 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.

If we fail to open stores as quickly as planned, or if new stores do not perform as planned, our business and future prospects could be harmed. In addition, changes in the average store sales or company store sales could cause operating results to vary adversely from expectations.
 
Expansion into new markets may present increased risks due to unfamiliarity with those areas.

Some of the new stores are planned for markets where we have little or no operating experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, those new stores may be less successful than stores in existing markets. Consumers in a new market may not be familiar with the UFood brand, and we may need to build brand awareness in that market through greater investments in advertising and promotional activity than we originally planned. We may find it more difficult in new markets to hire, motivate and keep qualified employees who can project the UFood vision, passion and culture. Stores opened in new markets may also have lower average store sales than stores opened in existing markets, and may have higher construction, occupancy or operating costs than stores in existing markets. Sales at stores opened in new markets may take longer to ramp up and reach expected sales and profit levels, and may never do so, thereby affecting overall profitability.
 
11

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

Due to our quality standards, our food an prices may be substantially higher than those of many of our competitors, particularly those in the fast food sector. Our success depends in large part on our ability to persuade customers that food and beverages made with higher-quality ingredients are worth the higher prices they will pay at our stores relative to prices offered by these competitors. That could require us to change our pricing, advertising or promotional strategies, which could materially and adversely affect its results or the brand identity we have tried to create.
 
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.

In 2004 and 2005, Asian and European countries experienced outbreaks of avian flu. Incidents of “mad cow” disease have occurred in Canadian and U.S. cattle herds. These problems, other food-borne illnesses (such as E. coli, hepatitis A, trichinosis or salmonella) and illnesses and injuries caused by food tampering have in the past, and could in the future, adversely affect the price and availability of affected ingredients and cause customers to shift their preferences, particularly if we choose to pass any higher ingredient costs along to consumers. As a result, our sales may decline. Instances of food-borne illnesses, real or perceived, whether at our restaurants or those of our competitors, could also result in negative publicity about us or the restaurant industry, which could adversely affect sales. If we react to negative publicity by changing our menu or other key aspects of our restaurants, we may lose customers who do not accept those changes, and may not be able to attract enough new customers to produce the revenue needed to make our stores profitable. If customers become ill from food-borne illnesses, we could face substantial liability and be forced to temporarily close restaurants.

Our franchisees could take actions that harm our reputation and reduce our royalty revenues.

We do not exercise control over the day-to-day operations of our franchised stores. While we try to ensure that franchised stores meet the same operating standards demanded of our company-operated stores, one or more franchised stores may not do so. Any operational shortcomings of our franchised stores are likely to be attributed by the public and/or regulators to our system-wide operations and could adversely affect our reputation and have a direct negative impact on the royalty revenues received from those stores.
 
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.

Customers may occasionally file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to a restaurant, or that we have problems with food quality or operations. We could also become subject to a variety of other claims arising in the ordinary course of business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and could become subject to class action or other lawsuits related to these or different matters in the future. In addition, the restaurant industry has been subject to a growing number of claims based on the nutritional content of food products they sell and disclosure and advertising practices. We may also be subject to this type of proceeding in the future and, even if not, publicity about these matters (particularly directed at the fast food and fast-casual sectors of the industry) may harm our reputation or prospects and adversely affect our results.

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.

Consumer perception of products can be significantly influenced by scientific research or findings, national media attention and other publicity about product use. A product may be received favorably, resulting in high sales associated with that product that may not be sustainable as consumer preferences change. Future scientific research or publicity could be unfavorable to the nutritional products market or any of our particular products and may not be consistent with earlier favorable research or publicity. A future research report or publicity that is perceived by our consumers as less favorable or that questions such earlier research or publicity could have a material adverse effect on our ability to generate revenues from nutritional products. For example, our sales were adversely affected when the Food and Drug Administration’s rule banning the sale of dietary supplements containing ephedra went into effect in 2004. As a result of the above factors, our revenues from nutritional products may fluctuate significantly from quarter to quarter, which may impair our overall revenues and profitability. Adverse publicity in the form of published scientific research or otherwise, whether or not accurate, that associates consumption of our nutritional products or any other similar products with illness or other adverse effects, that questions the benefits of our or similar products or that claims that any such products are ineffective could have a material adverse effect on our reputation, the demand for our nutritional products and our ability to generate revenues.
 
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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.

As a retailer of nutritional products designed for human consumption, we are subject to product liability claims if the use of our products is alleged to have resulted in injury. Our products include vitamins, minerals, herbs and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain innovative ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. All of the nutritional products we sell are produced by third-party manufacturers. Even though we are only a retailer of nutritional products manufactured by third parties, we may nevertheless be liable for various product liability claims. We may be subject to various product liability claims, including, among others, that our products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. A product liability claim against us could result in increased costs and could adversely affect our reputation with our customers, which in turn could adversely affect our revenues and operating income. Any claims would be tendered to the third-party manufacturer or to our insurer; however, there can be no assurance that the manufacturer would have sufficient financial resources to satisfy any claim or that a claim would be covered by or would not exceed the limits of our insurance.
 
It is highly likely that 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.

Additional capital in the future may not be available on reasonable terms or at all. Our income from operations is unlikely to be sufficient to fund our business plan. We may need to raise additional funds through borrowings or public or private debt or equity financings to meet various objectives including, but not limited to:
 
·
pursuing growth opportunities, including more rapid expansion;
 
·
acquiring complementary businesses;
 
·
making capital improvements to improve our infrastructure;
 
·
hiring qualified management and key employees;
 
·
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.

Any future issuance of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages. See “You may experience dilution of your ownership interests because of other future issuance of additional shares of common stock” below.
 
Furthermore, any additional debt or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain required additional capital, we may have to curtail our growth plans or cut back on existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
 
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes, restricted stock, stock options and warrants, which may adversely impact our financial condition.  
 
13
 
The failure of our subsidiary to satisfy its obligations under an existing credit facility could result in a foreclosure on our assets.
 
KFLG Watertown, Inc. (KFLG), our wholly-owned subsidiary, is a party to an approximately $1 million credit facility with TD Banknorth, N.A. (the Bank), which is secured by a lien on the assets of KFLG. The obligations of KFLG under the credit facility are guaranteed by KnowFat of Downtown Crossing, Inc., KnowFat of Landmark Center, Inc., and our Chief Executive Officer, and are secured by liens on the assets of each. In the event that KFLG fails to satisfy its obligations under the Bank credit facility, the Bank may attempt to foreclose on the assets of KFLG, KnowFat of Downtown Crossing, Inc., KnowFat of Landmark Center, Inc., and our Chief Executive Officer. Any such foreclosure could be costly and time consuming to us and our subsidiaries and could result in the forfeiture of the assets subject to the Bank’s liens. In addition, the Bank’s liens could make it more difficult for us to obtain additional debt or equity financing in the future.
 
Compliance with the reporting requirements of federal securities laws can be expensive.
 
We are a public reporting company in the United States, and accordingly, are subject to the information and reporting requirements of the Securities Exchange Act of 1934 (the Exchange Act) and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we had remained privately-held.
 
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 may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for effective management because of the rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive and financial officers. The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series of rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by the stock exchanges. The perceived increased personal risk associated with these changes may deter qualified individuals from accepting roles as directors and executive officers.
 
Further, some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain listing of our common stock on any stock exchange (assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.
 
We are a holding company that depends on cash flow from our subsidiaries to meet our obligations and pay dividends.
 
We are a holding company with no material assets other than the stock of our wholly-owned subsidiaries. Accordingly, all of our operations will be conducted by KnowFat, our wholly-owned subsidiary (and the wholly-owned subsidiaries of KnowFat). We currently expect that the earnings and cash flow of our subsidiaries will primarily be retained and used by them in their operations, including servicing any debt obligations they may have now or in the future. Therefore, our subsidiaries may not be able to generate sufficient cash flow to distribute funds to us in order to allow us to pay the obligations of UFood Restaurant Group, Inc., as they become due or, although we do not anticipate paying any dividends in the foreseeable future, pay future dividends on, or make any distributions with respect to, our common or other stock. Additionally, our ability to participate as an equity holder in any distribution of assets of any subsidiary upon liquidation is generally subordinate to the claims of creditors of the subsidiary.
 
14
 
We have reported a material weakness in our internal control over financial reporting as of December 30, 2007. 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.
 
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with the Annual Report on Form 10-KSB for the fiscal year ended December 30, 2007, we are required to furnish a report by management on our internal controls over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 30, 2007, resulted in a determination that we had a material weakness related to our control environment because we did not have sufficient personnel or time to complete the assessment of our internal controls following the merger on December 18, 2007.
 
We must maintain effective internal controls to provide reliable financial reports on a timely basis and detect fraud. We have been assessing our internal controls to identify areas that need improvement. We are in the process of implementing changes to internal controls, but have not yet completed implementing these changes. Failure to implement these changes to our internal controls or any others that we identify as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our stock.
 
We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act.
 
In addition to the report by management on our internal control over financial reporting described above, for our fiscal year ending December 27, 2009, and thereafter, such report must also contain a statement that our auditors have issued an attestation report on our management’s assessment of such internal control. If our auditors are unable to attest that our management’s report is fairly stated (or they are unable to express an opinion on the effectiveness of our internal control when such attestation is required), we could lose investor confidence in the accuracy and completeness of our financial reports which could have a material adverse effect on our stock price.
 
While we intend to expend resources to prepare the documentation required by Section 404 of the Sarbanes-Oxley Act (Section 404), and to perform the required testing procedures, there is a risk that we will not comply with all of the requirements imposed by Section 404. Accordingly, there can be no assurance that our independent registered public accounting firm will be able to issue the attestation required by Section 404. In the event we identify significant deficiencies or additional material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive an attestation from our independent registered public accounting firm with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could be adversely affected.
 
Risks Related to Our Securities
 
There is not now, and there may not ever be, an active market for our common stock.
 
There currently is a limited public market for our common stock. Further, although the common stock is currently quoted on the OTC Bulletin Board, trading of our common stock may be extremely sporadic. For example, several days may pass before any shares may be traded. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, the common stock. There can be no assurance that a more active market for the common stock will develop, or if one should develop, there is no assurance that it will be sustained. This severely limits the liquidity of the common stock, and would likely have a material adverse effect on the market price of the common stock and on our ability to raise additional capital.
 
We cannot assure you that our common stock will become liquid or that it will be listed on a securities exchange.
 
Until our common stock is listed on an exchange, we expect the common stock to remain eligible for quotation on the OTC Bulletin Board, or on another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the common stock, which may further affect the liquidity of the common stock. This would also make it more difficult for us to raise additional capital in the future.
 
15
 
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.

Our common stock is currently quoted on the OTC Bulletin Board, and trades below $5.00 per share; therefore, the common stock is considered a “penny stock” and subject to SEC rules and regulations which impose limitations upon the manner in which such shares may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of the common stock and reducing the liquidity of an investment in the common stock.

The price of our common stock may become volatile, which could lead to losses by investors and costly securities litigation.

The trading price of our common stock is likely to be highly volatile and could fluctuate in response to factors such as:

·
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.
 
The stock market in general, and in particular the penny stock market, is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against the company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.
 
We do not anticipate dividends to be paid on the common stock, and investors may lose the entire amount of their investment.
 
Cash dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.
 
Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.
 
The trading market for our common stock will depend on the research and reports that securities analysts publish about our business and our Company. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is the subject of an unfavorable report, our stock price would likely decline. If one or more of these analysts ceases to cover our Company or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline. In addition, because KnowFat became public through a “reverse triangular merger,” we may have further difficulty attracting the coverage of securities analysts. 
 
16

You may experience dilution of your ownership interests because of the future issuance of additional shares of  common stock.
 
Any future issuance of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages and could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger pool of outstanding equity. As stated above, we may need to raise additional capital through public or private offerings of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock. We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued under our equity incentive plans), as payment to providers of goods and services, in connection with future acquisitions or for other business purposes. Our Board of Directors may at any time authorize the issuance of additional common or preferred stock without common stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our articles of incorporation. We are currently authorized to issue an aggregate of 310,000,000 shares of capital stock, consisting of 300,000,000 shares of common stock and 10,000,000 shares of preferred stock with preferences and rights to be determined by our Board of Directors. As of May 28, 2008, there were 34,812,395 shares of common stock outstanding and 18,574,372 shares of common stock subject to outstanding options and warrants. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. Also, the future issuance of any such additional shares of common or preferred stock or other securities may create downward pressure on the trading price of the common stock. There can be no assurance that any such future issuances will not be at a price (or exercise prices) below the price at which shares of the common stock are then traded on the OTC Bulletin Board or other then-applicable over-the-counter quotation system or exchange.

SELLING STOCKHOLDERS

This prospectus covers the resale from time to time by the selling stockholders identified in the table below of:
 
 
·
Up to 15,659,059 issued and outstanding shares of our common stock, comprising:
 
 
o
10,941,000 shares sold in a private placement completed on March 31, 2008;
 
 
o
3,978,059 shares issued upon conversion of convertible notes upon the closing of the merger on December 18, 2007; and
 
 
o
740,000 shares issued to certain of our vendors in partial payment for their services; and
 
 
·
Up to 10,376,201 shares of our common stock issuable upon exercise of warrants, comprising:
 
 
o
5,470,500 shares underlying warrants sold in the private placement;
 
 
o
1,989,035 shares underlying warrants issued upon conversion of convertible notes upon the closing of the merger; and
 
 
o
2,916,666 shares underlying warrants issued to certain of our vendors in partial payment for their services.
 
Pursuant to registration rights agreements executed in connection with the closing of the merger and the private placement, we have filed with the SEC a registration statement on Form S-1, of which this prospectus forms a part, under the Securities Act to register these resales. The selling stockholders identified in the table below may from time to time offer and sell under this prospectus any or all of the shares of common stock described under the column “Shares of Common Stock Being Offered in the Offering” in the table below.
 
17
 
Certain selling stockholders may be deemed to be “underwriters” as defined in the Securities Act. Any profits realized by such selling stockholder may be deemed to be underwriting commissions.
 
The table below has been prepared based upon the information furnished to us by the selling stockholders as of the date of this prospectus. The selling stockholders identified below may have sold, transferred or otherwise disposed of some or all of their shares since the date on which the information in the following table is presented in transactions exempt from or not subject to the registration requirements of the Securities Act. Information concerning the selling stockholders may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly. We cannot give an estimate as to the number of shares of common stock that will actually be held by the selling stockholders upon termination of this offering because the selling stockholders may offer some or all of their common stock under the offering contemplated by this prospectus or acquire additional shares of common stock. The total number of shares that may be sold hereunder will not exceed the number of shares offered hereby. Please read the section entitled “Plan of Distribution” in this prospectus.
 
We have been advised, as noted below in the footnotes to the table, that none of the selling stockholders are broker-dealers and 19 of the selling stockholders are affiliates of broker-dealers. We have been advised that each such broker-dealer and affiliate of a broker-dealer purchased our common stock and warrants in the ordinary course of business, not for resale, and at the time of purchase, did not have any agreements or understandings, directly or indirectly, with any person to distribute the related common stock.
 
The following table sets forth the name of each selling stockholder, the nature of any position, office or other material relationship, if any, which the selling stockholder has had, within the past three years, with us or with any of our predecessors or affiliates (in a footnote), the number of shares of our common stock beneficially owned by such stockholder before this offering, the number of shares to be offered for such stockholder’s account and the number and (if one percent or more) the percentage of the class to be beneficially owned by such stockholder after completion of the offering. The number of shares owned are those beneficially owned, as determined under the rules of the SEC, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares of our common stock as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60 days after the date of this prospectus through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement, and such shares are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the person holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other person. Beneficial ownership percentages are calculated based on 34,812,395 shares of our common stock outstanding as of May 28, 2008. Unless otherwise set forth below, based upon the information furnished to us, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the selling stockholder’s name, subject to community property laws, where applicable.

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Abdou, Mark
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Abrams, Jason
   
32,017
    
10,188
    
30,563
    
11,642
    
*
  
Abrams, Jennifer
    
32,017
    
10,188
    
30,563
    
11,642
    
*
  
Abrams, Mark
   
315,995
    
101,875
    
305,625
    
112,245
    
*
  
Alderman, Norman Fred
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Anasazi Partners II, LLC‡1
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Arcade Investments LTD2
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Arie Leibovitz Trust Agreement3
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Arthur P Remley Revocable Trust4
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Askinas, Mitchel
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Augusty, Leon M.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Aviatech5
    
15,000
    
0
    
15,000
    
—
    
—
  
Avent, Thomas Webb, Jr.
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Azran, David
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Azrilant, Evan B.
    
20,375
    
10,188
    
30,563
    
—
    
—
  
Baisley, William
   
5,000
    
2,500
    
7,500
    
—
    
—
  
Baker, Adrienne‡
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Baker, Christopher M.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Baker, Christopher P. ‡
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Baldwin, Byron S., Jr.
    
60,938
    
30,469
    
91,407
    
—
    
—
  
Baldwin, Helen N.
    
10,000
    
5,000
    
15,000
    
—
    
—
  
Balsam, Gila
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Barnett, Donald
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Basile, Thomas P. ‡
    
10,188
    
5,094
    
15,282
    
—
    
—
  
Baskin, James K.
    
10,000
    
5,000
    
15,000
    
—
    
—
  
Bean, Jerome B. Jr. and Diana Kay
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Beaton, Mark Derek
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Beglin, Francois
    
8,000
    
4,000
    
12,000
    
—
    
—
  
Behrman, Theodore M.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Benham, David R.
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Benichou, Frederic
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Berger, Andrew Michael
    
10,212
    
5,106
    
15,318
    
—
    
—
  
Berger, Stanley
    
91,913
    
45,957
    
137,870
    
—
    
—
  
 
18

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Beth-Pearlson Family Living Trust dtd 1/13/20046
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Blosser, James
    
20,425
    
10,213
    
30,638
    
—
    
—
  
Bodnar Capital Management, LLC7
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Bollen, Jan Willem
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Bonanno Family Partnership LLP8
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Bonanno, Raymond J. & Joan E. JTWROS
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Borino, Carl
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Brown, Fredrick William IV
    
40,000
    
20,000
    
60,000
    
—
    
—
  
Buckley, James E.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Burns, Michael R. & Robin Fisher JTWROS
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Cannetti, Frank D.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Cases, Hector
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Castlerigg Master Investment Ltd. 9
    
1,000,000
    
500,000
    
1,500,000
    
—
    
—
  
Cimarolo Partners, LLC‡10
    
118,500
    
50,000
    
150,000
    
18,500
    
*
  
Clavin, Brian
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Cohen, Eric J.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Cohen, Michael
    
61,275
    
30,638
    
91,913
    
—
    
—
  
Cohen, Norman H.
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Conti, Douglas T. ‡
    
20,375
    
10,188
    
30,563
    
—
    
—
  
Correa, Frances M.
    
15,000
    
7,500
    
22,500
    
—
    
—
  
Courtland Investments, Inc.11
    
145,440
    
37,500
    
112,500
    
70,440
    
*
  
Crouth, Jeffrey Michael
    
100,000
    
50,000
    
150,000
    
—
    
—
  
D&H Pinnacle Partners LLC12
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Daniel B. Stern Revocable Trust13
    
51,063
    
25,531
    
76,594
    
—
    
—
  
Defries, Graham
   
65,000
    
32,500
    
97,500
    
—
    
—
  
Design Hardware Company14
    
151,875
    
75,938
    
227,813
    
—
    
—
  
Destin, James A.C.
    
20,425
    
10,213
    
30,638
    
—
    
—
  
Deutsch, Steven H.
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Dissette, Carl A.
    
200,000
    
100,000
    
300,000
    
—
    
—
  
Doeve, Gudo
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Domino, Carl J.
    
203,750
    
101,875
    
305,625
    
—
    
—
  
Donato, Nicholas Jr. ‡
    
8,638
    
2,500
    
7,500
    
3,638
    
*
  
Donohue, James C. IV
    
75,000
    
37,500
    
112,500
    
—
    
—
  
Dukach, Semyon
   
62,477
    
25,000
    
75,000
    
12,477
    
*
  
Edvinsson, Mats
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Edwards, W. Mark
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Eller, Ronald
   
20,000
    
10,000
    
30,000
    
—
    
—
  
Felder, Gregory15
    
830,000
    
415,000
    
1,245,000
    
—
    
—
  
 
19

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Fellman, Sten-Anders
   
90,000
    
45,000
    
135,000
    
—
    
—
  
Ferrer, John-John
   
10,000
    
5,000
    
15,000
    
—
    
—
  
FMC Group, Inc.16
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Fowers, Pamela
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Fowler, Donald L. Jr.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Friedland, Michael
   
40,000
    
20,000
    
60,000
    
—
    
—
  
Frieze, Michael
   
74,908
    
12,500
    
37,500
    
49,908
    
*
  
Goldberg, Mark & Joanna B. JTWROS
    
30,000
    
15,000
    
45,000
    
—
    
—
  
Gould, Peter C.
   
51,063
    
25,531
    
76,594
    
—
    
—
  
Goulston, Noel H. and Mary T. JTWROS
    
51,063
    
25,531
    
76,594
    
—
    
—
  
Grabill, Robert and Julie JTWROS
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Gutierrez, Hector
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Halle, Sharon E.
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Harrison, Peter
   
50,000
 
  
25,000
 
  
75,000
 
  
—
    
—
  
Hartley, A. Thomas & M.L. Kaufman JTWROS
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Haylett, Dean H.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Henry S. Smith Revocable Trust17
    
37,419
    
5,000
    
15,000
    
27,419
    
*
  
Hill, James
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Hill, John C.
   
15,000
    
7,500
    
22,500
    
—
    
—
  
Hinkle, Donald E.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Humber, James Terry and Manda W.
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Icon Capital Partners, LP‡18
    
203,188
    
101,594
    
304,782
    
—
    
—
  
IRA Timothy C Dreyer Pershing LLC as Custodian Rollover Account19
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Isaksson, Jon
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Isen, Lawrence20 
    
152,125
    
76,063
    
228,188
    
—
    
—
  
Isenberg, Michael
   
60,200
    
25,000
    
75,000
    
10,200
    
*
  
Janzen, Engelbertus Johannes
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Jaret, Alec
    
30,638
    
15,319
    
45,957
    
—
    
—
  
Jensen, Bryan & Carol JTWROS
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Joan K. Warnke Revocable Trust
    
25,531
    
12,766
    
38,297
    
—
    
—
  
John Thomas Bridge and Opportunity Fund, LP21
    
668,625
    
334,313
    
1,002,938
    
—
    
—
  
Johnson, Ben‡
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Kalmbach, Dohn L.
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Kanuit, Gary
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Katf, Ramez
   
35,000
    
17,500
    
52,500
    
—
    
—
  
 
20

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Kirk D. & Donna M. Scattergood Revocable Trus22
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Klein, Robert
   
102,125
    
51,063
    
153,188
    
—
    
—
  
Klingenstein, William P.
   
203,750
    
101,875
    
305,625
    
—
    
—
  
Kohli, Chander
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Krzewina, Al ‡
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Kurvinen, Matti
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Langmade, Mark G.
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Laurence E. White Revocable Trust23
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Lavery, Paul
   
75,000
    
37,500
    
112,500
    
—
    
—
  
Lee B. Stern Delta Trust U/A/D 11/28/9524
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Lee, Clarence G.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Lee, Gregory Joseph
    
10,000
    
5,000
    
15,000
    
—
    
—
  
Leininger, Eric
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Leopard, Chad
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Levine, Seth M.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Lichter, Larry
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Lin, Frank
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Liu, Sylvia Fan
    
203,750
    
101,875
    
305,625
    
—
    
—
  
Loomis, Roy S. and Claudia J. JT Ten
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Loss, James W.
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Lucey, James J.
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Lynch, Thomas IV‡
    
15,000
    
7,500
    
22,500
    
—
    
—
  
Maas, Barry
    
15,000
    
7,500
    
22,500
    
—
    
—
  
Manderson, Raymond & Jan
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Marine, Warren
   
32,000
    
12,500
    
37,500
    
7,000
    
*
  
MarketByte LLC25
    
200,000
    
83,333
    
283,333
    
—
    
—
  
Maximous, Signe and France
   
30,638
    
15,319
    
45,957
    
—
    
—
  
McGowan, Paul
   
25,000
    
12,500
    
37,500
    
—
    
—
  
McKean, Stephen
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Meagher, Chris
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Medfam Holdings Ltd. 26
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Mehallick, Jeff
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Melroy, Theresa A.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Messina, Stephen
   
15,590
    
5,000
    
15,000
    
5,590
    
*
  
Metzger, David‡
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Mezzina, Louis J.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Miller, Craig‡
    
10,213
    
5,107
    
15,320
    
—
    
—
  
Minard, Joseph M.
   
10,188
    
5,094
    
15,282
    
—
    
—
  
Mitchell, Graham
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Monaco, Gene
   
450,000
    
225,000
    
675,000
    
—
    
—
  
 
21

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Morgan, Alfred
   
20,425
    
10,213
    
30,638
    
—
    
—
  
Morganthaler, George
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Mulrooney, Chris
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Murphy, Brian
   
100,000
    
50,000
    
150,000
    
—
    
—
  
Najor, Daniel
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Neptune Media, LLC27
    
75,000
    
0
    
75,000
    
—
    
—
  
New Century Capital Consultants, Inc. 28
    
250,000
    
2,750,000
    
3,000,000
    
—
    
—
  
Newton, Keith O.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Nicholson, Keith
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Niehage, Udo
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Niggeman, David
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Niggeman, John P.
   
10,000
    
5,000
    
15,000
    
—
    
—
  
O.T. Finance, SA29
    
204,250
    
102,125
    
306,375
    
—
    
—
  
O'Connor, Gerald
    
10,000
    
5,000
    
15,000
    
—
    
—
  
Olafsson, Thorir
   
15,000
    
7,500
    
22,500
    
—
    
—
  
O'Malley, David
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Otter, Robert E.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Owens, Kenneth
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Papi, Paul‡
    
51,063
    
25,531
    
76,594
    
—
    
—
  
Paradise Wire & Cable Defined Benefit Pension Plan30
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Parsoff, Marvin & Carole
   
50,938
    
25,469
    
76,407
    
—
    
—
  
Pash, Robert
   
100,000
    
50,000
    
150,000
    
—
    
—
  
Pasquale, John
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Petrassi, Albert and Paula JTWROS
    
141,875
    
70,938
    
212,813
    
—
    
—
  
Petrillo, Raymond/Ann
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Polo, Jay E.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Pomatto Investments Family Limited Partnership31
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Pontefract, Ian
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Price, James A.
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Rapoport, John and Joan JTWROS
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Rapoport, Michael‡
    
51,063
    
25,531
    
76,594
    
—
    
—
  
Rathjen, Steven L.
   
75,000
    
37,500
    
112,500
    
—
    
—
  
Ratledge, Jerry T.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
RBC Dain Rauscher Cust FBO Kim Felder Roth IRA32
    
170,000
    
85,000
    
255,000
    
—
    
—
  
Rednum Investments LP33
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Refurbco Inc. 34
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Reinhart, James M.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Reinhart, John J.
   
75,000
    
37,500
    
112,500
    
—
    
—
  
 
22

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Reinhart, Karen
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Reinken, Tom
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Rich, Kenneth M.
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Richards, Donald J.
    
200,000
    
100,000
    
300,000
    
—
    
—
  
Robin L. Stern Revocable Trust35
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Robyn Schreiber Irrevocable Trust, Warren Schreiber Trustee36
    
50,938
    
25,469
    
76,407
    
—
    
—
  
Ross, Jeffrey P.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Rosten, Peter‡
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Rotchford L. Barker Revocable Living Trust37
    
101,063
    
50,531
    
151,594
    
—
    
—
  
Rudolph, Doug M.
   
254,250
    
127,125
    
381,375
    
—
    
—
  
Ruff, Steven O.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Russell, Robert J.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
SA Alternative Opportunity Fund LLC Series E38
    
250,000
    
125,000
    
375,000
    
—
    
—
  
Sagoo, Anoop
   
30,000
    
15,000
    
45,000
    
—
    
—
  
Sangster, Frank Brian
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Schubert Robert W. Jr.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Self, Michael R.
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Sensus LLC39
    
512,875
    
255,188
    
765,563
    
2,500
    
*
  
Shah, Dipak
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Shea, Christopher B.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Sheldon, Alan J.
    
100,000
    
50,000
    
150,000
    
—
    
—
  
Skaletsky, Marc S.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Smee, Richard Anthony
   
100,000
    
50,000
    
150,000
    
—
    
—
  
Smelgus, Jim
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Smith, Dennis
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Smith, Lawrence A.
   
5,000
    
2,500
    
7,500
    
—
    
—
  
Solledar Family Limited Partnership40
    
13,369
    
5,000
    
15,000
    
3,369
    
*
  
Somelofske, Martin
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Spangler, Arnold E.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Sperling, Seena and Gerald
   
50,000
    
25,000
    
75,000
    
—
    
—
  
Spitalny, Richard M
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Stallone, Dominick
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Stark, Jimmie T.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Steiner, Louis J.
   
250,000
    
125,000
    
375,000
    
—
    
—
  
Stern, Kenneth
   
40,000
    
20,000
    
60,000
    
—
    
—
  
Stern, Linda S.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Stockwire Research Group, Inc. 42
    
102,125
    
51,063
    
153,188
    
—
    
—
  
 
23

Selling Stockholder
  
Shares of Common Stock
Beneficially Owned Before the Offering
  
Shares of Common Stock Underlying Warrants Beneficially Owned Before the Offering
  
Shares of Common Stock Being Offered
  
Shares of Common Stock Beneficially Owned upon Completion of the Offering(a)
  
Percentage of Common Stock Outstanding Beneficially Owned upon Completion of the Offering
  
Stone David P. & Arlene R. JTWROS
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Strawbridge, William N.
   
16,000
    
8,000
    
24,000
    
—
    
—
  
TGR Group LLC43
    
200,000
    
83,333
    
283,333
    
—
    
—
  
Thorwid, Carl-Peter
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Till, Martyn Gerald
   
15,000
    
7,500
    
22,500
    
—
    
—
  
Timothy M. Holmes Trust‡44
    
71,313
    
35,656
    
106,969
    
—
    
—
  
Todd, Stephen W. G.
   
15,000
    
7,500
    
22,500
    
—
    
—
  
Totten, Ann S.
    
25,531
    
12,766
    
38,297
    
—
    
—
  
Tricarichi, Anthony
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Turner, Alan and Cindy
    
7,000
    
3,500
    
10,500
    
—
    
—
  
Tutino, Victor
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Uelner, Scott M.
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Vander Broek, David
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Vandevelde, Jean
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Vellon, William D. ‡
    
50,938
    
25,469
    
76,407
    
—
    
—
  
Wagner, L. Reginald‡
    
51,063
    
25,531
    
76,594
    
—
    
—
  
Wayness, Andrew W.
    
25,000
    
12,500
    
37,500
    
—
    
—
  
Weisel, John T.
   
200,000
    
100,000
    
300,000
    
—
    
—
  
Were, Hugo
   
30,000
    
15,000
    
45,000
    
—
    
—
  
Wheeler, Richard T.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
White Bertozzi Family Trust45
    
25,000
    
12,500
    
37,500
    
—
    
—
  
White, Jeffrey
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Whitehurst, Steven L.
   
25,000
    
12,500
    
37,500
    
—
    
—
  
Whittaker, James R. Jr.
    
20,000
    
10,000
    
30,000
    
—
    
—
  
Wiggins, Robert
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Wilkinson, Dr. Charles
   
10,000
    
5,000
    
15,000
    
—
    
—
  
Winter, Antonia
   
30,638
    
15,319
    
45,957
    
—
    
—
  
Wittkemper, Gerd
    
200,000
    
100,000
    
300,000
    
—
    
—
  
Wolf, Douglas R. 46
    
10,000
    
5,000
    
15,000
    
—
    
—
  
Wolmark, Diana
    
50,000
    
25,000
    
75,000
    
—
    
—
  
Zimmerman, Michael
   
20,000
    
10,000
    
30,000
    
—
    
—
  

* Less than 1%

† The selling stockholder is a broker-dealer.

‡ The selling stockholder is an affiliate of a broker-dealer.

(a)
Assumes that all of the shares of common stock beneficially owned by each selling stockholder being offered pursuant to this prospectus, including all shares of common stock underlying warrants, are sold in the offering, and that shares of common stock beneficially owned by such selling stockholder but not being registered by this prospectus are not sold.

24

1
Christopher P. Baker has the power to vote and dispose of the shares being registered on behalf of Anasazi Partners II, LLC.

2
E. Isaac Collie has the power to vote and dispose of the shares being registered on behalf of Arcade Investments LTD.

3
Arie Leibovitz has the power to vote and dispose of the shares being registered on behalf of Arie Leibovitz Trust Agreement.

4
Arthur P. Remley, successor, has the power to vote and dispose of the shares being registered on behalf of Arthur P Remley Revocable Trust.

5
Greg Anton has the power to vote and dispose of the shares being registered on behalf of Aviatech.

6
Gil Beth has the power to vote and dispose of the shares being registered on behalf of Beth-Pearlson Family Living Trust dtd 1/13/2004.

7
Steven J. Bodnar has the power to vote and dispose of the shares being registered on behalf of Bodnar Capital Management, LLC.

8
Raymond J. Bonanno has the power to vote and dispose of the shares being registered on behalf of Bonanno Family Partnership LLP.

9
Sandell Asset Management Corp. (“SAMC”), is the investment manager of Castlerigg Master Investment Ltd. (“Master”). Thomas Sandell is the controlling person of SAMC and may be deemed to share beneficial ownership of the shares beneficially owned by Master. Casterigg International Ltd. (“Casterigg International”) is the controlling shareholder of Casterigg International Holdings Limited (“Holdings”). Holdings is the controlling shareholder of Master. Each of Holdings and Casterigg International may be deemed to share beneficial ownership of the shares beneficially owned by Casterigg Master Investements.

10
Christopher P. Baker has the power to vote and dispose of the shares being registered on behalf of Cimarolo Partners, LLC.

11
Larry Rothstein has the power to vote and dispose of the shares being registered on behalf of Courtland Investments, Inc.

12
David Holfoth has the power to vote and dispose of the shares being registered on behalf of D&H Pinnacle Partners LLC.

13
Daniel B. Stern has the power to vote and dispose of the shares being registered on behalf of Daniel B. Stern Revocable Trust. Mr. Daniel B. Stern is married to Mrs. Robin Stern, and each may be deemed to beneficially own shares held by each other.
 
25
 
14
Avi Balsam and Nathan Abramson have the power to vote and dispose of the shares being registered on behalf of Design Hardware Company.

15
This number consists of 148,000 shares and 74,000 warrants to purchase shares that are registered of behalf of RBC Dain Rauscher Cust FBO Gregory Felder IRA. Gregory Felder has the power to vote and dispose of the shares being registered on behalf of RBC Dain Rauscher Cust FBO Gregory Felder IRA. Mr. Gregory Felder is married to Mrs. Kim Felder, and each may be deemed to beneficially own shares held by each other.

16
Paul E. Michelin and Louisa P. Michelin have the power to vote and dispose of the shares being registered on behalf of FMC Group, Inc.

17
Henry Smith has the power to vote and dispose of the shares being registered on behalf of Henry S. Smith Revocable Trust U/A 3/26/05.

18
Adam Cabibi has the power to vote and dispose of the shares being registered on behalf of Icon Capital Partners, LP.

19
Timothy C. Dreyer has the power to vote and dispose of the shares being registered on behalf of IRA Timothy C Dreyer Pershing LLC as Custodian Rollover Account.

20
Lawrence D. Isen may also be deemed to beneficially own shares being registered on behalf of MarketByte LLC and TGR Group LLC.

21
George R. Jarkesy, Jr. has the power to vote and dispose of the shares being registered on behalf of John Thomas Bridge and Opportunity Fund, LP.

22
Danny Dawidowski and Thomas Remley of Capital North Ltd., the holder’s Registered Investment Advisor, has the power to vote and dispose of the shares being registered on behalf of Scattergood Revocable Trust dtd 3/21/1997.

23
Laurence E. White has the power to vote and dispose of the shares being registered on behalf of Laurence E. White Revocable Trust.

24
Alvin Goldberg has the power to vote and dispose of the shares being registered on behalf of Lee B. Stern Delta Trust U/A/D 11/28/95.

25
Lawrence D. Isen has the power to vote and dispose of the shares being registered on behalf of MarketByte LLC. MarketByte LLC acts as a consultant to the Company. Lawrence D. Isen may also be deemed to beneficially own shares being registered on behalf of Lawrence D. Isen and TGR Group LLC.

26
Raymond C. Medeiros has the power to vote and dispose of the shares being registered on behalf of Medfam Holdings Ltd.
 
26
 
27
Snezana Radovanovic- Estevez has the power to vote and dispose of the shares being registered on behalf of Neptune Media, LLC.

28
Stephen Schaeffer has the power to vote and dispose of the shares being registered on behalf of New Century Capital Consultants, Inc.

29
Lucien I. Levy, the US Representative, has the power to vote and dispose of the shares being registered on behalf of O.T. Finance, SA.

30
Ira Gaines has the power to vote and dispose of the shares being registered on behalf of Paradise Wire & Cable Defined Benefit Pension Plan.

31
David Rubis has the power to vote and dispose of the shares being registered on behalf of Pomatto Investments Family Limited Partnership.

32
Kim Felder has the power to vote and dispose of the shares being registered on behalf of RBC Dain Rauscher Cust FBO Kim Felder Roth IRA. Mrs. Kim Felder is married to Gregory Felder and each may be deemed to beneficially own shares held by each other.

33
Lee Munder the power to vote and dispose of the shares being registered on behalf of Rednum Investments LP

34
Michael Esposito, President and Donna Maldorado, Secretary has the power to vote and dispose of the shares being registered on behalf of Refurbco Inc.

35
Robin L. Stern has the power to vote and dispose of the shares being registered on behalf of Robin L. Stern Revocable Trust. Mrs. Robin L. Stern is married to Mr. Daniel B. Stern, and each may be deemed to beneficially own shares held by each other.

36
Warren Schreiber, Trustee has the power to vote and dispose of the shares being registered on behalf of Robyn Schreiber Irrevocable Trust.

37
Rotchford L. Barker has the power to vote and dispose of the shares being registered on behalf of Rotchford L. Barker Revocable Living Trust.

38
Vernon C. Sumicht has the power to vote and dispose of the shares being registered on behalf of SA Alternative Opportunity Fund LLC Series E.

39
James V. Pizzo has the power to vote and dispose of the shares being registered on behalf of Sensus LLC.

40
John Solleder has the power to vote and dispose of the shares being registered on behalf of Solledar Family Limited Partnership.
 
27

41
Kevin Kimberlin, Non-Member Manager, has the power to vote and dispose of the shares being registered on behalf of Spencer Trask Breakthrough Partners.

42
Adrian James, President and CEO, has the power to vote and dispose of the shares being registered on behalf of Stockwire Research Group, Inc.

43
Arthur Kang has the power to vote and dispose of the shares being registered on behalf of TGR Group LLC. TGR Group LLC acts as a consultant to the Company. Lawrence D. Isen may also be deemed to beneficially own these shares in addition to shares being registered on behalf of Lawrence D. Isen and MarketByte LLC.

44
Timothy Michael Holmes has the power to vote and dispose of the shares being registered on behalf of Timothy M. Holmes Trust.

45
Fredrick Austin White, Trustee has the power to vote and dispose of the shares being registered on behalf of White Bertozzi Family Trust.

46
Douglas R. Wolf serves as outside intellectual property counsel for the Company.


USE OF PROCEEDS

We will not receive proceeds from the sale of common stock under this prospectus. We would, however, receive approximately $13,034,068 from the selling stockholders if they exercise their warrants in full, by cash payment, which we would use for working capital and general corporate purposes. The warrant holders may exercise their warrants at any time until their expiration, by cash payment of the exercise price or by “cashless exercise,” as further described below under “Description of Securities.” Because the warrant holders may exercise the warrants in their own discretion, if at all, we cannot plan on specific uses of proceeds beyond application of proceeds to general corporate purposes. We have agreed to bear the expenses (other than any underwriting discounts or commissions or agent’s commissions) in connection with the registration of the common stock being offered hereby by the selling stockholders.
 
28
 
DETERMINATION OF OFFERING PRICE
 
There currently is a limited public market for our common stock. The selling stockholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices or at privately negotiated prices. See “Plan of Distribution” below for more information.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information and Holders
 
Our common stock is quoted on the OTC Bulletin Board under the symbol “UFFC.OB.” As of May 28, 2008, there were 34,812,395 shares of our common stock issued and outstanding and 18,574,372 shares issuable upon exercise of outstanding stock options and warrants. On that date, there were approximately 400 holders of record of shares of our common stock. 

Prior to the merger on December 18, 2007, there was a limited sales history for our common stock, because it had never been actively traded. As of June 26, 2008, the last reported sale price of our shares on the OTC Bulletin Board was $1.40. For the periods indicated, the following table sets forth the range of high and low bid quotations for our common stock, as reported by Nasdaq in the Info Quotes section of its web site located at www.nasdaq.com. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. 
 
Quarter Ended
  
High
  
Low
  
 
  
 
  
 
  
September 30, 2007
  
$
1.27
  
$
0.41
  
December 30, 2007
  
$
1.87
  
$
0.52
  
March 30, 2008
  
$
1.52
  
$
0.95
  
June 29, 2008 (through June 26, 2008)
  
$
2.10
    
1.15
  

Dividends
 
We have never declared or paid dividends on our equity securities. We do not intend to pay cash dividends on our common stock for the foreseeable future, but currently intend to retain any future earnings to fund the development and growth of our business. The payment of dividends, if any, on the common stock will rest solely within the discretion of our Board of Directors and will depend, among other things, upon our earnings, capital requirements, financial condition, and other relevant factors. The loan agreement with our senior lender prohibits the payment of cash dividends. See “Risk Factors— We are a holding company that depends on cash flow from our subsidiaries to meet our obligations and pay dividends” above and Note 8, Long-Term Debt, to our 2007 Consolidated Financial Statements below.
 
29

Securities Authorized for Issuance under Equity Compensation Plans
 
The Company has two share-based, shareholder-approved equity compensation plans, the 2004 Stock Option Plan (2004 Plan) and the 2007 Equity Incentive Plan (2007 Plan). Descriptions of these plans, and certain information regarding options issued thereunder, are presented in Note 4, Stock-Based Compensation, to our Consolidated Financial Statements for the Three Months Ended March 30, 2008, and April 1, 2007, below.

As of the end of fiscal year 2007, we had the following securities authorized for issuance under our equity compensation plans:
 
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))
  
 
  
(a)
  
(b)
  
(c)
  
Equity compensation plans approved by security holders
    
2,254,702
  
$
0.95
    
1,050,000
  
 
              
Equity compensation plans not approved by security holders
    
89,070
  
$
0.66
    
0
  
 
              
Total
    
2,343,772
  
$
0.94
    
1,050,000
  

On February 12, 2008, our Board of Directors approved an increase in the number of shares of common stock reserved for issuance under the 2007 Plan to 6,000,000 shares. The increase is subject to shareholder approval and is expected to be submitted for consideration at a meeting of stockholders in August, 2008.

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 Consolidated Financial Statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” 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 prospectus.

Overview

We were incorporated in the State of Nevada on February 8, 2006, as Axxent Media Corporation. Prior to December 18, 2007, we were a development stage company as defined by Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. As Axxent Media Corporation, our business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, we changed our name to UFood Franchise Company, and on September 25, 2007, we changed our name to UFood Restaurant Group, Inc.

On December 18, 2007, a wholly-owned subsidiary of ours merged with and into KnowFat Franchise Company, Inc., with KnowFat surviving the merger as our wholly-owned subsidiary. Following the merger, we continued KnowFat’s business operations as a franchisor and operator of fast-casual food service restaurants that capitalize on consumer demands for great tasting food with healthy attributes. KnowFat was founded in 2004 to capitalize on the popularity of a chain of fast-casual concept restaurants operating under the trade name “Lo Fat Know Fat” in the greater Boston area, as well as the growing trend in the United States towards healthier living and eating. After operating for three years as KnowFat! Lifestyle Grille, while continuously modifying and improving the concept, management arrived at the conclusion that the KnowFat! name sent the wrong marketing message and alienated some people within the mainstream customer set. As a result, we have decided that future locations will operate under the name UFood Grill. Management believes that the new brand will embrace the mainstream customer better and help extend the concept into a nation-wide chain.
 
30

As of December 30, 2007, our operations consisted of five company-operated restaurants and three franchise-operated locations in Boston, Naples and Sacramento. One of our company-operated restaurants and two of our franchise-operated locations operate under the name UFood Grill. The conversion of the remaining five KnowFat! Lifestyle Grills is expected to take place over the next several months. As of April 8, 2008, we had sold seven Master Area Development Agreements covering 75 franchise licenses in ten states (California, Colorado, Florida, Illinois, Idaho, Massachusetts, Montana, Texas, Utah and Wyoming).

We view ourselves primarily as a franchisor and continually review our restaurant ownership mix (that is our mix among company-owned, franchised and joint venture) to deliver a great customer experience and drive profitability. In most cases, franchising is the best way to achieve both goals. In our company-owned stores, and in collaboration with our franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that we introduce system-wide only those that we believe are most beneficial.

We include in this discussion information on company, franchisee, and/or system-wide comparable sales and average weekly sales. System-wide sales are a non-GAAP financial measure that includes sales at all company-owned and franchise-operated stores, as reported by franchisees. Management uses system-wide sales information internally in connection with store development decisions, planning and budgeting analysis. Management believes it is useful in assessing customer acceptance of our brand and facilitating an understanding of financial performance as our franchisees pay royalties and contribute to marketing funds based on a percentage of their sales.

We derive revenues from three sources: (i) store sales include sales of hot and cold prepared food in a high-quality, fast casual dining environment as well as sales of health and nutrition related products; (ii) franchise royalties and fees represent amounts earned under franchise and area development agreements; and (iii) other revenues derived primarily from the sale of marketing materials to franchisees. Store operating expenses include the cost of goods, food and paper products sold in company-owned stores as well as labor and other operating costs incurred to operate company-owned stores. General and administrative expenses, advertising, marketing and promotion expenses and depreciation expense relate to all three revenue sources.

Outlook

We believe the recent volatility in food and energy prices, increases in unemployment and home foreclosures and tightening credit conditions have had and will continue to have an adverse effect on our business during the remainder of 2008 and 2009. While we believe these factors have had a negative impact on our business, we also believe we have benefited from an industry wide “trade down” phenomenon, as consumers elect to save money by shifting from casual dining to fast food due to the narrowing in the food quality gap between casual and fast food over the past few years, lower average checks that appeal to consumers and shorter wait times in fast casual restaurants compared with casual dining establishments. 

Critical Accounting Policies & Estimates

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements for the years ended December 30, 2007, and December 31, 2006, and  the three months ended March 30, 2008 and April 1, 2007 which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the Consolidated Financial Statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Variances in the estimates or assumptions used could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.

We have chosen accounting policies we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner.
 
31

Revenue Recognition

We follow the accounting guidance of SFAS No. 45, Accounting for Franchise Fee Income. Franchisee deposits represent advances on initial franchise fees prior to the opening of the franchisee location. We recognize initial franchise fee revenue when all material services we are required to perform and all material conditions we are required to satisfy have been substantially completed, which is generally the opening of the franchised location. We defer direct costs related to franchise sales until the related revenue is recognized; however, the deferred costs shall not exceed anticipated revenue less estimated additional related costs. Such costs include training, facilities design, menu planning and marketing. Franchise royalty revenues are recognized in the same period the relevant franchisee sales occur.

We record revenue for company-owned store sales upon delivery of the related food and other products to the customer.

Valuation of Goodwill

We account for goodwill and other intangible assets under SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are not amortized, but instead tested for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable.

Rent Expense

We recognize rent expense on a straight-line basis over the reasonably assured lease term as defined in SFAS No. 98, Accounting for Leases. The reasonably assured lease term on most of our leases is the initial non-cancelable lease term, which generally equates to between five and ten years. In addition, certain of our lease agreements provide for scheduled rent increases during the lease terms or for rental payments that commence on a date other than the date of initial occupancy. We include any rent escalations and rent holidays in its determination of straight-line rent expense. Consequently, rent expense for new locations is charged to expense beginning with the consummation date of the lease.

Stock-Based Compensation

We have adopted the provisions of SFAS No. 123R, Share-based Payment, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, shared-based compensation is measured at the grant date, based upon the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

We use the prospective approach as required by SFAS No. 123R and accordingly, compensation costs for periods prior to adoption were not restated. Under this approach, compensation cost is recognized for all share-based payments granted after the date of adoption based on the grant date fair value, estimated in accordance with the provisions of SFAS No. 123R. Financial statement amounts for prior periods have not been revised to reflect the fair value method of expensing share-based compensation. As a result of adopting SFAS No. 123R, our net income for the years ended December 30, 2007, and December 31, 2006, was lower by $249,292 and $23,464, respectively, than if we had continued to account for stock-based compensation under the previous method.

Recent Developments

In June 2008, we signed an agreement to open a UFood Grill in the Dallas-Fort Worth (DFW) International Airport with a franchise developer and operator. The franchisee operates several other businesses at DFW International Airport The agreement also provides the franchisee the right to open additional UFood Grill locations in other airports in Texas. The unit at DFW International Airport will be the second UFood Grill airport location after Logan International in Boston.

Also in June 2008, our first location in the Chicago metropolitan area broke ground and is expected to open in August of this year. This is the first of five locations expected to be developed and operated by our Chicago-area franchisee. The franchisee has also signed a lease for a second UFood Grill location in Chicago.
 
32

In May 2008, we commenced a corporate awareness campaign in the investment community. The campaign encompasses investor relations and public relations services, including traditional media outlets like television, radio, and print, as well as “guerilla marketing” and the internet. The campaign aims to build awareness for our brand with shareholders, franchisees and customers. In connection with this campaign, we entered into service agreements with a number of investor relations and public relations firms, under which we issued to the service providers an aggregate of 740,000 shares of our common stock and warrants to purchase an aggregate of 2,916,666 shares of our common stock in partial payment for their services and granted them “piggyback” registration rights in connection with such shares. See “Description of Capital Stock—Registration Rights” below.
 
Also in May 2008, we terminated a 2005 franchise agreement with our franchisee operator in Dade and Broward Counties in South Florida, covering 24 unopened franchise locations because the franchisee did not meet the opening timeline specified in the agreement, and we have reclaimed the franchise territory. We had anticipated our former South Florida franchisee would have had one or more locations open and operating by May 2008 and would have been paying us royalties based upon sales generated by those locations. Additional such defaults by franchisees could materially adversely affect our growth plans and our business, financial condition and operating results.

In April 2008, we paid $800,000 to extinguish the $880,628 note payable issued in connection with our acquisition of the business assets of one of our franchisees and recorded a gain on extinguishment of debt of $80,628. See Note 4, Acquisitions, to our 2007 Consolidated Financial Statements below.

Also in April 2008, we settled a dispute with a former franchisee regarding potential claims against us and certain of our officers and directors that sought damages in the approximate amount of $2,000,000.
 
33
 
Three Months Ended March 30, 2008, Compared to Three Months Ended April 1, 2007

The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our consolidated statements of operations for the periods indicated. Percentages may not add due to rounding:

 
  
Three Months Ended
  
 
  
March 30,
2008
  
April 1,
2007
  
Revenues:
          
Store sales
    
94.4
%
  
94.7
%
Franchise royalties and fees
    
5.6
    
5.3
  
Other revenue
    
—
    
—
  
 
    
100.0
%
  
100.0
%
 
          
Costs and expenses:
          
Store operating expenses (1):
          
Cost of goods sold, food and paper products
    
40.1
%
  
44.8
%
Labor
    
31.7
    
33.6
  
Occupancy
    
11.7
    
9.0
  
Other store operating expenses
    
20.4
    
16.1
  
General and administrative expenses
    
112.0
    
55.0
  
Advertising, marketing and promotion expenses
    
13.9
    
4.5
  
Depreciation and amortization
    
9.4
    
8.1
  
Loss on disposal of assets
    
0.2
    
—
  
Total costs and expenses
    
233.7
    
165.7
  
 
          
Operating loss
    
(133.7
)
  
(65.7
)
 
          
Other income (expense):
          
Interest income
    
1.2
    
0.7
  
Interest expense
    
(2.0
)
  
(6.1
)
Other income (expense), net
    
(0.8
)
  
(5.4
)
 
          
Loss before income taxes
    
(134.5
)
  
(71.1
)
Income taxes
    
—
    
—
  
 
          
Net loss
    
(134.5
)%
  
(71.1
)%

(1)
As a percentage of store sales.

34

The following table sets forth certain data relating to the number of Company-owned, franchise-operated and system-wide store locations:

 
  
Three Months Ended
  
 
  
March 30,
2008
  
April 1,
2007
  
Company-owned locations:
          
Locations at the beginning of the year
    
4
    
5
  
Locations opened
    
—
    
—
  
Locations closed
    
—
    
—
  
Locations sold
    
—
    
—
  
Locations transferred (1)
    
1
    
—
  
Locations at the end of the period
    
5
    
5
  
 
          
Franchise-owned locations:
          
Locations at the beginning of the year
    
4
    
4
  
Locations opened
    
—
    
—
  
Locations closed
    
—
    
—
  
Locations sold
    
—
    
—
  
Locations transferred (1)
    
(1
)
  
—
  
Locations at the end of the period
    
3
    
4
  
 
          
System-wide locations
          
Locations at the beginning of the year
    
8
    
9
  
Locations opened
    
—
    
—
  
Locations closed
    
—
    
—
  
Locations sold
    
—
    
—
  
Locations transferred
    
—
    
—
  
Locations at the end of the period
    
8
    
9
  

 
(1)
During the three months ended March 30, 2008, the Company agreed to operate one franchise-owned location pursuant to the terms of a management services agreement.

General

For the three months ended March 30, 2008, our comparable store sales for Company operated stores decreased by 6.7%. System-wide comparable store sales decreased by 6.1%. The decrease in comparable store sales was primarily attributable to unseasonably cold and wet weather in the Boston area where our Company-operated stores are located. Comparable store sales are based on sales for stores that have been in operation for the entire period of comparison. Franchise-operated stores which we acquire are included in comparable store sales once they have been open for the entire period of comparison. Comparable store sales exclude closed locations.

During the three months ended March 30, 2008, average weekly sales for Company-operated stores increased by $1,020, or 5.3%, to $20,111 from $19,091 for the three months ended April 1, 2007. The increase in average weekly sales for Company-owned stores was primarily due to one new Company-owned store that opened in December 2007.

Average weekly sales for franchise-operated stores increased by $4,539, or 33.7%, to $18,005 during the three months ended March 30, 2008 from $13,466 for the three months ended April 1, 2007. The increase in average weekly sales for franchise-operated stores was primarily due higher average weekly sales at new franchise-owned stores opened in the last seven months of 2007 that were more productive than existing franchise-owned locations.

35

System-wide, average weekly sales increased by $2,730, or 16.5%, to $19,321 for the three months ended March 30, 2008 from $16,591 for the three months ended April 1, 2007, primarily due to higher average weekly sales at new franchise-owned stores opened in the last seven months of 2007.

Results of Operations

Revenues

Our total revenues for the three months ended March 30, 2008 decreased by $4,069, or 0.3%, to $1,325,566 from $1,329,635 for the three months ended April 1, 2007. The decrease in total revenues for the three months ended March 30, 2008, as compared to the prior year was primarily due to the decrease in comparable store sales for Company-operated stores.

The system-wide average weekly sales per store and the related number of operating weeks for the three months ended March 30, 2008 and April 1, 2007, were as follows:

   
  
Three Months Ended
  
 
  
   
  
Mar. 30,
 2008
 
April 1, 
2007
 
Percentage 
Change
  
System-wide average weekly sales 
  
$
19,321
  
$
16,591
    
16.5
%
System-wide number of operating weeks 
    
104
    
117
    
(11.1
)%

Average weekly sales are calculated by dividing total net sales by the total number of operating weeks in the period. Accordingly, the year over year change reflects sales for all locations, whereas comparable store sales are based on sales for locations that have been in operation and owned throughout the period of comparison.

Sales at Company-operated stores for the three months ended March 30, 2008 decreased by $7,072, or 0.6%, to $1,251,882 from $1,258,954 for the three months ended April 1, 2007. As a percentage of total revenues, sales at Company-operated stores decreased slightly to 94.4% of total revenues for the three months ended March 30, 2008 from 94.7% of total revenues for the three months ended April 1, 2007. The decrease in sales at Company-operated stores for the three months ended March 30, 2008 was primarily due to the decrease in comparable store sales. Average weekly sales for Company-operated stores and the related number of operating weeks for the three months ended March 30, 2008 and April 1, 2007, were as follows:

 
  
Three Months Ended
  
 
  
 
  
Mar. 30, 
2008
 
April 1,
 2007
 
Percentage 
Change
  
Company-operated stores average weekly sales
  
$
20,111
  
$
19,091
    
5.3
%
Company-operated stores number of operating weeks
    
65
    
65
    
—
%

During the three months ended March 30, 2008, franchise royalties and fees increased $3,003, or 4.2% to $73,684 from $70,681 for the three months ended April 1, 2007, due to an increase in royalties. The Company did not recognize any revenue from franchise fees during the three months ended March 30, 2008 or the three months ended April 1, 2007.

36

Average weekly sales for franchise-operated stores and the related number of operating weeks for the three months ended March 30, 2008 and April 1, 2007, were as follows:

 
  
Three Months Ended
      
 
  
Mar. 30, 
2008
  
April 1, 
2007
  
Percentage
Change
  
Franchise-operated stores average weekly sales
  
$
18,005
  
$
13,466
    
33.7
%
Franchise-operated stores number of operating weeks
    
39
    
52
    
(25.0
)%

As of May 19, 2008, four franchise-oowned stores were open and operating, including one operated by the Company pursuant to a management services agreement, and franchise and area development agreements covering an additional 72 franchise locations had been signed. Our standard franchise and area development agreements require franchisees and area developers to develop a specified number of stores on or before specific dates. If a franchisee or area developer fails to develop stores on schedule, we have the right to terminate the franchise agreement and develop company-owned locations or develop locations through new area developers in that market. We may exercise one or more alternative remedies to address defaults by area developers and franchisees of the terms of their franchise agreements including the failure to open locations on time and non-compliance with our operating and brand requirements and other covenants under the franchise agreement.

Costs and Expenses

Cost of goods sold, food and paper products for the three months ended March 30, 2008 decreased by $61,721, or 10.9%, to $502,523 from $564,244 for the three months ended April 1, 2007. As a percentage of store sales, cost of goods sold, food and paper products decreased to 40.1% of store sales for the three months ended March 30, 2008 from 44.8% of store sales for the three months ended April 1, 2007. The decrease in cost of goods sold, food and paper products was primarily attributable to improved cost controls and slightly lower meat prices.

Labor expense for the three months ended March 30, 2008 decreased by $26,078, or 6.2%, to $397,463 from $423,541 for the three months ended April 1, 2007. The decrease in labor expense was primarily attributable to lower hourly wage rates paid to new employees hired in connection with a recently opened store and the replacement of the assistant manager position with a shift manager position. As a percentage of store sales, labor expense decreased to 31.7% of store sales for the three months ended March 30, 2008 from 33.6% of store sales for the three months ended April 1, 2007. The decrease in labor expense as a percentage of store sales for the three months ended March 30, 2008 was primarily due to the lower hourly wage rates paid to new employees and lower salaries paid to new store managers.

Occupancy costs for the three months ended March 30, 2008 increased by $32,850, or 29.0%, to $146,091 from $113,241 for the three months ended April 1, 2007. The increase in occupancy costs was primarily attributable to a new Company-operated store that opened in December 2007 and a franchise-owned location that the Company began operating pursuant to a management services agreement during the three months ended March 30, 2008 and an adjustment to recognize rent on a straight-line basis. As a percentage of store sales, occupancy costs increased to 11.7% of store sales for the three months ended March 30, 2008 from 9.0% of store sales for the three months ended April 1, 2007.

Other store operating expenses for the three months ended March 30, 2008 increased by $53,255, or 26.3%, to $255,740 from $202,485 for the three months ended April 1, 2007. The increase in other store operating expenses was primarily due to costs associated with the transition of a former franchise-owned location to a Company-operated location during the three months ended March 30, 2008 and higher utility costs. As a percentage of store sales, other store operating expenses increased to 20.4% of store sales for the three months ended March 30, 2008 from 16.1% of store sales during the three months ended April 1, 2007.

General and administrative expenses for the three months ended March 30, 2008 increased by $753,482, or 103.1%, to $1,484,388 from $730,906 for the three months ended April 1, 2007. The increase in general and administrative expenses for the three months ended March 30, 2008 compared to the same period in the prior year is primarily due to design costs incurred in connection with the planned conversion of franchise-owned and company-operated stores operating under the KnowFat! trade name to stores operating under the UFood Grill trade name, costs of operating as a public company and legal and other costs associated with the settlement of a dispute with a former franchisee. During the three months ended March 30, 2008, the Company recognized $104,073 of stock-based compensation expense. The Company did not recognize any stock-based compensation expense during the three months ended April 1, 2007. As a result of the foregoing, general and administrative expenses increased to 112.0% of total revenues during the three months ended March 30, 2008 from 55.0% of total revenues for the three months ended April 1, 2007.

37

Advertising, marketing and promotion expenses for the three months ended March 30, 2008 increased by $124,044, or 206.0%, to $184,256 from $60,212 for the three months ended April 1, 2007. The increase in advertising, marketing and promotion expenses was primarily due to promotion expense related to the services agreement with George Foreman Ventures, LLC (GFV Services Agreement) that became effective June 12, 2007, and expires in June 2011, and expenses incurred in connection with the conversion of franchise-owned and company-operated stores operating under the KnowFat! trade name to stores operating under the UFood Grill trade name. As a percentage of total revenues, advertising, marketing and promotion expenses increased to 13.9% of total revenues in the three months ended March 30, 2008 from 4.5% of total revenues in the three months ended April 1, 2007.

Depreciation and amortization expense for the three months ended March 30, 2008 increased by $16,735, or 15.5%, to $124,907 from $108,172 for the three months ended April 1, 2007. Depreciation and amortization expense increased primarily due to the new Company-owned store location opened in December 2007 and new equipment installed in the other Company-owned store locations. As a percentage of total revenues, depreciation and amortization expense increased to 9.4% of total revenues for the three months ended March 30, 2008 from 8.1% of total revenues for the three months ended April 1, 2007.

Net interest expense for the three months ended March 30, 2008 decreased by $61,109, or 85.1%, to $10,727, from $71,836 for the three months ended April 1, 2007. As a percentage of total revenues, net interest expense decreased to 0.8% of total revenues for the three months ended March 30, 2008 from 5.4% of total revenues for the three months ended April 1, 2007. The decrease in net interest expense was primarily due to interest income earned on investments of net cash proceeds received from the sale of 8,950,000 Units in the private placement offering through March 30, 2008.

Our net loss for the three months ended March 30, 2008 increased by $838,036, or 88.7%, to $1,783,038, from $945,002 for the three months ended April 1, 2007. Our net loss increased primarily due to the increase in general and administrative expenses and advertising, marketing and promotion expenses As a percentage of total revenues, our net loss increased to 134.5% of total revenues for the three months ended March 30, 2008 from 71.1% of total revenues for the three months ended April 1, 2007.

38

Fiscal Year Ended December 30, 2007, Compared to Fiscal Year Ended December 31, 2006

The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our consolidated statements of operations for the periods indicated. Percentages may not add due to rounding:

 
  
Year Ended
  
 
  
December 30,
2007
  
December 31,
2006
  
Revenues:
          
Store sales
    
92.6
%
  
88.7
%
Franchise royalties and fees
    
6.7
    
8.7
  
Other revenue
    
0.7
    
2.6
  
 
    
100.0
%
  
100.0
%
 
          
Costs and expenses:
          
Store operating expenses (1):
          
Cost of goods sold, food and paper products
    
44.3
%
  
44.9
%
Labor
    
30.9
    
31.9
  
Occupancy
    
9.0
    
9.4
  
Other store operating expenses
    
17.5
    
17.2
  
General and administrative expenses
    
71.8
    
96.3
  
Advertising, marketing and promotion expenses
    
13.7
    
14.9
  
Depreciation and amortization
    
8.8
    
6.0
  
Loss on disposal of assets
    
13.6
    
—
  
Total costs and expenses
    
202.1
    
208.9
  
 
          
Operating loss
    
(102.1
)
  
(108.9
)
 
          
Other income (expense):
          
Interest income
    
0.3
    
1.3
  
Interest expense
    
(7.9
)
  
(4.0
)
Other expense, net
    
(1.5
)
  
(0.2
)
Other income (expense), net
    
(9.1
)
  
(2.9
)
 
          
Loss before income taxes
    
(111.2
)
  
(111.8
)
Income taxes
    
—
    
—
  
Net loss
    
(111.2
)%
  
(111.8
)%

(1)     As a percentage of store sales.

39

The following table sets forth certain data relating to the number of company-owned, franchise-operated and system-wide store locations:

 
  
Year Ended
  
 
  
December 30,
2007
  
December 31
2006
  
Company-owned locations:
          
Locations at the beginning of the year
    
5
    
3
  
Locations opened
    
1
    
1
  
Locations closed
    
(1
)
  
—
  
Locations sold
    
(1
)
  
—
  
Locations transferred
    
—
    
1
  
Locations at the end of the year
    
4
    
5
  
 
              
Franchise-operated locations:
              
Locations at the beginning of the year
    
4
    
1
  
Locations opened
    
2
    
4
  
Locations closed
    
(2
)
  
—
  
Locations sold
    
—
    
—
  
Locations transferred
    
—
    
(1
)
Locations at the end of the year
    
4
    
4
  
 
              
System-wide locations
              
Locations at the beginning of the year
    
9
    
4
  
Locations opened
    
3
    
5
  
Locations closed
    
(3
)
      
Locations sold
    
(1
)
      
Locations transferred
    
—
    
—
  
Locations at the end of the year
    
8
    
9
  
 
General

For the year ended December 30, 2007, our comparable store sales for Company owned stores decreased 2.7%. System-wide comparable store sales decreased by the same percentage because there was no franchise store data to compare since all franchise-operated stores had been open less than a year. Comparable store sales are based on sales for stores that have been in operation for the entire period of comparison. Franchise-operated stores which we acquire are included in comparable store sales once they have been open for the entire period of comparison. Comparable store sales exclude closed locations.

Average weekly sales for company-owned stores increased $2,439, or 12.7%, to $21,582 for the year ended December 30, 2007, from $19,143 for the year ended December 31, 2006. The increase in average weekly sales for company-owned stores was primarily due to the opening of one new company-owned store and the acquisition of one franchise-operated store during the fourth quarter of 2006 and one new company-owned store that opened in December 2007.

Average weekly sales for franchise-operated stores decreased $4,574, or 24.3%, to $14,284 for the year ended December 30, 2007, from $18,858 for the year ended December 31, 2006. The decrease in average weekly sales for franchise-operated stores was primarily due to a change in the status of one store from a franchise-operated store to a company-owned store during the fourth quarter of 2006.

System-wide, average weekly sales decreased $1,265, or 6.7%, to $17,756 for the year ended December 30, 2007, from $19,022 for the year ended December 31, 2006.

40

Results of Operations

Revenues

Our total revenues for the year ended December 30, 2007, increased $1,213,189, or 32.9%, to $4,904,883 from $3,691,694 for the year ended December 31, 2006. The growth in total revenues for the year ended December 30, 2007, as compared to the prior year was primarily due to the addition of one new company-owned store opened during the fourth quarter of 2006 and a change in the status of one store from a franchise-operated store to a company-owned store during the fourth quarter of 2006 partially offset by a decrease in sales at a company-owned store that was closed in April 2007.

The system-wide average weekly sales per store and the related number of operating weeks for the year ended December 30, 2007, and December 31, 2006, were as follows:

   
  
Year Ended
  
 
  
   
  
Dec. 30,
2007
  
Dec.  31,
2006
  
Percentage
Change
  
System-wide average weekly sales  
  
$
17,756
  
$
19,022
    
(6.7
)%
System-wide number of operating weeks  
    
433
   
298
   
45.3
%

Average weekly sales are calculated by dividing total net sales by operating weeks. Accordingly, the year over year change reflects sales for all locations, whereas comparable store sales exclude closed locations and are based on sales for locations that have been in operation and owned throughout the period of comparison.

Sales at company-owned stores for the year ended December 30, 2007, increased by $1,270,091, or 38.8%, to $4,543,194 from $3,273,103 for the year ended December 31, 2006. As a percentage of total revenues, sales at company-owned stores increased to 92.6% of total revenues for the year ended December 30, 2007, from 88.7% for the year ended December 31, 2006. The increase in sales at company-owned stores for the year ended December 30, 2007, was primarily due to the opening of one new store and the acquisition of a franchise-operated store during the fourth quarter of 2006 partially offset by a decrease in sales of a company-owned store closed in April 2007 and a company-owned store sold in September 2007. Average weekly sales for company-owned stores and the related number of operating weeks for the years ended December 30, 2007, and December 31, 2006, were as follows:

 
  
Year Ended
      
 
  
Dec. 30,
2007
  
Dec. 31,
2006
  
Percentage
Change
  
Company-owned stores average weekly sales
  
$
21,582
  
$
19,143
    
12.7
%
Company-owned stores number of operating weeks
    
206
    
171
    
20.5
%
 
During the year ended December 30, 2007, franchise royalties and fees increased $7,168, or 2.2% to $326,733 from $319,565 for the year ended December 31, 2006. The increase in franchise royalties and fees in 2007 was primarily due to an increase in royalties earned on sales at three franchise-operated locations that opened after December 31, 2006, higher sales at the three franchise-operated locations open at December 31, 2006, and higher advertising fund contributions partially offset by a decrease in franchise fees.

During the year ended December 30, 2007, franchise royalties increased $31,087, or 28.0%, to $142,233 from $111,146 for the year ended December 31, 2006. Franchise fees for the year ended December 30, 2007, decreased by $70,000, or 50.0%, to $70,000 from $140,000 for the year ended December 31, 2006. Contributions to the advertising fund increased by $46,081, or 67.4%, to $114,500 for the year ended December 30, 2007, from $68,419for the year ended December 31, 2006.

41

Average weekly sales for franchise-operated stores and the related number of operating weeks for the year ended December 30, 2007, and December 31, 2006, were as follows:

 
  
Year Ended
      
 
  
Dec. 30,
2007
  
Dec. 31,
2006
  
Percentage
Change
  
Franchise-operated stores average weekly sales
  
$
14,284
  
$
18,858
    
(24.3
)%
Franchise-operated stores number of operating weeks
    
227
    
127
    
78.7
%

At December 30, 2007, four franchise-operated stores were open and operating and commitments to open an additional 64 franchise-operated locations had been received. We expect the 64 additional franchise-operated locations to open according to the timetable set forth in agreements we have with various area developers, with the majority of the locations opening in the next four or five years. Our standard franchise agreement requires a franchisee to develop a specified number of stores on or before specific dates. If a franchisee or area developer fails to develop stores on schedule, we have the right to terminate the franchise agreement and develop company-owned locations or develop locations through new area developers in that market. We may exercise one or more alternative remedies to address defaults by area developers and franchisees of the terms of their franchise agreements including the failure to open locations on time and non-compliance with our operating and brand requirements and other covenants under the franchise agreement.

Costs and Expenses

Cost of goods sold, food and paper products for the year ended December 30, 2007, increased by $541,545, or 36.8%, to $2,011,229 from $1,469,684 for the year ended December 31, 2006. The increase in cost of goods sold, food and paper products was primarily due to an increase in the number of weeks that company-owned stores operated in 2007 compared with 2006. As a percentage of store sales, cost of goods sold, food and paper products decreased to 44.3% of store sales for the year ended December 30, 2007, from 44.9% of store sales for the year ended December 31, 2006. The decrease in cost of goods sold, food and paper products as a percentage of store sales was primarily due to operational improvements such as portion control, loss prevention and reduced waste partially offset by higher meat prices.

Labor expense for the year ended December 30, 2007, increased by $362,348, or 34.7%, to $1,405,662 from $1,043,314 for the year ended December 31, 2006. The increase in labor expense was primarily attributable to costs of new employees hired in connection with the opening of new company-owned store locations and the increase in the number of weeks that company-owned stores operated in 2007 compared with 2006. As a percentage of store sales, labor expense decreased to 30.9% of store sales for the year ended December 30, 2007, from 31.9% of store sales for the year ended December 31, 2006. The decrease in labor expense as a percentage of store sales for the year ended December 30, 2007, was primarily due to increased labor efficiencies resulting from changes in our kitchen layout.

Occupancy costs for the year ended December 30, 2007, increased by $100,904, or 32.6%, to $410,061 from $309,157 for the year ended December 31, 2006. The increase in occupancy costs was primarily attributable to new company-owned stores and the increase in the number of weeks that company-owned stores operated in 2007 compared with 2006. As a percentage of store sales, occupancy costs decreased to 9.0% of store sales for the year ended December 30, 2007, from 9.4% of store sales for the year ended December 31, 2006. The decrease in occupancy costs as a percentage of store sales was primarily due to the decrease in occupancy costs and increase in store sales.

Other store operating expenses for the year ended December 30, 2007, increased by $235,454, or 41.9%, to $796,804 from $561,350 for the year ended December 31, 2006. The increase in other store operating expenses was primarily due to the increase in the number of weeks that company-owned stores operated in 2007 compared with 2006. As a percentage of store sales, other store operating expenses increased slightly to 17.5% of store sales during the year ended December 30, 2007, from 17.2% of store sales during the year ended December 31, 2006.

General and administrative expenses for the year ended December 30, 2007, decreased by $35,582, or 1.0%, to $3,520,392 from $3,555,974 for the year ended December 31, 2006. The decrease in general and administrative expenses for the year ended December 30, 2007, compared to the same period in the prior year is primarily due to reduced headcount and reduced professional fees offset by higher stock-based compensation expense. General and administrative expenses include $249,292 of stock-based compensation expense in 2007 compared with $23,462 of stock-based compensation expense in 2006. As a percentage of total revenues, general and administrative expenses decreased to 71.8% of total revenues for the year ended December 30, 2007, from 96.3% of total revenues for the year ended December 31, 2006. The decrease in general and administrative expenses as a percentage of revenues for the year ended December 30, 2007, compared to the same period in the prior year is primarily due reduced headcount, lower professional fees and tighter expense control.

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Advertising, marketing and promotion expenses for the year ended December 30, 2007, increased by $123,110, or 22.5%, to $671,440 from $548,330 for the year ended December 31, 2006. The increase in advertising, marketing and promotion expenses was primarily due to promotion expense related to the services agreement with George Foreman Ventures, LLC (GFV Services Agreement) that became effective June 12, 2007, and expires in June 2011, partially offset by improved expense control. As a percentage of total revenues, advertising, marketing and promotion expenses decreased to 13.7% of total revenues in 2007 from 14.9% of total revenues in 2006.

Pursuant to the terms of the GFV Services Agreement, we agreed to (i) issue 1,371,157 shares of common stock to GFV (ii) issue an additional 152,351 shares of common stock to GFV promptly following the sale of the 600th franchise, provided the sale of such franchise has occurred by December 31, 2009, and (iii) pay GFV a royalty equal to 0.2% of aggregate net sales, in exchange for the performance of certain services by George Foreman and a limited license to use Mr. Foreman’s name and likeness in connection with the promotion of restaurants operated by us and our franchisees. One half of the 1,371,157 shares issued to GFV, or 685,578 shares, vested on June 12, 2007, and 304,702 shares vested on June 13, 2008. The remainder will vest over three years. In the event there is a change of control as defined in the GFV Services Agreement, GFV may return 50% of the shares of common stock received in exchange for a prospective increase in the royalty rate to 0.5%. During the year ended December 30, 2007, we recorded $424,000 of promotion expense representing the fair value of the vested shares.

Depreciation and amortization expense for the year ended December 30, 2007, increased by $206,842, or 92.9%, to $429,586 from $222,744 for the year ended December 31, 2006. Depreciation and amortization expense increased due to new company-owned store locations and new equipment installed in previously existing company-owned store locations. As a percentage of total revenues, depreciation and amortization expense increased to 8.8% of total revenues for the year ended December 30, 2007, from 6.0% of total revenues for the year ended December 31, 2006.

The loss on disposal of assets for the year ended December 30, 2007, represents the costs associated with the closing of one company-owned store and the sale of one company-owned store. The costs associated with the disposition of the two stores were accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and are comprised of $232,073 representing the liability for the remaining lease obligation, $428,191 for the write-off of goodwill and $6,574 representing a loss incurred on the disposition of inventory, plant and equipment.

Net interest expense for the year ended December 30, 2007, increased by $271,263, or 277.2%, to $369,130, from $97,867 for the year ended December 31, 2006. As a percentage of total revenues, net interest expense increased to 7.6% of total revenues for the year ended December 30, 2007, from 2.7% of total revenues for the year ended December 31, 2006. The increase in net interest expense was primarily due to higher debt levels during the year ended December 30, 2007, compared to the year ended December 31, 2006, and higher interest rates. The higher debt levels in 2007 were attributable to debt incurred in connection with the acquisition of two store locations during the fourth quarter of 2006 and $3,000,000 principal amount of promissory notes sold during 2007.

Our net loss for the year ended December 30, 2007, increased by $1,325,801, or 32.1%, to $5,451,414, from $4,125,613 for the year ended December 31, 2006. Our net loss increased primarily due to the increase in store operating expenses, higher promotion expenses resulting from the GFV Services Agreement, higher stock-based compensation expense, higher depreciation and amortization expenses, the loss recognized in connection with the disposition of two company-owned store locations and higher net interest expense. As a percentage of total revenues, our net loss decreased to 111.2% of total revenues for the year ended December 30, 2007, from 111.8% of total revenues for the year ended December 31, 2006.

Liquidity, Funding and Capital Resources

At and for the Three Months Ended March 30, 2008

Cash and cash equivalents and restricted cash at March 30, 2008 were $5,022,393 compared to $4,435,813 at December 30, 2007. Cash is primarily used to fund our (i) capital expenditures for new and remodeled company-owned stores, (ii) acquisitions of franchise-operated stores, (iii) working capital requirements and (iv) net operating losses. At March 30, 2008, restricted cash included $919,554 of cash proceeds received from the private placement offering and deposited in an escrow account to fund qualified public relations and investor relations expenses.

43

During the three months ended March 30, 2008, the Company sold 2,790,000 Units of its securities at a price of $1.00 per Unit in connection with the third and fourth closings of its private placement offering. The Company received net cash proceeds of approximately $2,468,004 from the third and fourth closings after expenses of $321,996. In addition, on March 31, 2008, the Company sold 1,991,000 Units at a price of $1.00 per Unit in connection with the fifth and final closing of its private placement offering.

At March 30, 2008, we had working capital of $1,970,398 compared to working capital of $1,165,395 at December 30, 2007. The increase in working capital was primarily due to an increase in cash and cash equivalents due to net cash proceeds received from 2,790,000 Units sold in the third and fourth closings of the private placement offering.

We used $1,685,001 of cash to fund our operating activities in the three months ended March 30, 2008 compared with $911,651 of cash used to fund our operating activities in three months ended April 1, 2007. The increase in cash used to fund our operating activities was primarily due to design costs incurred in connection with the planned conversion of franchise-owned and company-operated stores operating under the KnowFat! trade name to stores operating under the UFood Grill trade name, costs of operating as a public company, legal and other costs associated with the settlement of a dispute with a former franchisee and changes in working capital.

During the three months ended March 30, 2008, we spent $35,368 for the acquisition of equipment compared with $12,417 spent for the acquisition of equipment during the three months ended April 1, 2007.

During the three months ended March 30, 2008, financing activities provided $2,384,915 of cash, primarily due to net cash proceeds received from the sale of 2,790,000 Units of our securities described above partially offset by payments on long-term debt. During the three months ended April 1, 2007, we used $443,886 of cash for financing activities, primarily due to payments on long-term debt and an increase in restricted cash.

At and for the Fiscal Year Ended December 30, 2007

Cash and cash equivalents and restricted cash at December 30, 2007, were $4,435,813 compared to $1,840,090 at December 31, 2006. Cash is primarily used to fund (i) capital expenditures for new and remodeled company-owned stores, (ii) acquisitions of franchise-operated stores, (iii) working capital requirements and (iv) net operating losses.

In December 2007, we consummated a private offering to accredited investors of up to 8,000,000 units of our securities at a price of $1.00 per unit. Each unit consists of one share of common stock and a warrant to purchase one-half, or 50%, of a share of common stock. The investors in the offering collectively purchased 6,160,000 units in December 2007 for total cash consideration of $6,160,000, before expenses of $1,345,840, and 4,781,000 units in the first quarter of fiscal 2008 for total cash consideration of $4,781,000, before estimated expenses of $600,000. Under the terms of the private offering, we were required to deposit $1,000,000 of the proceeds received in an escrow account. The amount placed in escrow can only be used to pay qualified public relations and investor relations expenses.

At December 30, 2007, we had working capital of $1,165,395 compared to a working capital deficit of $1,214,657 at December 31, 2006. The increase in working capital was primarily due to an increase in cash and cash equivalents. The increase in cash and cash equivalents was primarily due to the net cash proceeds received from the sale of 6,160,000 units in the private offering.

We used $3,134,984 of cash to fund our operating activities in 2007 compared with $3,539,743 of cash used to fund our operating activities in 2006, representing an improvement of $404,759.

During 2007, we spent $842,447 of cash for investing activities compared with $1,066,807 spent on investing activities in 2006. The improvement in net cash used in investing activities was primarily due to $150,000 of cash proceeds we received from the sale of a company-operated store in 2007. During 2007, we spent $992,447 for the acquisition of property and equipment compared with $1,065,119 spent on the acquisition of property and equipment in 2006. In 2007 and 2006 we opened one company-operated store.

Net cash provided by financing activities increased by $819,232 to $5,489,542 in 2007 from $4,670,310 in 2006. The increase was primarily due to an increase in net cash proceeds received from the sale of debt and equity securities partially offset by an increase in restricted cash. In 2007, we received net cash proceeds of $7,351,320 from the sale of debt and equity securities comprised of $4,814,160 received from the sale of 6,160,000 units and $2,537,160 received from the sale of $3,000,000 principal amount of promissory notes. Approximately $1,000,000 of the proceeds received from the sale of units was deposited in an escrow account. The amount placed in escrow may be used by us but only for the payment of qualified public relations and investor relations expenses. In 2006, we received net cash proceeds of $3,519,466 from the sale of debt and equity securities comprised of $3,069,466 received from the sale of 719,440 shares of series C preferred stock and $450,000 received from debt incurred in connection with the acquisition of a franchise-operated restaurant. In 2006, approximately $1,400,000 of cash which had been restricted became unrestricted.

44

Historically we have funded our operations, working capital requirements, acquisitions and capital expenditures with cash flow generated by operations and proceeds from the issuance of debt and equity securities. We believe that cash flow from operations and proceeds from the issuance of debt and equity securities will be sufficient to fund our operations and capital expenditures for the next twelve months.

Restrictions on Payments by Subsidiaries

Under the terms of the credit agreement between our wholly-owned subsidiary, KFLG Watertown, Inc. (KFLG) and TD Banknorth, N.A., KFLG is prohibited from declaring or paying to UFood Restaurant Group, Inc., any distribution or dividend of any kind whatsoever (other than dividends payable solely in common stock) so long as the loans thereunder are outstanding.

Contractual Obligations and Other Commitments

In addition to our capital expenditures requirements, we have certain other contractual and committed cash obligations. Our contractual cash obligations primarily consist of non-cancelable operating leases for our stores, and administrative offices. Lease terms for our stores and administrative offices are generally for seven to ten years with renewal options at most locations and generally require us to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. Some store leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amount. Certain of our 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.

The following table sets forth information as of December 30, 2007, with respect to our contractual obligations and the effect they are expected to have on our liquidity and cash flows in future periods:
 
   
  
Total
 
Less Than 
1 Year
 
1 Year to 
3 Years
 
4 Years to 
5 Years
 
More than 
5 Years
  
   
  
   
  
   
  
   
  
   
  
   
  
Long-term debt 
  
$
2,605,684
  
$
1,874,993
(1)  
$
730,691
  
$
—
  
$
—
  
Capital leases 
    
168,449
    
70,698
    
93,830
    
3,921
    
—
 
Operating leases 
    
4,480,000
    
727,000
    
1,234,000
    
1,249,000
    
1,270,000
  

 
(1)
During the three months ended March 30, 2008, the Company repaid $146,111 of its long-term debt. In addition, in April 2008, we paid $800,000 to extinguish the $880,628 note payable issued in connection with the acquisition of the Downtown Crossing restaurant and store. Long-term debt due in less than 1 year includes $450,000 that becomes due upon the sale of the Company’s Landmark Center restaurant and store. The Company currently has no plans to sell its Landmark Center unit.
 
Our capital requirements, including development costs related to the opening or acquisition of additional stores and maintenance and remodel expenditures, have and will continue to be significant. Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations, and the nature of the arrangements negotiated with landlords. We have incurred significant operating losses since inception and expect to incur a significant operating loss in 2008.

Impact of Inflation 

Our profitability depends in part on our ability to anticipate and react to increases in our operating costs, including food, labor, occupancy (including utilities and energy), insurance and supplies costs. In the past, we have been able to recover some of our higher operating costs through increased menu prices. There have been, and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit our ability to recover such cost increases in their entirety. Historically, the effects of inflation on our net income have not been materially adverse. However, the recent volatility in certain commodity markets, such as those for energy, grains and dairy products, which have experienced significant increases in prices, may have an adverse effect on us in the latter half of fiscal 2008 and beyond. The extent of the impact may depend on our ability to increase our menu prices and the timing thereof.

45

Many of our employees are paid hourly rates related to federal and state minimum wage laws. Although we have and will continue to attempt to pass along any increased labor costs through food price increases, there can be no assurance that all such increased labor costs can be reflected in our prices or that increased prices will be absorbed by consumers without diminishing to some degree consumer spending at our stores. However, we have not experienced to date a significant reduction in store profit margins as a result of changes in such laws, and management does not anticipate any related future significant reductions in gross profit margins.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115. Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effect for fiscal years beginning after November 15, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material impact on our future consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until December 28, 2008. We expect SFAS No. 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date. We are still assessing the impact of this standard on our future consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be re-characterized as non-controlling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply retrospectively. The adoption of SFAS No. 160 is not expected to have a material impact on our future consolidated financial statements.

In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 110. SAB No. 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123R. SAB No. 110 is not expected to have a significant impact on our consolidated financial statements.

46

DESCRIPTION OF BUSINESS

Corporate History and Additional Information

We were incorporated in the State of Nevada on February 8, 2006, as Axxent Media Corporation. Prior to December 18, 2007, we were a development stage company as defined by Statement of Financial Accounting Standard (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. As Axxent Media Corporation, our business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, we changed our name to UFood Franchise Company, and on September 25, 2007, we changed our name to UFood Restaurant Group, Inc.

On December 18, 2007, a wholly-owned subsidiary of ours merged with and into KnowFat Franchise Company, Inc., with KnowFat surviving the merger as our wholly-owned subsidiary. Following the merger, we continued KnowFat’s business operations as a franchisor and operator of fast-casual food service restaurants that take advantage of consumer demands for great tasting food with healthy attributes. KnowFat was founded in 2004 to capitalize on the popularity of a chain of fast-casual concept restaurants operating under the trade name “Lo Fat Know Fat” in the greater Boston area, as well as the growing trend in the United States towards healthier living and eating. After operating for three years as KnowFat! Lifestyle Grille, while continuously modifying and improving the concept, management arrived at the conclusion that the KnowFat! name sent the wrong marketing message and alienated some potential customers. As a result, we have decided that future locations will operate under the name UFood Grill. To date, we have opened two new original UFood Grills and have converted one KnowFat! store into a UFood Grill. The conversion of the remaining five KnowFat! Lifestyle Grills will take place over the next several months. Management believes that the new brand will embrace the mainstream customer better and help extend the concept into a nation-wide chain.
 
Our operations currently consist of four company-owned restaurants and four franchise-owned locations in Boston, Naples, FL, and Sacramento, CA. Two of the franchise-owned locations are operated by the Company pursuant to management services agreements. During the five months ended May 31, 2008, we entered into franchise and development agreements to open 46 UFood Grill outlets comprised of five UFood Grill units in the Chicago metropolitan area, 38 UFood Grill units in a five-state area composed of Colorado, Utah, Montana, Idaho and Wyoming and three units at airports in Texas. We have previously sold franchise development agreements for Houston, Naples, Sacramento and San Jose. In May 2008, we terminated a 2005 franchise agreement with our franchisee operator in Dade and Broward Counties, Florida, covering 24 unopened franchise locations because the franchisee did not meet the opening timeline specified in the agreement, and we have reclaimed the franchise territory. We currently have 75 franchise locations under development. One of our company-operated restaurants and two of our franchise-operated locations operate under the name UFood Grill. We expect to convert the remaining five KnowFat! Lifestyle Grille units to UFood Grill outlets over the next several months.

We operate two business segments; Store Operations and Franchise Operations. The Store Operations segment comprises the operating activities of restaurants owned or operated by the Company. The Franchise Operations segment is comprised of the operating activities of the franchise business unit that licenses qualified operators to conduct business under the Knowfat and UFood Grill tradenames and monitors the operations of these business units. Certain financial information for each segment is set forth in Note 9, Segment Data, to the Consolidated Financial Statements for the Three Months Ended March 30, 2008, and April 1, 2007, and in Note 18, Segment Data, to the 2007 Consolidated Financial Statements.

Our headquarters are located at 255 Washington Street, Suite 100, Newton, Massachusetts 02458. Our telephone number is (617) 787-6000.

Concept and Strategy

We are a franchisor and operator of fast-casual food service restaurants and nutritional product retail stores that capitalize on the growing trend toward healthier living and eating and on the increased consumer demands for restaurant fare that offers great-tasting food with healthy attributes. We use high quality ingredients and healthy cooking techniques to ensure that our menu items taste great and are “better for you” than ordinary quick serve food. Guests order at a counter and wait three to five minutes for their meals to be prepared. At UFood Grill, we bake, grill or steam our menu offerings; we never fry our food. All of the meat we serve is all-natural and hormone-free. Our sauces, cheeses and salad dressings are reduced-fat. We serve whole-grain breads and side dishes and, where we can do so while still charging our customers a reasonable price, organic meats and vegetables (meeting U.S. Food and Drug Administration standards for “organic”). The food is served on ceramic plates with metal utensils and is either taken to the table by each guest or delivered to the table by a UFood server. Great taste and an overall pleasing dining experience for an individual customer is the focus of UFood’s mission and concept.

47

Many customers not only want to eat well; they also want to buy products that support an overall healthy lifestyle. Some of our locations offer integrated convenience-style retail stores that carry a wide variety of health-oriented nutrition products, such as supplements, vitamins, nutrition bars, energy drinks and healthy snacks.

As part of the re-branding effort that culminated in the UFood Grill concept, we developed a market segmentation model that identified the following five customer personas:

 
·
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)]
 
The UFood Grill concept attempts to provide each customer segment with the features it seeks in a quick service restaurant. Understanding the market segmentation model allows us to focus on those market segments that afford the greatest sales opportunities. The UFood Grill brand has four pillars on which it rests:

 
·
U Love Great Food
 
·
U Are Always on the Go
 
·
U Want It Your Way
 
·
U Want to Look and Feel Great

Approximately half of all our sales are prepared for take-out, with the guest either calling ahead or ordering in the restaurant. Nearly 60% of customers frequent our restaurants for lunch, with the remaining 40% enjoying our fare at dinner time. Most of Our restaurants are not open for breakfast service. We are required to offer breakfast service at our UFood Grill outlet at Logan International Airport in Boston and are considering the addition of breakfast service at some of our urban locations.
 
Some of our restaurant locations also offer an integrated convenience-style retail store that carries a wide variety of health-oriented nutrition products, such as supplements, vitamins, nutrition bars, energy drinks, and healthy snacks.

We believe the UFood concept has significant growth potential, which we hope to realize through a combination of company and franchisee efforts. Franchising will be a key component of our success. There are currently a total of eight restaurant locations open, including three UFood Grill restaurant locations and five KnowFat locations. Six of the locations are in the greater Boston area, with one location each in Naples, Florida, and Sacramento, California. We have entered into seven Master Area Development Agreements covering 75 franchise licenses in ten states (California, Colorado, Florida, Illinois, Idaho, Massachusetts, Montana, Texas, Utah and Wyoming).

Industry Background

The United States restaurant industry is benefitting from a long-term trend of consumers eating out more frequently. According to the National Restaurant Association, the restaurant industry’s share of consumer food expenditures has increased from 25% in 1955 to 47.5% in 2005, and restaurant sales are expected to reach $558 billion in 2008, an increase of 4.4% over 2007 sales. The leading factors contributing to the recent growth have been the growing population, increases in real disposable income per capita, the trend toward busier lifestyles, greater spending on dining and entertainment activities and the increased availability of high-quality dining options.
 
The recent emergence of the fast-casual dining sector has capitalized significantly on the industry’s expansion. This group, led by companies such as Chipotle Mexican Grill and Panera Bread Company, caters to customers who desire the convenience of fast food, and who are willing to pay a premium for higher quality, differentiated menu items. According to the National Restaurant Association, these consumer preferences have made fast-casual one of the fastest growing sub-sectors within the restaurant industry, with sales in 2008 expected to increase 4.4% over 2007’s sales.

However, the increase in eating out has also contributed to a general deterioration in the health of Americans. Today, obesity has reached epidemic proportions in the United States. According to the Centers for Disease Control and Prevention (CDC), approximately 34% of American adults aged 20 and over, or 72 million people, met the criterion for obesity in 2006. In addition, a CDC study indicates that in the past 30 years, the occurrence of obesity in children has doubled, and it is now estimated that one in five children in the United States is overweight. According to published studies, obese children are more likely to be obese as adults, which leads to an increased risk for a number of diseases including stroke, cardiovascular disease, hypertension, diabetes and some cancers. Obesity also contributes to additional negative health consequences, including Type 2 Diabetes, high total and LDL (bad) cholesterol and triglyceride levels in the blood, low HDL (good) cholesterol levels in the blood, sleep apnea and inflammation of the liver. Poor food choices, such as diets high in calories (including fats and simple sugars) and lower in fruits and vegetables, are linked with being overweight.

48

Many consumers are actively looking to improve their quality of life and prevent health problems. They are changing their diet, increasing exercise and activity and consciously seeking out healthier alternatives to existing main-stream restaurants to help improve their overall lifestyles and well-being. Moreover, today’s consumers are more knowledgeable than ever before about nutritional composition of foods and supplements, and they increasingly demand information on what they are consuming, not only from the grocery store, but also from restaurants.

According to the Nutrition Business Journal, the nutritional products category is a $42 billion annual business market in the United States. The growth of the nutritional supplements market is driven by several factors, including the aging of the population, increased use of supplements believed to treat or enhance specific physical conditions and an increasing number of individuals who prioritize their health and well-being. Rising healthcare costs and soaring Medicare premiums are also causing consumers to seek alternative healthcare therapies, including the expanded use of nutritional supplements.
 
Menu

With our innovative menu, we are targeting mainstream customers as well as health conscious customers. We believe the taste and quality of our food offerings will have wide market appeal.

Our menu contains a wide variety of food types, including hot entrees, burgers, salads, sandwiches, wraps, smoothies and desserts, each of which is united in the theme that the food is “better for you” than many other dining-out options. Each item is prepared with healthier alternatives in mind, whether an ingredient or a method of preparation, and has better nutritional qualities than the equivalent item a consumer might find at a typical quick serve establishment.

Our menu categories are:

Entrees

These include sirloin tips, turkey tips, bison patties and chicken breast. Each entrée is served with a choice of two sides. The sides include UnFries™ (baked French fries), steamed broccoli, mashed sweet potatoes, black beans, brown rice and steamed vegetables. Entrees are priced between $5.99 and $12.99.

Fired-Up Burgers

There are several choices of topping-laden burgers including the Better Bacon Cheeseburger which has reduced fat American cheese and turkey bacon and is served on a whole-grain bun. Each burger option can be prepared with a patty made with any of 85% lean beef, turkey, bison or vegetarian. Fired-Up Burgers are priced between $3.99 and $5.99.

UnFries™ 

Nearly 60% of all orders include our version of the classic french fries. Unlike regular french fries that are typically cooked by deep frying in oil, UnFries™ are baked in a convection oven, resulting a crisp wholesome taste that enhances the flavor of the potato. UnFries™ are trans fat-free and have fewer calories and lower saturated fat content than regular french fries. UnFries cost $1.59 and can be bundled with a fountain drink or bottled water and added to any meal for $2.29.

Wraps

Some of our best sellers are our Chicken Meatball Marinara and our BBQ Steak Tip and Broccoli wraps. Each is served in a natural whole-grain white or wheat tortilla. Wraps come in two sizes and are priced between $3.99 and $6.99.

49

UBowls

The newest addition to the menu, the UBowl, has three options, each of which contains either chicken or tofu marinated with light, flavorful sauces and served with steamed vegetables over whole-grain brown rice. A small UBowl costs $4.99 and a large UBowl costs $6.49.

Signature Sandwiches

Our chef has developed several unique, great tasting combinations served on either a ciabatta bread, a baguette or wheat berry bread. Signature sandwiches are priced between $4.99 and $5.99.
 
Specialty Salads

Our Bistro Salad has organic field greens, grape tomatoes, feta, walnuts, cranberries and onion, and it is tossed with blueberry-pomegranate vinaigrette. Other specialty salads can be topped with chicken breast. Salads are priced between $4.99 and $6.99.

Smuuthies™ and Prolattas™

Made with freshly frozen fruit, juice and yogurt, these items account for a significant component of the menu mix. Prolattas combine a fruit base with a proprietary protein blend to create a meal in a cup. Smuuthies are priced at $4.29, and Prolattas are $4.99.

The nutritional values of each item are prominently listed in a take-away nutrition guide displayed on the front counter, which contains information about calories, protein, fiber, carbohydrates, good fat and saturated fat.

Nutritional Supplements
 
Some of our restaurant locations include an integrated convenience-style retail store that carries a wide variety of health-oriented nutrition products in the following five categories: supplements, vitamins, nutrition bars, energy drinks and healthy snacks. We carry leading national brands, and we price competitively with the specialty retail segment of the nutritional products retail category. The retail stores are staffed by knowledgeable, trained nutritional retail specialists, who offer advice and recommendations along with product information.  
 
Growth Strategy

We plan to further expand our franchising network as well as open other company-owned stores. We have a two-part franchising strategy. We will award franchises both on an individual basis in the Boston area and to area developers outside of Boston.

Franchise sales are led by our chairman and chief executive officer, George Naddaff. In addition, we have entered into a services agreement with George Foreman, the well-known world heavyweight boxing champion, businessman and celebrity, to be a spokesperson for the brand as well as to assist in generating interest in franchising the UFood concept. Mr. Foreman has a successful track record as a spokesperson for various brands, including Meineke, Casual Male and the George Foreman Grill, which has sold more than 80 million grills worldwide. Moreover, we believe that Mr. Foreman’s name is strongly associated with healthy eating and lifestyle in a way that is attractive to both men and women. Under the terms of an agreement, Mr. Foreman has agreed to lend his name and likeness and assist in marketing and branding efforts of UFood restaurants. Mr. Foreman is expected initially to be involved in helping to sell franchises. Once we have more than 50 stores opened, he is expected to shift his focus to generating publicity through personal appearances in UFood restaurants and traditional media. The agreement expires in June 2011.

Pursuant to the terms of our agreement with George Foreman Ventures (GFV), we agreed to issue shares of our common stock to GFV and to pay GFV a royalty equal to 0.2% of our aggregate net sales. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fiscal Year Ended December 30, 2007, Compared to Fiscal Year Ended December 31, 2006—Results of Operations—Costs and Expenses” above and “Description of Securities—Common Stock” and “-Registration Rights” below.
We will allow franchisees to build single units in the Boston metro area that will co-exist alongside those of other franchisees as well as company-owned units. The proximity to our headquarters of our Boston area restaurants will enable management to closely monitor these single-unit franchises. In addition, the simultaneous construction of several franchises in the Boston area would allow for more rapid growth of the Boston market. To date, two UFood franchises have been sold in the Boston area.

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Outside of the Boston area, we plan to award only multi-unit territories to sophisticated, experienced owner-operators. These operators will sign Master Area Development Agreements wherein they will obtain an exclusive territory in which to build UFood outlets. Upon signing these agreements, the operators will pay an upfront fee for the rights to their territory, and they will then be bound to a timeline over which they must open the units. Currently we have 75 franchises in eight areas:

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

We have seven area developers in the areas other than Boston. We seek to sell franchises to sophisticated, experienced restaurant operators who already know their markets, having operated other restaurants in their territories. We believe these sophisticated operators will enable our concept to grow rapidly and help establish the UFood brand across the country. We do not allow sub-franchising. All franchise agreements are directly with us.

We also intend to grow our store base through the building of company-owned stores. Our current plan calls for approximately 10% of our stores to be company-owned. The primary purpose of this effort is to ensure that management understands how the stores evolve and operate and has its own “kitchen” to test new initiatives (menu items, loyalty programs etc.) in front of real customers. We have already instituted a loyalty program that utilizes magnetically encoded discount loyalty cards with our repeat customers. Our database contains the names of over 20,000 loyalty card users. The loyalty card provides us with a direct communications channel with our customers, drives sales and allows us to track consumer behavior. To leverage the current geographical concentration of UFood stores in the Boston area, we plan to locate the new company-owned stores in the New England area, close to our headquarters.

We have developed three prototype stores that we believe are suitable to differing site and demographic conditions: 1) 2,000 – 2,500 sq. foot units that feature a combination of a restaurant and retail store (currently four stores); 2) 1,500 – 2,000 sq. feet units that feature only the restaurant (due to close proximity to other health-oriented food stores) (currently three stores); and 3) 800 – 1,000 sq. feet units that are kiosks in airports, bus and train stations, hospitals and other high-traffic locations (currently one store). We cannot currently estimate the proportion of our planned future locations that will fall in each of these categories.

Franchise Operations

We have pursued a broad-based franchising program since 2004. We continue to extend our franchise relationships beyond our current franchisees. Pursuant to federal and state regulations, we annually update our Uniform Franchise Offering Circular, which includes a disclosure statement, a Franchise Agreement and an Area Development Agreement, to facilitate sales of additional franchise and area development licenses. The UFood franchise agreement typically requires the payment of a franchise fee of $35,000 per restaurant, royalties of 5.0% of gross sales and contributions to a system-wide advertising fund of 1.5% of gross sales. The franchisee is also required to spend 1.5% of gross sales on local marketing. In general, 50% of the franchise fee is payable at the time the Franchise Agreement is signed and the balance is due at the time each store opens. Each Franchise Agreement generally provides for a term of 15 years and gives the franchisee two, five-year renewal options.

The Area Development Agreement is similar to the Franchise Agreement in its terms. In order for an area developer to acquire the rights to a territory, the developer must pay one-half of the franchise fee up front for each unit that developer agrees to build in the territory. In some agreements, we have deferred the payment of the upfront fee, so that the developer pays up-front fees for the first few stores upon the execution of the agreement and fees for the stores opening in phase 2 of the build-out at a later date. We estimate that it costs between $560,000 and $760,000 to open one of our outlets.

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To ensure that the UFood concept is consistent across all geographic areas, we have fully built out the corporate support system for franchisees. New franchisees get assistance on all levels, including build-out specifications, operational guidance and menu and recipes. We also provide a five week training program for each of our new franchisees and employees prior to new store openings.

Suppliers

We strive to obtain consistent high-quality ingredients at competitive prices from reliable sources. To obtain operating efficiencies and to provide fresh ingredients for our food products while obtaining the lowest possible ingredient prices for the required quality, we purchase over 70% of our restaurant supplies from a single supplier, US Foodservice, Inc. The balance of our restaurant supplies come from local vegetable and bread suppliers. Most food, produce and other products are shipped from US Foodservice’s distribution facility directly to our restaurant locations two to three times per week. We do not maintain a central food product warehouse or commissary. We do not have any long-term contracts with our food suppliers. In the past, we have not experienced delays in receiving our food and beverage inventories, restaurant supplies or equipment.

Approximately 70% of the sports nutrition and vitamin products sold in our nutritional supplement business are purchased from two distributors, KCF Nutrition Distributors of Milford, Connecticut, and Dynamic Marketing of Cranston, Rhode Island.

Competition

The restaurant industry is intensely competitive. There are many different sectors within the restaurant industry that are distinguished by types of service, food types and price/value relationships. We position our restaurants in the highly competitive and fragmented fast-casual sector of the restaurant industry. In addition to competing against other fast-casual restaurants, we compete against other sectors of the restaurant industry, including fast-food restaurants and casual dining restaurants. The number, size and strength of competitors within each sector vary by region. We compete based on a number of factors including taste, product quality, speed of service, value, name recognition, restaurant condition and ambiance, location and customer service. Although we believe we compete favorably with respect to each of these factors, many of our direct and indirect competitors are well-established national, regional or local chains and have substantially greater financial, marketing, personnel and other resources.

Customers seeking a “better for you” meal at a foodservice establishment, have several choices available to them throughout the country. However, there are no truly national chains of health-oriented quick-service restaurants that geographically cover the whole United States or even a number of states.

The following is a list of “better for you” restaurants that compete in the quick-serve environment, mostly on a local level. The largest chain has six stores.

 
·
Better Burger (New York City)
 
·
Energy Kitchen (New York City)
 
·
The Pump (New York City) 
 
·
Topz (California)
 
·
Evo’s (Florida)
 
·
B. Good (Boston)
 
·
Soma Grill (Arizona)
 
·
Healthy Bites (Florida)

Our nutritional supplements business competes with a number of outlets that sell similar products. Most pharmacies and many supermarkets carry both brand-name and generic nutritional supplements as well as nutrition bars, energy drinks, and healthy snacks. Within the specialty retail market, where consumers can find knowledgeable staff to recommend supplements, we have three major competitors (GNC, Vitamin Shoppe and Vitamin World) and a wide variety of “mom-and-pop”, sports and specialty nutrition stores.
 
We also compete with these and many other retail establishments for desirable site locations. See “Risk Factors—There is intensive company in our industry.”

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Employees

As of May 31, 2008, we employed approximately 50 full-time associates (defined as associates who average 35 hours or more per week), of whom 16 were employed in general or administrative functions, principally at our headquarters in Newton, Massachusetts. In addition, we employed approximately 90 part-time associates in our six company-operated restaurant locations in the Boston area as managers and associates. We do not have any collective bargaining agreements with our employees and consider our employee relations to be good. We place a priority on staffing our restaurant and store operations with skilled associates and invest in training programs intended to ensure the quality of our operations.
 
Trademarks

We have registered the following trademarks with the United States Patent and Trademark Office: “Unfries”, “UFood Grill” (pending), “Proccino”, “KnowFat! Lifestyle Grille,” “KnowFat,” “Prolatta,” and “LoFat KnowFat”. We believe that our trademarks and other proprietary rights have significant value and are important to the marketing of our restaurant concept. See “Risk Factors—Our success and competitive position depends on our ability to protect our proprietary intellectual property.”

Seasonality

Our business is not significantly seasonal.

Government Regulation

Our restaurants are subject to licensing and regulation by state and local health, sanitation, safety, fire and other authorities, including licensing and permit requirements for the sale of food. To date we have not experienced an inability to obtain or maintain any necessary licenses, permits or approvals. In addition, the development and construction of additional units are also subject to compliance with applicable zoning, land use and environmental regulations. See “Risk Factors—Our food service business and the restaurant industry are subject to extensive government regulation.”

Environmental Regulation

Our business is subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling, release and disposal of hazardous or toxic substances. These environmental laws provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances. To date, our stores have not been the subject of any material environmental matters. See “Risk Factors—We have not conducted a comprehensive review of all the potential environmental liabilities at our properties.”

PROPERTIES

Our corporate headquarters, consisting of approximately 3,278 square feet, are located in Newton, Massachusetts. We occupy our headquarters under a lease that expires in 2013, with an option to extend the lease for an additional seven years. We lease each of our restaurant facilities. Our leases expire on various dates through December 2016. The leases require us to pay our share of the operating expenses of the leased properties, including taxes, utilities and insurance.

At December 30, 2007, future minimum payments under non-cancelable leases are as follows:
 
Year ending December 31,
  
 
  
 
  
 
  
2008
  
$
727,000
  
2009
    
632,000
  
2010
    
602,000
  
2011
    
616,000
  
2012
    
633,000
  
Thereafter
    
1,270,000
  
 
  
$
4,480,000
  

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LEGAL PROCEEDINGS

We are subject to legal proceedings and claims which arise in the normal course of business. Although there can be no assurance as to the ultimate outcome, we generally have denied, or believe we have a meritorious defense and will deny, liability in all significant cases pending against us, including the matters described below, and we intend to defend vigorously each such case. Based on information currently available, we believe the amount, or range, of reasonably possible losses in connection with the actions against us, including the matters described below, in excess of established reserves, in the aggregate, not to be material to our consolidated financial condition or cash flows. However, losses may be material to our operating results for any particular future period, depending on the level of our income for such period.

BAA Boston, Inc., Default Claim

KFLG Watertown, Inc. (KFLG) d/b/a KnowFat and or KnowFat Franchise Company, Inc., our wholly-owned subsidiary, received a Default Letter and Notice of Liquidated Damages on September 28, 2007, as well as several other follow up notices of default (collectively the “Default Letters) from BAA Boston, Inc. (BAAB) claiming certain defaults under KFLG’s Sublease Agreement with BAAB for retail premises (the Premises) at Logan International Airport in Boston, Massachusetts (the Sublease Agreement). The Default Letters claim that KFLG is in default of its obligations under the Sublease Agreement due to, among other things, KFLG’s failure to timely open the Premises for business. The Default Letters demand that KFLG pay $104,000 in liquidated damages to BAAB and pay legal fees and expenses of BAAB in the amount of $48,000. This matter is only in the claim stage and no legal proceeding has been commenced. We believe we made the subtenant improvements on a timely basis and have denied BAAB’s allegations that we are in default of the Sublease Agreement. In the event we are unable to resolve this matter, BAAB has indicated it will seek to enforce any and all of its rights and remedies available under the Sublease Agreement including the possible termination of the Sublease.

Subcontractors’ Claims

In connection with the build-out of the Premises, several of the subcontractors that performed work at the Premises have claimed that the general contractor failed or refused to pay amounts due them. Accordingly, such subcontractors asserted mechanic’s liens totaling $253,431 (the Lien Amounts) against our leasehold interest in the Premises. In April 2008, pursuant to the terms of the Sublease Agreement, we obtained target lien dissolution bonds in order to dissolve the liens against our leasehold interest in the Premises. The lien bond surety required cash collateral in the amount of 120% of the Lien Amounts. The general contractor on the project is responsible for the amounts claimed by the subcontractors and was recently forced into involuntary bankruptcy.

54

DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS

Our executive officers and directors are as follows:

Name
 
Age
 
Position
 
 
 
 
 
George Naddaff
 
78
 
 
 
 
 
 
Charles Cocotas
 
72
 
President and Chief Operating Officer, Director
 
 
 
 
 
Glenn Davis
 
53
 
Chief Financial Officer
 
 
 
 
 
Eric Spitz
 
38
 
Executive Vice President of Business Development
 
 
 
 
 
Robert C. Grayson
 
63
 
Director
 
 
 
 
 
Jeffrey Ross
 
63
 
Director
 
 
 
 
 
Mark Giresi
 
50
 
Director

Background of Officers and Directors

George Naddaff has been our Chairman and Chief Executive Officer since the merger with KnowFat on December 18, 2007. Prior to the merger Mr. Naddaff was KnowFat’s Co-Chief Executive Officer since February 2004, its CEO since September 2007 and its Chairman of the Board since March 2004. From February 1986 to February 2004, he was Chief Executive Officer of Business Expansion Capital, Inc., an investment firm located in Newton, Massachusetts. From 1997 to 2001, he held various management positions (including acting Chief Executive Officer) at Ranch*1, Inc., a franchisor of quick service restaurants with its headquarters in New York, New York.

Charles A. Cocotas has been our President and Chief Operating Officer and a director since the merger with KnowFat on December 18, 2007. Mr. Cocotas joined KnowFat as a consultant in May 2007. In September 2007 he was appointed as KnowFat’s President and Chief Operating Officer. From 1999 to 2007, Mr. Cocotas was principal of the Charles A. Cocotas Restaurant Consulting firm in Massachusetts. He is an experienced executive with more than 35 years experience in the restaurant industry, which included the launch of start-up ventures as well as turn-arounds with established corporations operating both company and franchise restaurants.

Eric Spitz has been our Executive Vice President of Business Development since the merger. He became KnowFat’s Executive Vice President of Business Development in September 2007 and was KnowFat’s Co-Chief Executive Officer and President from February 2004 to September 2007 and a director of KnowFat from March 2004. Mr. Spitz held the post of CEO for Trakus, a sports technology company that he founded in 1997, until joining the KnowFat management team in 2004. Prior to Trakus, he worked in various capacities for Information Resources, Inc. Mr. Spitz holds an MBA from MIT’s Sloan School of Management and a B.A. from the University of Pennsylvania.

Glenn Davis joined KnowFat as its Chief Financial Officer in October 2007 and became our Chief Financial Officer upon the merger. Most recently, Mr. Davis has served as CFO of several emerging growth companies, including Multilayer Coating Technologies (from August 2006 through April 2007), a former division of Polaroid Corp., SmartBargains, Inc. (from July 2005 to December 2005) and North American Midway Entertainment Corp. (from November 2004 to July 2005), a provider of carnival rides, food and beverage services at more than 160 venues throughout North America. Previously, Mr. Davis was CFO of Homeruns.com (from 2000 to 2002), an on-line grocery shopping and delivery service. Between his CFO positions, Mr. Davis has provided consulting services to various clients on financial and accounting matters. Mr. Davis holds an MBA from the Amos Tuck School of Business Administration at Dartmouth College and a BA in economics from DePauw University and is a Certified Public Accountant.

55

Robert C. Grayson has been a director of KnowFat since 2004 and a director of UFood since the merger. Since 1992 Mr. Grayson has been President and Chief Executive Officer of RC Grayson and Associates, a retail-oriented consulting firm in New York City. Mr. Grayson has many years of experience in the retail industry, and currently serves as a director of St. John’s Knits, Inc., Kenneth Cole and Lillian August Designs, Inc..

Jeffrey Ross has been a director of KnowFat since 2005 and a director of UFood since the merger. Since 1999 he has been Managing Partner of RossFialkow Capital Partners, an investment advisory firm specializing in private equity and merger and acquisition transactions. From January 1997 to July 1997, he was President and Chief Executive Officer of Hearthstone Assisted Living, a chain of assisted living facilities in Houston, Texas.

Mark Giresi has been a director of KnowFat since December 6, 2007, and a director of UFood since the merger. From February 2000 until May 2008, Mr. Giresi worked for Limited Brands where, as Executive Vice President, he was responsible for the retail operation of Victoria’s Secret, Bath & Body Works, Express and The Limited, as well as the Company’s real estate, store design and construction and loss prevention functions. Most recently he led the strategic growth of Victoria’s Secret and Bath & Body Works outside of the United States. Prior to Limited Brands, Mr. Giresi spent almost 16 years at Burger King Corporation where he held several executive positions including Senior Vice President of U.S. Franchise Operations and Development and Worldwide General Counsel. Mr. Giresi holds a Bachelor of Sciences degree in accounting from Villanova University and a Juris Doctorate of Law degree from Seton Hall Law School.

Section 16(a) Beneficial Ownership Reporting Compliance

We do not have a class of equity securities registered pursuant to Section 12 of the Exchange Act and therefore our directors, executive officers and significant shareholders are not subject to beneficial ownership reporting under Section 16(a) of the Exchange Act.

Nominations to the Board of Directors

Stockholders may recommend individuals to the Nominating and Corporate Governance Committee of the Board of Directors for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials, to the Nominating and Corporate Governance Committee, c/o Corporate Secretary, UFood Restaurant Group, Inc., 255 Washington Street, Suite 100, Newton, MA 02458.

Code of Ethics

We have a Code of 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 of Ethics free of charge to any person upon written request to us at the following address: 255 Washington Street, Suite 100, Newton, MA 02458 Attn: Chief Financial Officer

Board of Directors

The Board of Directors currently consists of five members. Directors serve until their successors are duly elected or appointed. On February 12, 2008, the Board of Directors designated a Compensation Committee, Audit Committee and Nominating and Corporate Governance Committee of the Board. Mark Giresi, Robert Grayson and Jeffrey Ross were designated as members of the Compensation Committee, Mark Giresi and Charles Ramat (who resigned as a director on February 29, 2008) were designated as members of the Audit Committee, and Robert Grayson, Charles Ramat and Jeffrey Ross were designated as members of the Nominating and Corporate Governance Committee of the Board.

Audit Committee Financial Expert

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

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management

The following tables set forth certain information regarding the beneficial ownership of our common stock as of May 28, 2008, by (i) each person who, to our knowledge, owns more than 5% of the common stock; (ii) each of our directors and executive officers; and (iii) all of our executive officers and directors as a group. Unless otherwise indicated in the footnotes to the following tables, each person named in the table has sole voting and investment power and that person’s address is c/o UFood Restaurant Group, Inc., 255 Washington Street, Suite 100, Newton, Massachusetts 02458. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of May 28, 2008 are deemed outstanding for computing the share ownership and percentage of the person holding such options and warrants, but are not deemed outstanding for computing the percentage of any other person.
 
Name and Address of Beneficial Owner
  
Amount and
Nature of
Beneficial
Ownership
  
Percent
of
Class+
  
 
  
     
  
       
  
George Naddaff(1)
    
3,478,991
    
9.5
%
Charles A. Cocotas(2)
    
315,203
    
*
 
Eric Spitz(3)
    
924,199
   
2.6
%
Robert C. Grayson(4)
    
117,437
   
*
 
Jeffrey Ross(5)
    
125,265
   
*
 
Mark Giresi(6)
    
16,954
    
*
 
Glenn Davis(7)
    
13,371
    
*
 
Directors and Executive Officers as a group(1)-(7)
    
4,991,420
    
13.4
%
 
          
Alan Antokal(8)
    
2,373,029
    
6.8
%
Spencer Trask Ventures, Inc., and its affiliates (9)
   
3,698,584
    
10.5
%
535 Madison Avenue
          
New York, New York 10022
          
Kevin Kimberlin(10)
    
3,698,584
    
10.5
%
Spencer Trask Ventures, Inc.
          
535 Madison Avenue
          
New York, NY 10022
          
 
* Less than one percent
+ Based on 34,812,395 shares of common stock issued and outstanding as of May 28, 2008.

 
(1)
Includes 1,600,012 shares of common stock beneficially owned by Mr. Naddaff. Also includes 184,533 shares of common stock issuable upon exercise of warrants currently exercisable or exercisable within 60 days of May 28, 2008 and 1,694,446 shares of common stock issuable upon exercise of options currently exercisable or exercisable within 60 days of May 28, 2008. Does not include 805,554 shares of common stock issuable upon exercise of options granted to Mr. Naddaff which will not be exercisable within 60 days of May 28, 2008.
 
(2)
Consists of 315,203 shares of common stock issuable upon exercise of options currently exercisable or exercisable within 60 days of May 28, 2008. Does not include 390,471 shares of common stock issuable upon exercise of options granted to Mr. Cocotas which will not be exercisable within 60 days of May 28, 2008.
 
(3)
Includes 774,888 shares of common stock beneficially owned by Mr. Spitz. Also includes 149,311 shares of common stock issuable upon exercise of options currently exercisable or exercisable within 60 days of May 28, 2008. Does not include an additional 100,689 shares of common stock issuable upon exercise of options granted to Mr. Spitz which will not be exercisable within 60 days of May 28, 2008.
 
(4)
Includes 74,815 shares of common stock beneficially owned by Mr. Grayson. Also includes 42,622 shares of common stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days of May 28, 2008. Does not include an additional 88,046 shares of common stock issuable upon exercise of options granted to Mr. Grayson pursuant to the Company’s Non-Employee Director Compensation Plan which will not be exercisable within 60 days of May 28, 2008.
 
(5)
Includes 97,646 shares of common stock beneficially owned by Mr. Ross. Also includes 27,619 shares of common stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days of May 28, 2008. Does not include an additional 88,046 shares of common stock issuable upon exercise of options granted to Mr. Ross pursuant to the Company’s Non-Employee Director Compensation Plan which will not be exercisable within 60 days of May 28, 2008.

57

 
(6)
Includes 16,954 shares of common stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days of May 28, 2008. Does not include an additional 88,046 shares of common stock issuable upon exercise of options granted to Mr. Giresi pursuant to the Company’s Non-Employee Director Compensation Plan which will not be exercisable within 60 days of May 28, 2008.
 
(7)
Includes 7,371 shares of common stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days of May 28, 2008. Does not include an additional 42,629 shares of common stock issuable upon exercise of options granted to Mr. Davis which will not be exercisable within 60 days of May 28, 2008.
 
(8)
Includes 2,307,677 shares of common stock beneficially owned by Mr. Antokal. Also includes 65,352 shares of common stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days of May 28, 2008.
 
(9)
Based upon information provided to us by sources we believe are reliable, this includes 2,400,000 shares of common stock held by Spencer Trask Investment Partners, LLC, 940,000 shares of common stock held by Spencer Trask Breakthrough Partners LLC and 358,584 shares of common stock issuable upon exercise of warrants initially issued to Spencer Trask Ventures Inc. as placement agent and currently held by Spencer Trask & Co. which are currently exercisable or exercisable within 60 days of May 28, 2008. Kevin Kimberlin is the beneficial owner of the securities held by the forgoing Spencer Trask entities.
 
(10)
Consists of 3,698,584 shares held by the Spenser Trask entities described in footnote (9) above.

58
 
EXECUTIVE COMPENSATION

Summary Compensation Table
 
The table below sets forth, for the last two fiscal years, the compensation earned by our Chief Executive Officer and the only other highly compensated executive officer who received annual compensation in excess of $100,000. Each of the named executive officers is entitled to certain payments in connection with resignation, retirement or other termination, as described more fully under the heading “Agreements with Executive Officers and Consultants.”

Name and
Principal
Position(s)
(a)
  
Year
(b)
  
Salary(c)
  
Bonus
(d)
  
Stock
Awards
(e)
  
Option
Awards
(f)
  
Non-Equity
Incentive
Plan
Compensation
(g)
  
Nonqualified
Deferred
Compensation
Earnings
(h)
  
All Other
Annual
Compensation
(i)
  
Total
(j)
  
George Naddaff,
   
2007
  
$
221,045
  
$
-0-
  
$
-0-
  
$
136,879
  
$
-0-
  
$
-0-
  
$
22,840
  
$
357,924
  
Chairman and CEO
    
2006
  
$
209,257
  
$
-0-
  
$
-0-
  
$
-0-
  
$
-0-
  
$
-0-
  
$
125,000
  
$
334,257
  
 
    
   
   
   
   
   
   
   
   
 
Eric Spitz,
   
2007
  
$
196,391
  
$
25,000
  
$
-0-
  
$
34,219
  
$
-0-
  
$
-0-
  
$
0
  
$
255,610
  
Executive Vice President of Business Development
    
2006
  
$
200,924
  
$
-0-
  
$
-0-
  
$
-0-
  
$
-0-
  
$
-0-
  
$
0
  
$
200,924
  

(1)
The amount shown for option awards (column (f)) is based upon the estimated fair value of stock options granted to the named executive and represents the amount of compensation expense we recognized in our consolidated financial statements for the indicated fiscal year. The fair value of the stock option award(s) was determined using a Black Scholes option pricing model and the assumptions for expected option term, volatility of our common stock, risk-free interest rate and expected annual dividend yield disclosed in Note 11, Stock-Based Compensation, of the Notes to our 2007 Consolidated Financial Statements included elsewhere in this prospectus.

(2)
All Other Annual Compensation (column (i)) earned by Mr. Naddaff in 2007 represents the amount of expense we recognized in our 2007 Consolidated Financial Statements for the repricing of 184,533 warrants issued to Mr. Naddaff in 2006 for his personal guaranty of KnowFat’s obligations to TD BankNorth, N.A. Immediately prior to the consummation of the merger with KnowFat, the exercise price of all outstanding KnowFat warrants was reduced to $1.00 and such exercise price was not affected by the conversion ratio in the merger.

(3)
All Other Compensation earned by Mr. Naddaff in 2006 represents amounts paid to him for the sale of franchise locations. (See Note 15, Related Party Transactions of the Notes to our 2007 Consolidated Financial Statements.)

The salaries of Mr. Naddaff and Mr. Spitz are currently $300,000 and $175,000, respectively.

Agreements with Executive Officers and Consultants

On May 1, 2004, KnowFat entered into a Founders’ Agreement with each of (i) George Naddaff, our current Chairman and Chief Executive Officer and (ii) Eric Spitz, our current Executive Vice President of Business Development (each, a Founder). Under the Founder’s Agreements, all 1,000,000 shares of KnowFat common stock granted to Mr. Naddaff have vested and all 500,000 shares of KnowFat common stock granted to Mr. Spitz have vested.
 
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KnowFat entered into an employment contract on October 15, 2007, with each Founder that provides: (i) the term of each employment agreement is for three years; (ii) the base salary for Mr. Naddaff and Mr. Spitz is $300,000 and $175,000, respectively, plus benefits; (iii) Mr. Naddaff and Mr. Spitz were granted options to purchase 1,500,000 and 250,000 our shares, respectively, under the 2007 Plan; and (iv) if a Founder’s employment is terminated by KnowFat without cause, or by the Founder as a result of a constructive termination by KnowFat, or as a result of the Founder’s death or disability, then KnowFat is obligated to pay severance (consisting of salary and benefits as in effect at the time of termination) to the Founder (or the Founder’s legal representatives) for a period equal to the lesser of 12 months or the then-remaining balance of the employment term. The options referenced above have an exercise price of $1.00 per share, have a term of ten years and vest over a three-year period as follows: (A) Mr. Naddaff’s options to purchase (i) 500,000 shares vested upon the grant of the options and (ii) 1,000,000 shares vest in equal monthly amounts of approximately 27,778 shares over a three year period through December 17, 2010; and (B) Mr. Spitz’s options to purchase (i) 125,000 shares vested upon the grant of the options and (ii) 125,000 shares vest in equal monthly amounts of approximately 3,472 shares over a three year period through December 17, 2010. If Mr. Spitz terminates his employment voluntarily at a point more than 30 days after the effective date of registration statement by which the securities sold in the Offering are registered for resale, Mr. Spitz is entitled to the same severance benefits. In addition to the foregoing, upon our consummation of the sale of any franchise restaurant, we will pay Mr. Naddaff a fee of $10,000. To the extent any franchise transaction is a part of an Area Development Agreement, the fee will be payable to Mr. Naddaff upon consummation of the franchise sale as follows : (i) $5,000 in cash and (ii) the remaining portion in a number of shares of our common stock having an aggregate value of $5,000 on the date such fee is due. Both employment agreements provide for severance (consisting of base salary and benefits continuation) for a period of up to 12 months upon termination of the executive without cause.

The Founders and Low Fat No Fat Gourmet Café, Inc. (LFNF) are parties to a Joint Venture Agreement dated January 26, 2004. Under the JV Agreement, LFNF granted KnowFat the exclusive right to franchise the concept of retail outlets offering food service featuring low-fat, low-carbohydrate and low-calorie food items, selected beverages and nutritional products to the general public and agreed to contribute all its trademarks, copyrights, know-how, trade secrets and other intellectual property to KnowFat. As consideration, KnowFat issued 545,454 shares of its common stock to LFNF. The JV Agreement also provides that LFNF has the right to send one attendee to meetings of the Board of directors as an observer.

On February 12, 2008, the Board of Directors approved an employment agreement with Mr. Cocotas. The agreement provides: (i) for an initial term of two years; (ii) for a base salary of $200,000 per year, plus benefits; (iii) that Mr. Cocotas is entitled to receive options to purchase 200,000 shares of the Company’s common stock, exercisable at $1.00 per share of common stock, which options shall vest in equal amounts on the first day of each month for twenty-four months following the date of the employment agreement; and (iv) that if Mr. Cocotas’ employment is terminated by him for good reason (as defined in the agreement) or by the Company because of his permanent disability (as defined in the agreement), the Company is obligated to pay severance, consisting of base salary, for a six month period.
 
Outstanding Equity Awards at Fiscal Year End
December 30, 2007

Name
  
No. of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  
No. of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
  
Option
Exercise
Price
  
Option
Expiration
Date
  
George Naddaff
    
500,000
    
1,000,000
(1)
  
-0-
  
$
1.00
    
Dec. 17, 2017
  
Eric Spitz
    
125,000
    
125,000
(1)
  
-0-
  
$
1.00
    
Dec. 17, 2017
  
 
 
(1)
The vesting schedule for the unexercised shares is outlined in the section titled “Agreements with Executive Officers and Consultants”.

2004 Stock Option Plan

KnowFat did not grant any options or other stock awards under the 2004 Stock Option Plan to any named executive officers in 2007 or 2006.

2007 Equity Incentive Plan

Our Board of Directors and stockholders adopted the 2007 Equity Incentive Plan on August 17, 2007, which reserves a total of 3,000,000 shares of our common stock for issuance under the 2007 Plan. If an incentive award granted under the 2007 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2007 Plan.
 
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Shares issued under the 2007 Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of acquiring another entity are not expected to reduce the maximum number of shares available under the 2007 Plan. In addition, the number of shares of common stock subject to the 2007 Plan, any number of shares subject to any numerical limit in the 2007 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in our outstanding common stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.

On February 12, 2008, our Board of Directors approved an increase in the number of shares of common stock reserved for issuance under the 2007 Plan to 6,000,000 shares. The increase is subject to shareholder approval and is expected to be submitted for consideration at a meeting of stockholders in August, 2008.
 
Administration

The Compensation Committee of the Board, or the Board in the absence of such a committee, will administer the 2007 Plan. Subject to the terms of the 2007 Plan, the Compensation Committee has complete authority and discretion to determine the terms of awards under the 2007 Plan.
 
Grants

The 2007 Plan authorizes the grant to participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants intended to comply with Section 162(m) of the Internal Revenue Code, as amended, and stock appreciation rights, as described below:
 
 
●
Options granted under the 2007 Plan entitle the grantee, upon exercise, to purchase a specified number of shares from us at a specified exercise price per share. The exercise price for shares of common stock covered by an option cannot be less than the fair market value of the common stock on the date of grant unless agreed to otherwise at the time of the grant.
 
 
●
Restricted stock awards and restricted stock units may be awarded on terms and conditions established by the compensation committee, which may include performance conditions for restricted stock awards and the lapse of restrictions on the achievement of one or more performance goals for restricted stock units.
 
 
●
The compensation committee may make performance grants, each of which will contain performance goals for the award, including the performance criteria, the target and maximum amounts payable and other terms and conditions.
 
 
●
The 2007 Plan authorizes the granting of stock awards. The compensation committee will establish the number of shares of common stock to be awarded and the terms applicable to each award, including performance restrictions.
 
 
●
Stock appreciation rights (SARs) entitle the participant to receive a distribution in an amount not to exceed the number of shares of common stock subject to the portion of the SAR exercised multiplied by the difference between the market price of a share of common stock on the date of exercise of the SAR and the market price of a share of common stock on the date of grant of the SAR.
 
Duration, Amendment and Termination

The Board has the power to amend, suspend or terminate the 2007 Plan without stockholder approval or ratification at any time or from time to time. No change may be made that increases the total number of shares of common stock reserved for issuance pursuant to incentive awards or reduces the minimum exercise price for options or exchange of options for other incentive awards, unless such change is authorized by our stockholders within one year. Unless sooner terminated, the 2007 Plan would terminate ten years after it is adopted.

Other Equity Awards

In May 2008, the Board of Directors awarded Mr. Naddaff and Mr. Cocotas non-qualified options to purchase 1,000,000 and 300,000 shares, respectively, of UFood common stock at an exercise price of $1.23. The options granted to Mr. Naddaff are fully vested and expire ten years from the date of grant. The options granted to Mr. Cocotas vest in monthly installments over the remaining term of his employment agreement (through January 2010) and expire ten years from the date of grant.
 
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Director Compensation
 
On February 12, 2008, our Board of Directors approved the following compensation for non-employee directors:

 
(a)
Each non-employee director shall be granted non-qualified options to purchase 100,000 shares of common stock at an exercise price equal to the closing stock price on February 11, 2008. Such grant shall represent a tri-annual retainer for the 2008, 2009 and 2010 fiscal years. The options granted shall vest weekly over 36 months and shall expire February 11, 2018.

 
(b)
Each non-employee director who serves as chairman of the Audit, Compensation or Nominating and Corporate Governance committee shall receive an annual grant of non-qualified options to purchase 3,000 shares of common stock. All other members of each committee shall receive an annual grant of non-qualified options to purchase 2,500 shares of common stock.

KnowFat did not award stock options or other compensation to its directors in 2006. Our directors are reimbursed for reasonable and necessary out-of-pocket expenses incurred in connection with their service to us, including travel expenses.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Directors and Officers of UFood

In May 2006, KnowFat entered into an agreement with George Naddaff, Chairman and CEO, by which Mr. Naddaff received a warrant to purchase up to 184,533 shares of KnowFat common stock in exchange for Mr. Naddaff’s personal guaranty of KnowFat’s credit obligations to the Bank.

KnowFat’s directors have received stock option grants and reimbursement of certain expenses. See the “Director Compensation” section of this prospectus. Two of our directors are also executive officers. Messrs. Naddaff, Cocotas and Spitz have entered into employment agreements with us, and each receives compensation thereunder. See “Executive Compensation—Agreements with Executive Officers and Consultants” above in this prospectus.

Transactions with Former UFood Shareholders

Prior to the closing of the merger, we transferred all of our operating assets and liabilities to a wholly owned subsidiary, Axxent Media, Inc., and contemporaneously with the closing of the merger split-off Axxent Media, Inc., through the sale of all of the outstanding shares of Axxent Media, Inc., to Brent Hahn, our former Chief Executive Officer. In connection with the split-off, 16,200,000 shares of common stock held by Mr. Hahn prior to the merger were surrendered and cancelled without further consideration.
 
Transactions with the Placement Agent and Its Related Parties

We retained the services of Spencer Trask Ventures, Inc., as placement agent in connection with a private offering of up to 8,000,000 units of our securities, plus an over-allotment of 5,000,000 units, at a price of $1.00 per unit, to accredited investors in December 2007. Each unit consists of one share of common stock and a warrant to purchase one-half, or 50%, of a share of common stock. We paid the Placement Agent a commission of 10% of the funds raised from the investors in the offering plus an expense allowance of $190,000. In addition, the placement agent received warrants to purchase a number of shares of common stock equal to 20% of the shares of common stock included in the units sold to investors in the offering. As a result of the foregoing, the placement agent was paid commissions of $616,000 and received warrants to purchase 1,232,000 shares of common stock in connection with the first and second closings of the offering in December 2007. The placement agent was paid further commissions of approximately $478,100 and received warrants to purchase an additional 956,200 shares of common stock in connection with the third, fourth and fifth closings of the offering.

The placement agent acted as our placement agent in connection with our sale of $2,000,000 of principal amount of convertible notes, which was consummated in September and October 2007. We paid $200,000 to the placement agent as cash compensation for such services. In addition, we issued a warrant to purchase 800,000 shares of common stock at an exercise price of $1.00 per share as additional compensation. The warrants have a term of seven-years and are fully exercisable. We also paid to the placement agent an expense allowance of $75,000 in connection with such placement.
 
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In August 2007, Spencer Trask Breakthrough Partners (STBP), a party related to the placement agent of the note offering, purchased an aggregate of 3,600,000 shares of common stock from various shareholders who were selling shareholders in our Form SB-2 Registration Statement that was declared effective by the SEC in August 2006. The aggregate purchase price paid to such shareholders by STBP for such shares was $525,000. In addition, STBP purchased $50,000 of our convertible notes in September 2007, which converted to 102,125 shares of common stock upon the consummation of the December 2007 private offering.
 
STBP subsequently transferred 2,400,000 shares of common stock to Spencer Trask Investment Partners, LLC, a related party to the placement agent, and 360,000 shares to an individual employed by the placement agent.

Board Independence

Although we are not currently subject to the listing standards of any exchange or to the SEC rules pertaining to director independence, we believe that Messrs. Grayson and Giresi are “independent” directors as that term is defined by applicable listing standards of the Nasdaq stock market and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee definition of Rule 16b-3 promulgated under the Exchange Act. Jeffrey Ross, who is not an independent director, is a member of the Compensation Committee and the Nominating and Corporate Governance Committee of the Board of Directors.
 
PLAN OF DISTRIBUTION

The selling stockholders may, from time to time, sell any or all of their shares of our common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. If the shares of common stock are sold through underwriters, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. All selling stockholders who are broker-dealers are deemed to be underwriters. These sales may be at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:

 
·
any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 
·
transactions otherwise than on these exchanges or systems or in the over-the-counter market;

 
·
through the writing of options, whether such options are listed on an options exchange or otherwise;

 
·
an exchange distribution in accordance with the rules of the applicable exchange;

 
·
privately negotiated transactions;

 
·
short sales;

 
·
broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

 
·
a combination of any such methods of sale; and

 
·
any other method permitted pursuant to applicable law.
 
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The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades.

Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Any profits on the resale of shares of common stock by a broker-dealer acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by a selling stockholder. The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act.

In connection with the sale of the shares of our common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

The selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of our common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of our common stock from time to time under this prospectus after we have filed an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus and may sell the shares of common stock from time to time under this prospectus after we have filed an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgees, transferees or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions paid, or any discounts or concessions allowed to, such broker-dealers or agents and any profit realized on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers. Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. There can be no assurance that any selling stockholder will sell any or all of the shares of our common stock registered pursuant to the shelf registration statement, of which this prospectus forms a part.

Each selling stockholder has informed us that it does not have any agreement or understanding, directly or indirectly, with any person to distribute our common stock. None of the selling stockholders who are affiliates of broker-dealers, other than the initial purchasers in private transactions, purchased the shares of common stock outside of the ordinary course of business or, at the time of the purchase of the common stock, had any agreements, plans or understandings, directly or indirectly, with any person to distribute the securities.
 
64
 
We are required to pay all fees and expenses incident to the registration of the shares of common stock. Except as provided for indemnification of the selling stockholders, we are not obligated to pay any of the expenses of any attorney or other advisor engaged by a selling stockholder. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

If we are notified by any selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares of common stock, we will file a post-effective amendment to the registration statement. If the selling stockholders use this prospectus for any sale of the shares of our common stock, they will be subject to the prospectus delivery requirements of the Securities Act.

The anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934 may apply to sales of our common stock and activities of the selling stockholders, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in passive market-making activities with respect to the shares of common stock. Passive market making involves transactions in which a market maker acts as both our underwriter and as a purchaser of our common stock in the secondary market. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.
 
DESCRIPTION OF SECURITIES

Authorized Capital Stock

Our amended and restated Articles of Incorporation provide for the issuance of 310,000,000 shares of capital stock, of which 300,000,000 are shares of common stock, par value $0.001 per share, and 10,000,000 are blank-check preferred stock.

Equity Securities Issued and Outstanding

As of May 28, 2008, there were issued and outstanding:

 
·
34,812,395 shares of our common stock;

 
·
No shares of preferred stock;

 
·
Options to purchase 4,551,692 shares of our common s tock:

 
o
2,435,684 of which options are currently vested and exercisable; and
 
o
2,116,008 of which options will vest through May 2011; and

 
·
Warrants to purchase 14,022,680 shares of our common stock, 11,335,180 of which are currently exercisable.

Description of Common Stock

The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as otherwise provided by law, the holders of common stock vote as one class. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of common stock that are present in person or represented by proxy, subject to any voting rights granted to holders of any preferred stock. Except as otherwise provided by law, and subject to any voting rights granted holders of any preferred stock, amendments to the articles of incorporation generally must be approved by a majority of the votes entitled to be cast by all outstanding shares of common stock. The amended and restated Articles of Incorporation do not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of preferred stock created by the Board from time to time, the common stock holders will be entitled to share pro rata such cash dividends as may be declared from time to time by the Board from funds available. Subject to any preferential rights of any outstanding series of preferred stock, upon liquidation, dissolution or winding up of our Company, the common stock holders will be entitled to receive pro rata all assets available for distribution to such holders. There are no preemptive or other subscription rights, conversion rights or redemption or scheduled installment payment provisions relating to shares of common stock. All of the outstanding shares of common stock are fully paid and nonassessable. Our common stock is traded on the OTC Bulletin Board under the symbol “UFFC.OB.”
 
65
 
Description of Preferred Stock

We are authorized to issue 10,000,000 shares of “blank check” preferred stock, $0.001 par value per share, none of which as of the date hereof is designated or outstanding. Our Board of Directors is vested with authority to divide the shares of preferred stock into series and to fix and determine the relative rights and preferences of the shares of any such series. Once authorized, the dividend or interest rates, conversion rates, voting rights, redemption prices, maturity dates and similar characteristics of preferred stock will be determined by our Board of Directors, without the necessity of obtaining approval of the stockholders.

Description of Options

The options to purchase shares of our common stock under the 2004 Plan were issued to former KnowFat option holders. All of these options became immediately exercisable upon consummation of the merger, and no further options will be granted under the 2004 Plan. The options to purchase shares of our common stock under the 2007 Plan were issued to our executive officers and certain employees. We may grant options to purchase up to an additional 142,080 shares of common stock pursuant to the 2007 Plan. On February 12, 2008, our Board of Directors approved an increase in the number of shares of common stock reserved for issuance under the 2007 Plan to 6,000,000 shares. The increase is subject to shareholder approval and is expected to be submitted for consideration at a meeting of stockholders in August, 2008. See “Market for Common Equity and Related Stockholder Matters—Securities Authorized for Issuance under Equity Compensation Plans” above and Note 4, Stock-Based Compensation, to our Consolidated Financial Statements for the Three Months Ended March 30, 2008, and April 1, 2007 below.

Description of Warrants

There are currently outstanding warrants to purchase 14,022,680 shares of our common stock, 11,335,180 of which are currently exercisable, as follows:

Number of Shares
  
Exercise Price
  
Expiration Date
  
5,120,088
   
$
1.25
    
December
2012  
431,500
      
1.25
    
January
2013  
963,500
      
1.25
    
February
2013  
995,500
     
1.25
    
March
2013  
2,916,666
      
1.25
    
April
2013  
2,988,200
      
1.00
    
December
2014  
281,483
      
1.00
    
November
2015  
325,743
     
1.00
    
December
2016  
14,022,680
                       

Of these, 2,988,200 warrants, at the option of the holder, may be exercised by cash payment of the exercise price or by “cashless exercise.” A “cashless exercise” means that in lieu of paying the aggregate purchase price for the shares being purchased upon exercise of the warrants in cash, the holder will forfeit a number of shares underlying the warrants with a “fair market value” equal to such aggregate exercise price. We will not receive additional proceeds to the extent that warrants are exercised by cashless exercise.   

The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. The warrants also s benefit from weighted average price protection for the term of the warrants in the event that we issue additional shares of common stock (or securities convertible into common stock) (with certain exceptions) without consideration or for a consideration per share less than the exercise price of the warrants then in effect.
 
66
 
Registration Rights

Registration Rights Granted in Connection with the Private Placement

In connection with the closing of the private placement, we entered into a registration rights agreement with the investors in that offering, under the terms of which we committed to file a registration statement, within 90 days from the final closing of the offering, covering the resale of the common stock common stock: (i) included in the units; (ii) issuable upon exercise of the warrants included in the units; (iii) issued upon conversion of the convertible notes previously issued by Axxent Media Corporation; and (iv) issuable upon exercise of warrants issued to holders of the Axxent convertible notes in connection with the conversion of their convertible notes, and to use commercially reasonable efforts to cause such registration statement to become effective no later than 90 days after it is filed. Also, we agreed to use commercially reasonable efforts to maintain the effectiveness of such registration statement through the second anniversary of the date it is declared effective by the SEC, or until Rule 144(k) of the Securities Act is available to investors in the offering with respect to all of their shares, whichever is earlier.

Prior to six months after the effective date of such registration statement, we may not, without the prior written consent of holders of a majority of the registrable securities, file any other registration statement with the SEC, and during any time subsequent to such effective date when the registration statement for any reason is not available for use by any holder of the registrable securities for the resale thereof, we may not, without the prior written consent of holders of a majority of the registrable securities, file any other registration statement or any amendment thereto with the SEC or request the acceleration of the effectiveness of any other registration statement previously filed with the Commission, with certain limited exceptions.

The holders of any shares of securities removed from the registration statement as a result of a comment from the SEC will have “piggyback” registration rights for the shares of common stock or common stock underlying their warrants with respect to any registration statement filed by the Company following the effectiveness of the registration statement which would permit the inclusion of these shares.

Registration Rights Granted in Connection with the Corporate Awareness Campaign

In May 2008, we commenced a corporate awareness campaign in the investment community. In connection with this campaign, we entered into service agreements with a number of investor relations and public relations firms, under which we issued to the service providers an aggregate of 740,000 shares of our common stock and warrants to purchase an aggregate of 2,916,666 shares of our common stock in partial payment for their services and granted them “piggyback” registration rights entitling them to include their shares in the registration statement required to be filed following the closing of the private placement as described above.

The registration statement of which this prospectus forms a part was filed pursuant to the registration rights granted in connection with the private placement as well as those granted in connection with the corporate awareness campaign.

Anti-Takeover Effects of Provisions of Nevada State Law

We may be or in the future we may become subject to Nevada’s control share laws. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and if the corporation does business in Nevada, including through an affiliated corporation. This control share law may have the effect of discouraging corporate takeovers. We currently have approximately 400 stockholders.

The control share law focuses on the acquisition of a “controlling interest,” which means the ownership of outstanding voting shares that would be sufficient, but for the operation of the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (1) one-fifth or more but less than one-third; (2) one-third or more but less than a majority; or (3) a majority or more. The ability to exercise this voting power may be direct or indirect, as well as individual or in association with others.
 
67
 
The effect of the control share law is that an acquiring person, and those acting in association with that person, will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to take away voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell the shares to others. If the buyer or buyers of those shares themselves do not acquire a controlling interest, the shares are not governed by the control share law.

If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than the acquiring person, who did not vote in favor of approval of voting rights, is entitled to demand fair value for such stockholder’s shares.

In addition to the control share law, Nevada has a business combination law, which prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after the interested stockholder first becomes an interested stockholder, unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an interested stockholder is any person who is: (a) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation, or (b) an affiliate or associate of the corporation and at any time within the previous three years was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding shares of the corporation. The definition of “business combination” contained in the statute is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.

The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of our Company from doing so if it cannot obtain the approval of our board of directors.

Transfer Agent

The transfer agent for our common stock is Continental Stock Transfer & Trust Company. The transfer agent’s address is 17 Battery Place, New York, New York 10004, and its telephone number is (212) 509-4000.
 
LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us by Gottbetter & Partners, LLP, 488 Madison Avenue, 12th Floor, New York, New York 10022. Jackson Steinem, Inc., which is controlled by one of the partners of Gottbetter & Partners, LLP, beneficially owns 1,322,200 shares of our common stock.
 
EXPERTS

The consolidated financial statements for the years ended December 30, 2007, and December 31, 2006, included in this prospectus and in the registration statement have been audited by Carlin, Charron & Rosen, LLP, independent registered public accountants, to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.
 
WHERE YOU CAN FIND MORE INFORMATION

We file annual reports, quarterly reports, current reports and other information with the SEC. You may read or obtain a copy of these reports at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference room and their copy charges by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains registration statements, reports, proxy information statements and other information regarding registrants that file electronically with the SEC. The address of the website is http://www.sec.gov.
 
68
 
We have filed with the SEC a registration statement on Form S-1 under the Securities Act to register the shares offered by this prospectus. The term “registration statement” means the original registration statement and any and all amendments thereto, including the schedules and exhibits to the original registration statement or any amendment. This prospectus is part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement or the exhibits to the registration statement. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other documents filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the SEC’s public reference facilities and Internet site referred to above.
 
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Under the Nevada Revised Statutes, our directors and officers are not individually liable to us or our stockholders for any damages as a result of any act or failure to act in their capacity as an officer or director unless it is proven that:

 
·
His act or failure to act constituted a breach of his fiduciary duty as a director or officer; and
 
 
·
His breach of these duties involved intentional misconduct, fraud or a knowing violation of law.

Nevada law allows corporations to provide broad indemnification to its officers and directors. At the present time, our Articles of Incorporation and Bylaws also provide for broad indemnification of our current and former directors, trustees, officers, employees and other agents.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

On February 12, 2008, our board of directors unanimously approved the dismissal of Manning Elliot LLP as our principal accountants and engaged Carlin, Charron & Rosen, LLP (CCR) as our new principal accountants. The audit committee of the board did not separately approve the dismissal, though all members of the committee were present at the board meeting.

During our two most recently completed fiscal years and the subsequent interim period preceding the decision to change principal accountants, there were no disagreements with Manning Elliot on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Manning Elliot, would have caused it to make references to the subject matter of the disagreement in connection with its report. Manning Elliot’s report to our directors and stockholders dated June 13, 2007, which is included in our Form 10-KSB filed with the Securities and Exchange Commission on June 27, 2007, indicated Manning Elliot’s “substantial doubt about the Company’s ability to continue as a going concern.” Manning Elliot’s reports on our financial statements for the past two years did not otherwise contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During our two most recently completed fiscal years and the subsequent interim period preceding the decision to change principal accountants, there were no reportable events as defined in Regulation S-K Item 304(a)(v).
 
We provided Manning Elliot with a copy of the disclosures made by us in a current report filed with respect to their dismissal (which were substantially the same as the statements made above), and at our request Manning Elliot furnished us with a letter stating that it agrees with the statements as they relate to Manning Elliott. A copy of this letter was filed as Exhibit 16.1 to our Current Report on Form 8-K/A filed with the SEC on March 11, 2008, and is incorporated herein by reference.

We engaged CCR as our principal accountants effective as of February 12, 2008. During our two most recent fiscal years and the subsequent interim period prior to engaging CCR, neither we nor anyone on our behalf consulted with CCR regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us by CCR that was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue; provided, however, that on December 18, 2007, a wholly-owned subsidiary of ours merged with and into KnowFat Franchise Company, Inc., with KnowFat as the surviving corporation in the merger, and prior to the merger, CCR was the principal accountant of KnowFat since March 2004.

69

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
UFOOD RESTAURANT GROUP, INC.
 
F-2
 
  
Consolidated Statements of Operations for the Unaudited Fiscal Quarters Ended March 30, 2008 and April 1, 2007
F-4
 
  
Consolidated Statements of Cash Flows for the Unaudited Fiscal Quarters Ended March 30, 2008 and April 1, 2007
F-5
 
  
Notes to Consolidated Financial Statements
F-6
   
Report of Independent Registered Public Accounting Firm
F-14
 
  
Consolidated Balance Sheets as of December 30, 2007 and December 31, 2006
F-15
 
  
Consolidated Statements of Operations for the Fiscal Years Ended December 30, 2007 and December 31, 2006
F-17
 
  
Consolidated Statements of Stockholders’ Equity (Deficit) for the Fiscal Years Ended December 30, 2007 and December 31, 2006
F-18
 
  
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 30, 2007 and December 31, 2006
F-19
 
  
Notes to Consolidated Financial Statements
F-20
 
F-1

UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Balance Sheets
March 30, 2008 and December 30, 2007
 
Assets
 
 
  
March 30,
2008
  
December
30,
2007
  
 
  
(unaudited)
  
(audited)
  
   
 
  
 
  
Current assets:
    
   
 
Cash and cash equivalents
  
$
4,016,747
  
$
3,352,201
  
Restricted cash
    
1,005,646
    
1,083,612
  
Accounts receivable
    
406,796
    
93,534
  
Inventories
    
182,328
    
193,359
  
Prepaid expenses and other current assets
    
185,639
    
40,283
  
 
    
5,797,156
    
4,762,989
  
 
    
   
 
Property and equipment:
    
   
 
Equipment
    
891,799
    
874,853
  
Furniture and fixtures
    
223,958
    
209,893
  
Leasehold improvements
    
2,305,929
    
2,301,571
  
Website development costs
    
27,050
    
27,050
  
 
    
3,448,736
    
3,413,367
  
Accumulated depreciation and amortization
    
824,212
    
699,305
  
 
    
2,624,524
    
2,714,062
  
 
    
   
 
Other assets:
    
   
 
Goodwill
    
977,135
    
977,135
  
Other
    
127,325
    
129,360
  
 
    
1,104,460
    
1,106,495
  
 
    
   
 
Total assets
  
$
9,526,140
  
$
8,583,546
  

See accompanying notes.

F-2

UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Balance Sheets
March 30, 2008 and December 30, 2007
 
  Liabilities and Stockholders’ Equity
 
 
  
March 30,
2008
  
December
30,
2007
  
 
  
(unaudited)
  
(audited)
  
 
  
 
  
 
  
Current liabilities:
    
   
 
Current portion of long-term debt
  
$
1,823,386
  
$
1,874,993
  
Current portion of capital lease obligations
    
48,778
    
51,582
  
Accounts payable
    
260,000
    
727,293
  
Franchisee deposits
    
819,500
    
504,500
  
Accrued expenses and other current liabilities
    
875,094
    
439,226
  
 
    
3,826,758
    
3,597,594
  
 
    
   
 
Long-term liabilities:
    
   
 
Long-term debt
    
636,188
    
730,691
  
Capital lease obligations
    
70,865
    
83,005
  
Other noncurrent liabilities
    
183,192
    
152,158
  
 
    
890,245
    
965,854
  
 
    
   
 
Total liabilities
    
4,717,003
    
4,563,448
  
 
          
Commitments and contingencies
          
 
          
Stockholders’ equity:
          
Preferred stock, $0.001 par value, 10,000,000 shares authorized
    
—
    
—
  
Common stock, $0.001 par value, 300,000,000 shares authorized, 32,078,693 and 29,241,158 shares issued and outstanding
    
32,079
    
29,241
  
Additional paid-in capital
    
21,402,335
    
18,833,096
  
Accumulated deficit
    
(16,625,277
)
  
(14,842,239
)
Total stockh’lders' equity
    
4,809,137
    
4,020,098
  
 
          
Total liabilities and stockholders’ equity
  
$
9,526,140
  
$
8,583,546
  

See accompanying notes.

F-3

UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Operations - Unaudited
For the Three Months Ended March 30, 2008 and April 1, 2007

 
  
Three Months Ended
  
 
  
March 30,
2008
  
April 1,
2007
  
Revenues:
    
   
 
Store sales
  
$
1,251,882
  
$
1,258,954
  
Franchise royalties and fees
    
73,684
    
70,681
  
 
    
1,325,566
    
1,329,635
  
 
    
   
 
Costs and expenses:
    
   
 
Store operating expenses:
    
   
 
Cost of goods sold, food and paper products
    
502,523
    
564,244
  
Labor
    
397,463
    
423,541
  
Occupancy
    
146,091
    
113,241
  
Other store operating expenses
    
255,740
    
202,485
  
General and administrative expenses
    
1,484,388
    
730,906
  
Advertising, marketing and promotion expenses
    
184,256
    
60,212
  
Depreciation and amortization
    
124,907
    
108,172
  
Loss on disposal of assets
    
2,509
    
—
  
Total costs and expenses
    
3,097,877
    
2,202,801
  
 
    
   
 
Operating loss
    
(1,772,311
)
  
(873,166
)
 
    
   
 
Other income (expense):
    
   
 
Interest income
    
15,460
    
9,103
  
Interest expense
    
(26,187
)
  
(80,939
)
Other income (expense), net
    
(10,727
)
  
(71,836
)
 
    
   
 
Loss before income taxes
    
(1,783,038
)
  
(945,002
)
Income taxes
    
—
    
—
  
 
    
   
 
Net loss
  
$
(1,783,038
)
$
(945,002
)
 
          
Basic and diluted loss per share
  
$
(0.06
)
$
(0.15
)

See accompanying notes.

F-4

UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows - Unaudited
For the Three Months Ended March 30, 2008 and April 1, 2007

 
  
Three Months Ended
  
 
  
March 30,
2008
  
April 1, 2007
  
 
  
 
  
 
  
Cash flows from operating activities:
    
   
 
Net loss
  
$
(1,783,038
)
$
(945,002
)
Adjustments to reconcile net loss to net cash used in operating activities:
    
   
 
Depreciation and amortization
    
124,907
    
108,172
  
Amortization of deferred financing costs
    
3,968
    
—
  
Stock-based compensation
    
104,073
    
—
  
Loss on disposal of assets
    
2,509
    
—
  
Non-cash promotion expenses
    
71,000
    
—
  
Increase (decrease) in cash from changes in assets and liabilities:
    
   
 
Accounts receivable
    
(313,262
)
  
(12,696
)
Inventories
    
11,031
    
(5,764
)
Prepaid expenses and other current assets
    
(145,356
)
  
(11,135
)
Other assets and noncurrent liabilities
    
29,101
    
8,589
  
Accounts payable
    
(467,293
)
  
(86,629
)
Franchisee deposits
    
315,000
    
—
  
Accrued expenses and other current liabilities
    
362,359
    
32,814
  
Net cash used in operating activities
    
(1,685,001
)
  
(911,651
)
 
    
   
 
Cash flows from investing activities:
    
   
 
Acquisition of property and equipment
    
(35,368
)
  
(12,417
)
Net cash used in investing activities
    
(35,368
)
  
(12,417
)
 
    
   
 
Cash flows from financing activities:
    
   
 
Proceeds from issuance of common stock, net
    
2,468,004
    
—
  
Payments on long-term debt
    
(146,111
)
  
(324,466
)
Payments on capital lease obligations
    
(14,944
)
  
(17,107
)
(Increase) decrease in restricted cash
    
77,966
    
(102,313
)
Net cash provided by (used in) financing activities
    
2,384,915
    
(443,886
)
 
    
   
 
Increase (decrease) in cash and cash equivalents
    
664,546
    
(1,367,954
)
Cash and cash equivalents – beginning of year
    
3,352,201
    
1,840,090
  
 
    
   
 
Cash and cash equivalents – end of year
  
$
4,016,747
  
$
472,136
  

See accompanying notes.

F-5
 
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
1.
Nature of Operations and Basis of Presentation

Nature of Operations

UFood Restaurant Group, Inc. was incorporated in the State of Nevada on February 8, 2006 as Axxent Media Corp. Prior to December 18, 2007, UFood was a development stage company headquartered in Vancouver, Canada. As Axxent Media Corp., the Company’s business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, the Company changed its name to UFood Franchise Company, Inc., and on September 25, 2007, changed its name to UFood Restaurant Group, Inc. (UFood or the Company).

On December 18, 2007, (the Merger Date) pursuant to the terms of an Agreement and Plan of Merger and Reorganization, a wholly-owned subsidiary of the Company merged with and into KnowFat Franchise Company, Inc. (KnowFat). Following the merger (the Merger), UFood continued KnowFat’s business operations as a franchisor and operator of fast-casual food service restaurants that capitalize on consumer demands for great tasting food with healthy attributes. As of March 30, 2008, the Company’s operations consisted of five company-operated restaurants, including one franchise-owned location operated by the Company pursuant to a management services agreement, and three franchise-operated locations. On the Merger Date, each share of KnowFat common stock issued and outstanding immediately prior to the Merger was exchanged for 1.52350763 shares of UFood Common Stock. All share amounts have been adjusted to reflect the effect of the share exchange.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the Securities and Exchange Commission. They include the activity and balances of UFood and its subsidiaries but do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The interim consolidated financial statements are unaudited; however, they include all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly UFood’s financial position at March 30, 2008, and the results of its operations and cash flows for the three months ended March 30, 2008 and April 1, 2007. The results of operations for the three months ended March 30, 2008 are not necessarily indicative of the results to be expected for future quarters or the full year. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the fiscal year ended December 30, 2007 included in the Company’s Annual Report on Form 10-KSB.

2.
Summary of Significant Accounting Policies

Fiscal Quarters

In 2008, our fiscal quarters end on March 30th , June 29th , September 28th and December 28th . In 2007, our fiscal quarters ended on April 1st , July 1st , September 30th and December 30th .

Principles of Consolidation

The consolidated financial statements include the assets, liabilities and results of operations of UFood Restaurant Group, Inc. and its subsidiary. All significant intercompany balances and transactions have been eliminated.
 
F-6
 
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
Use of Estimates

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

Reclassifications

Certain reclassifications have been made to conform previously reported data to the current presentation.

Revenue Recognition

The Company records revenue for company-owned store sales upon the delivery of the related food and other products to the customer.

The Company follows the accounting guidance of Statement of Financial Accounting Standard (SFAS) No. 45, Accounting for Franchise Fee Income . Franchisee deposits represent advances on initial franchise fees prior to the opening of the franchisee location. We recognize initial franchise fee revenue when all material services we are required to perform and all material conditions we are required to satisfy have been substantially completed, which is generally the opening of the franchised location. The Company defers direct costs related to franchise sales until the related revenue is recognized; however, the deferred costs shall not exceed anticipated revenue less estimated additional related costs. Such costs include training, facilities design, menu planning and marketing. Franchise royalty revenues are recognized in the same period the relevant franchisee sales occur.

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. The reasonably assured lease term on most of the Company’s leases is the initial non-cancelable lease term, which generally equates to between 5 and 10 years. 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. The Company includes any rent escalations and other rent holidays in its determination of straight-line rent expense. Therefore, rent expense for new locations is charged to expense upon the commencement date of the lease.

Earnings Per Share Data

Earnings per share are based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for common stock equivalents, including stock options, restricted stock, and other stock-based compensation. Earnings per common share are computed in accordance with SFAS No. 128, Earnings Per Share, which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income allocable to common stockholders 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.
 
Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and other accrued expenses and debt obligations approximate their fair values due to the short-term maturity of these instruments.
 
F-7

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
Stock-Based Compensation

The Company determines the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model in accordance with Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment . The Black-Scholes option pricing model requires extensive accounting judgment and financial estimate, including estimates of the expected term participants will retain their vested stock options before exercising them and the estimated volatility of the Company’s common stock price over the expected term.

Stock-based compensation expense recognized during the three months ended March 30, 2008 totaled $104,073. There were no equity awards granted during the three months ended April 1, 2007. Stock-based compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 . Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements . SFAS No 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company expects SFAS No. 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date. The Company is still assessing the impact of this standard on its future consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be re-characterized as non-controlling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply restrospectively. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s future consolidated financial statements.

In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 110. SAB No. 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123R. SAB No. 110 is not expected to have a significant impact on our consolidated financial statements.
 
F-8

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
3.
Capital Stock

During the three months ended March 30, 2008, the Company sold 2,790,000 units (Units) of its securities at a price of $1.00 per Unit in connection with the third and fourth closings of its private placement of securities (the Offering). Each Unit consists of one share of common stock of the Company, par value $0.001 per share (Common Stock) and a warrant to purchase one-half of one share of Common Stock (the Investor Warrants). The Investor Warrants are exercisable for a period of five years at an exercise price of $1.25 per whole share of Common Stock.

In connection with the Offering, the Company retained a placement agent (Placement Agent) and paid the Placement Agent a commission of 10% of the funds raised from the investors in the third and fourth closings of the Offering. In addition, the Placement Agent received warrants to purchase a number of shares of Common Stock equal to 20% of the shares of Common Stock included in the Units sold to investors in the Offering. The Placement Agent warrants are exercisable for seven years at an exercise price of $1.00 per share. The Placement Agent was paid commissions of $279,000 and received warrants to purchase 558,000 shares of Common Stock in connection with the third and fourth closings of the Offering.

Within 90 days of the final closing of the Offering, the Company is expected to file a registration statement, to become effective in an additional 90 days from the filing date, registering for resale all shares of Common Stock issued in the Offering, including Common Stock (i) included in the Units; (ii) issuable upon exercise of warrants included in the Units; (iii) issuable upon conversion of promissory notes (the Investor Notes) sold in anticipation of the Offering; and (iv) issuable upon exercise of warrants issued to purchasers of the Investor Notes in connection with the conversion of their Investor Notes. The Company is obligated to pay monetary penalties equal to one and one-quarter percent (1.25%) of the purchase price paid by the holders of registrable securities for each full month that (i) the Company is late in filing the registration statement or (ii) the registration statement is late in being declared effective; provided, that in no event shall the aggregate of any such penalties exceed fifteen percent (15%) of the gross purchase price paid by the holders of registrable securities.

4.
Stock-Based Compensation

The Company has two share-based, shareholder approved employee compensation plans, the KnowFat 2004 Stock Option Plan (the 2004 Plan) and the UFood 2007 Equity Incentive Plan (the 2007 Plan, and together with the 2004 Plan, the Equity Plans), which are described below. During the three months ended March 30, 2008 the Company recognized $104,073 of stock-based compensation expense for awards under the Equity Plans.

The Company estimates the fair value of stock options using a Black Scholes option pricing model with the assumptions noted in the following table. Key inputs used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.

The fair value of each stock option granted during the three months ended March 30, 2008 was estimated on the date of grant using the following assumptions:

 
  
2008
  
 
  
  
  
Expected term (years)
    
6
  
Expected volatility
    
45
%
Risk-free interest rate  
    
4.37
%
Expected annual dividend
    
None
  
 
F-9
 
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
The expected term is based on the weighted average midpoint between vesting and the contractual term. Expected volatility is based on the historical volatility of published common stock prices over the last six years of comparable publicly held companies. The risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock options granted during the three months ended March 30, 2008. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The 2004 Plan

Under the terms of the 2004 Plan, the Company was authorized to grant incentive stock options (ISO’s), non-qualified stock options and restricted stock for up to 304,702 shares of common stock in the aggregate, to employees, officers, directors, consultants and agents of the Company. There were no options granted, exercised or forfeited under the 2004 Plan during the three months ended March 30, 2008 and April 1, 2007. At March 30, 2008, there were 304,702 options outstanding under the 2004 Plan. All of the outstanding options are exercisable as of March 30, 2008. There was no unrecognized compensation expense related to options outstanding under the 2004 Plan at March 30, 2008.

The 2007 Plan

There were no awards under the 2007 Plan prior to December 18, 2007. Awards of ISO’s, non-qualified stock options, stock appreciation rights, restricted stock units, restricted stock or performance units may be made under the 2007 Plan of up to a maximum of 3,000,000 shares of Common Stock to employees, directors, consultants and agents of the Company. The Company believes awards under the 2007 Plan align the interests of its employees with those of its shareholders. At March 30, 2008, there are 2,716,000 stock options outstanding under the 2007 Plan. The outstanding stock options have a weighted average exercise price of $1.06 per share, have a contractual term of 10 years and vest over three years. At March 30, 2008, options to purchase 773,211 shares of Common Stock were exercisable at a weighted average exercise price of $1.01. An additional 582,121 options will vest in fiscal 2008 and 730,333 and 630,334 options will vest in fiscal 2009 and 2010, respectively.

Activity under the 2007 Plan from December 18, 2007, the Merger Date, through March 30, 2008 is presented below:

 
  
Number of
Options
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
  
 
  
 
  
 
    
 
  
Outstanding at December 17, 2007
    
-0-
  
$
—
          
Granted
    
1,950,000
    
1.00
          
Exercised
    
—
    
-
    
-
      
Forfeited
    
—
    
-
    
-
      
Outstanding at December 30, 2007
    
1,950,000
  
$
1.00
    
10.0
  
$
175,500
  
Granted
    
766,000
    
1.22
    
10.0
      
Exercised
    
—
    
-
    
-
      
Forfeited
    
—
    
-
    
-
      
Outstanding at March 30, 2008
    
2,716,000
  
$
1.06
    
9.8
  
$
380,500
  
 
                  
Exercisable at March 30, 2008
    
773,211
  
$
1.01
    
9.8
  
$
146,910
  
 
F-10
 
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
The weighted average grant date fair value of options granted under the 2007 Plan during the first quarter of fiscal 2008 was $0.60.

At March 30, 2008 there was $771,214 of total unrecognized compensation cost related to non-vested options granted under the 2007 Plan. This cost will be recognized over approximately 2.9 years.

On February 12, 2008, the Company’s board of directors approved an increase in the number of shares of Common Stock reserved for issuance under the 2007 Plan to 6,000,000 shares. The increase is subject to shareholder approval.

5.
Income Taxes

On January 1, 2007, the Company adopted the provisions of FIN No. 48. FIN No. 48 requires that the impact of tax positions taken by the Company be recognized in the financial statements if they are more likely than not of being sustained based upon the technical merits of the position. The Company has a valuation allowance against the full amount of its net deferred taxes. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. The implementation of FIN No. 48 had no impact on the Company’s financial statements due to the valuation allowances that have historically been provided against all deferred tax assets.

No provision for current income taxes has been recorded for 2008 and 2007 due to the Company’s cumulative net losses. Significant components of deferred tax assets are net operating loss carryforwards, start-up costs and organizational costs capitalized for tax purposes, and deferred revenue. Significant components of deferred tax liabilities are depreciation of property and equipment.

Management has evaluated the evidence bearing upon the realization of its deferred tax assets and has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets. As a result, the Company has recorded a full valuation allowance against its deferred tax assets. If the Company should generate sustained future taxable income against which these tax attributes might be applied, some portion or all of the valuation allowance would be reversed.

The Company’s income tax returns have not been audited by the Internal Revenue Service (IRS) or any state taxing authority. The years 2004 through 2007 remain open to examination by the IRS and state taxing authority. The Company believes it is not subject to any tax exposure beyond the preceding discussion. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date FIN No. 48 was adopted, we did not have any accrued interest or penalties associated with any unrecognized tax benefits.

6.
Commitments and Contingencies

Legal matters

In November 2007, the Company received a letter from counsel to a former franchisee regarding potential claims against the Company and certain of its officers and directors. The letter stated a desire for the parties to reach a mutually-satisfactory negotiated resolution to the dispute. A draft demand for arbitration, which was not filed, was included with the letter and claimed that the Company and certain of its officers and directors made false and misleading statements (and material omissions of facts) in connection with the sale of the franchise in violation of the Minnesota Franchise Act. The draft demand sought damages in the approximate amount of $2,000,000. The Company believed that it complied with all applicable franchise rules and regulations in its dealings with the former franchisee and sought to vigorously defend any claims that were brought. This matter was settled in April 2008.
 
F-11
 
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
KFLG Watertown, Inc. (KFLG), a wholly-owned subsidiary of the Company, received a Default Letter (the Default Letter) on April 2, 2008, from BAA Boston, Inc. (BAAB) claiming certain defaults under KFLG’s Sublease Agreement with BAAB for retail premises (the Premises) at Logan International Airport in Boston, Massachusetts (the Sublease Agreement). The Default Letter claims that KFLG is in default of its obligations under the Sublease Agreement due to, among other things, KFLG’s failure to timely make certain subtenant improvements. The Default Letter demands that KFLG pay $104,000 in liquidated damages to BAAB and pay legal fees and expenses of BAAB in the amount of $48,000. This matter is only in the claim stage and no legal proceeding has been commenced. The Company believes it made the subtenant improvements on a timely basis and has denied BAAB’s allegations that it is in default of the Sublease Agreement. The Company has been in contact with representatives of BAAB to try and resolve this matter. In the event the Company is unable to resolve this matter, BAAB has indicated it will seek to enforce any and all of its rights and remedies available under the Sublease Agreement including the possible termination of the Sublease.

In connection with the build-out of the Premises, certain subcontractors that performed work on the Premises filed liens totaling $253,431 (the Lien Amount) against the Company’s subsidiaries and their properties in connection with payments for services allegedly past due. In April 2008, pursuant to the terms of the Sublease Agreement, the Company posted a cash collateralized surety bond for 120% of the Lien Amount. The general contractor on the project is responsible for the amounts claimed by the subcontractors but was recently forced into involuntary bankruptcy. The Company paid the general contractor for, among other things, certain amounts claimed by the subcontractor.

The Company is subject to legal proceedings and claims which arise in the normal course of business. In the opinion of management, the ultimate liabilities with respect to these actions will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.

7.
Supplemental Disclosures of Cash Flow Information:

 
  
2008
  
2007
  
 
  
 
  
  
  
Cash paid during the period for interest
  
$
25,529
  
$
63,254
  
 
          
Summary of non-cash investing and financing activities
          
Accrued preferred stock dividends
  
$
—
  
$
244,057
  

8.
Earnings per share

The amounts used for basic and diluted per share calculations are as follows:
 
 
  
2008
  
  2007
  
Net loss
  
$
(1,783,038
)
$
(945,002
)
Preferred stock dividend requirements
    
—
    
244,057
  
Net loss allocable to common stockholders
  
$
(1,783,038
)
$
(1,189,059
)
 
          
Weighted average number of shares outstanding - basic and diluted
    
31,047,693
    
7,961,133
  
Basic and diluted per common share
  
$
(0.06
)
$
(0.15
)

Diluted earnings (loss) per share are not presented since the effect of the assumed exercise of options and warrants to purchase common stock would have been anti-dilutive. A total of 976,261 and 77,445 potential common shares from the assumed exercise of options and warrants were excluded from the calculation of diluted net loss per share for the three months ended March 30, 2008 and April 1, 2007, respectively, because their inclusion would have been anti-dilutive.
 
F-12

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements – Unaudited
 
9.
Segment Data
 
The Company operates two business segments; Store Operations and Franchise Operations. The Store Operations segment comprises the operating activities of restaurants owned or operated by the Company. The Franchise Operations segment is comprised of the operating activities of the franchise business unit which licenses qualified operators to conduct business under the Knowfat and UFood Grill tradenames and also costs to monitor the operations of these business units. Under the terms of the franchise agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Knowfat and UFood Grill tradenames.
 
The accounting policies of the segments are the same. Interest expense has been allocated based on operating results and total assets employed in each segment.
 
Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals of the reportable segments’ revenues and net loss agree with the comparable amounts contained in the Company’s consolidated financial statements.
 
Segment information for the Company’s two business segments follows:

 
  
Three Months Ended
  
 
  
March 30,
2008
  
April 1,
2007
  
Revenues:
          
Store operations
  
$
1,251,882
  
$
1,258,954
  
Franchise operations
    
73,684
    
70,681
  
Total revenue
  
$
1,325,566
  
$
1,329,635
  
 
          
Segment loss:
          
Store operations
  
$
(102,166
)
$
(94,430
)
Franchise operations
    
(767,440
)
  
(118,080
)
Total segment loss
  
$
(869,606
)
$
(212,510
)
 
          
Advertising, marketing and promotion
  
$
184,256
  
$
60,212
  
Depreciation and amortization
    
124,907
    
108,172
  
Unallocated general and administrative expenses
    
546,033
    
492,272
  
Interest (income) expense
    
10,727
    
71,836
  
Loss on disposal of assets
    
2,509
    
—
  
Net loss
  
$
(1,738,038
)
$
(945,002
)
 
10.
Subsequent Events
 
On March 31, 2008 the Company sold 1,991,000 Units at a price of $1.00 per Unit in connection with the final closing of its private placement of securities (see Note 3). The Company paid the Placement Agent a commission of $199,100 representing 10% of the funds raised in the final closing. In addition, the Placement Agent received warrants to purchase 398,200 shares of Common Stock representing 20% of the shares of Common Stock included in the Units sold to investors in the final closing.

In April 2008, the Company paid $800,000 to extinguish the $880,628 note payable issued in connection with the Company’s acquisition of the Downtown Crossing restaurant and store and recorded a gain on extinguishment of debt of $80,628.

F-13

REPORT OF INDEPENDENT REGISTERD PUBLIC ACCOUNTING FIRM
 
To the Shareholders of UFood Restaurant Group, Inc:

We have audited the accompanying consolidated balance sheets of UFood Restaurant Group, Inc and Subsidiary (the Company) as of December 30, 2007 and December 31, 2006, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the fiscal years 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). 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 is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes 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 of 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UFood Restaurant Group, Inc and Subsidiary as of December 30, 2007 and December 31, 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Carlin, Charron & Rosen, LLP

Westborough, Massachusetts
April 14, 2008
 
F-14
 
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Balance Sheets
December 30, 2007 and December 31, 2006
 
Assets
  
 
  
 
  
 
  
 
  
2007
  
2006
  
 
  
 
  
 
  
Current assets:
          
Cash and cash equivalents
  
$
3,352,201
  
$
1,840,090
  
Restricted cash
    
1,083,612
    
—
  
Accounts receivable
    
93,534
    
30,068
  
Inventories
    
193,359
    
244,766
  
Prepaid expenses and other current assets
    
40,283
    
57,877
  
 
    
4,762,989
    
2,172,801
  
 
          
Property and equipment:
          
Equipment
    
874,853
    
878,763
  
Furniture and fixtures
    
156,207
    
189,833
  
Leasehold improvements
    
2,301,571
    
1,552,763
  
Website development costs
    
80,736
    
27,050
  
 
    
3,413,367
    
2,648,409
  
Accumulated depreciation and amortization
    
699,305
    
388,645
  
 
    
2,714,062
    
2,259,764
  
 
          
Other assets:
          
Goodwill
    
977,135
    
1,405,325
  
Other
    
129,360
    
229,632
  
 
    
1,106,495
    
1,634,957
  
 
          
Total assets
  
$
8,583,546
  
$
6,067,522
  

See accompanying notes.

F-15

UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Balance Sheets
December 30, 2007 and December 31, 2006

Liabilities and Stockholders’ (Deficit)
  
 
  
 
  
 
  
 
  
2007
  
2006
  
 
  
 
  
 
  
Current liabilities:
  
 
  
 
  
Current portion of long-term debt
  
$
1,874,993
  
$
2,045,722
  
Current portion of capital lease obligations
    
51,582
    
57,608
  
Accounts payable
    
727,293
    
565,800
  
Franchisee deposits
    
504,500
    
647,500
  
Accrued expenses and other current liabilities
    
439,226
    
70,828
  
 
    
3,597,594
    
3,387,458
  
 
          
Long-term liabilities:
          
Long-term debt
    
730,691
    
1,212,340
  
Capital lease obligations
    
83,005
    
106,631
  
Other noncurrent liabilities
    
152,158
    
—
  
 
    
965,854
    
1,318,971
  
 
          
Series C convertible preferred stock, $0.001 par value, -0- and 719,440 shares issued and outstanding
    
—
    
3,070,812
  
 
          
Total liabilities
    
4,563,448
    
7,777,241
  
 
          
Commitments and contingencies
    
—
    
—
  
 
          
Stockholders’ equity (deficit):
          
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized
          
Series B convertible preferred stock, -0- and 1,407,416 shares issued and outstanding
    
—
    
431,187
  
Series A convertible preferred stock, -0- and 1,576,040 shares issued and outstanding
    
—
    
525,439
  
Common stock, $0.001 par value, 300,000,000 shares authorized, 29,241,158 and 4,208,745 shares issued and outstanding
    
29,241
    
4,209
  
Additional paid-in capital
    
18,833,096
    
6,720,271
  
Accumulated deficit
    
(14,842,239
)
  
(9,390,825
)
 
    
4,020,098
    
(1,709,719
)
 
          
Total liabilities and stockholders’ equity (deficit)
  
$
8,583,546
  
$
6,067,522
  

See accompanying notes.

F-16
 
UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Operations
For the Fiscal Year Ended December 30, 2007 and December 31, 2006
 
 
  
2007
  
2006
  
Revenues:
  
 
  
 
  
Store sales
  
$
4,543,194
  
$
3,273,103
  
Franchise royalties and fees
    
326,733
    
319,565
  
Other revenue
    
34,956
    
99,026
  
 
    
4,904,883
    
3,691,694
  
 
          
Costs and expenses:
          
Store operating expenses:
          
Cost of goods sold, food and paper products
    
2,011,229
    
1,469,684
  
Labor
    
1,405,662
    
1,043,314
  
Occupancy
    
410,061
    
309,157
  
Other store operating expenses
    
796,804
    
561,350
  
General and administrative expenses
    
3,520,392
    
3,555,974
  
Advertising, marketing and promotion expenses
    
671,440
    
548,330
  
Depreciation and amortization
    
429,586
    
222,744
  
Loss on disposal of assets
    
666,838
    
—
  
Total costs and expenses
    
9,912,012
    
7,710,553
  
 
          
Operating loss
    
(5,007,129
)
  
(4,018,859
)
 
          
Other income (expense):
          
Interest income
    
18,627
    
49,120
  
Interest expense
    
(387,757
)
  
(146,987
)
Other expense
    
(75,155
)
  
(8,887
)
Other income (expense), net
    
(444,285
)
  
(106,754
)
 
          
Loss before income taxes
    
(5,451,414
)
  
(4,125,613
)
Income taxes
    
—
    
—
  
 
          
Net loss
  
$
(5,451,414
)
$
(4,125,613
)
 
          
Basic and diluted earnings (loss) per share
  
$
(0.68
)
$
(0.60
)
 
See accompanying notes.

F-17

UFOOD RESTAURANT GROUP, INC. and SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Year Ended December 30, 2007 and December 31, 2006

 
  
Series B Convertible
  
Series A Convertible
  
Common Stock
  
Additional Paid-in
  
Accumulated
  
 
  
 
 
Shares
  
Value
  
Shares
  
Value
  
Shares  
  
Value
  
Capital
  
Deficit
  
Total
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Balances, January 1, 2006
    
1,407,416
  
$
62,511
    
1,576,040
  
$
289,127
    
4,208,745
  
$
4,209
  
$
7,278,910
  
$
(5,265,212
)
$
2,369,545
  
 
    
   
   
   
   
   
   
   
   
 
Dividends accrued on mandatory redeemable preferred stock
    
-
    
-
    
-
    
-
    
-
    
-
    
(1,346
)
  
-
    
(1,346
)
 
    
   
   
   
   
   
   
   
   
 
Warrants exchanged for debt gaurantee
    
-
    
-
    
-
    
-
    
-
    
-
    
24,231
    
-
    
24,231
  
 
    
   
   
   
   
   
   
   
   
 
Accrued preferred stock dividends
    
-
    
368,676
    
-
    
236,312
    
-
    
-
    
(604,988
)
  
-
    
-
  
 
    
   
   
   
   
   
   
   
   
 
Stock-based compensation
    
-
    
-
    
-
    
-
    
-
    
-
    
23,464
    
-
    
23,464
  
 
    
   
   
   
   
   
   
   
   
 
Net loss for year ended December 31, 2006
    
-
    
-
    
-
    
-
    
-
    
-
    
-
    
(4,125,613
)
  
(4,125,613
)
 
    
   
   
   
   
   
   
   
   
 
Balances, December 31, 2006
    
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 preference stock
    
(1,407,416
)
  
(826,957
)
  
(1,576,040
)
  
(826,148
)
  
3,710,642
    
3,710
    
4,965,093
    
-
    
3,315,698
  
 
    
   
   
   
   
   
   
   
   
 
Conversion of promissory notes
    
-
    
-
    
-
    
-
    
6,248,868
    
6,249
    
2,650,560
    
-
    
2,656,809
  
 
    
   
   
   
   
   
   
   
   
 
Stock issued for marketing and promotional services
    
-
    
-
    
-
    
-
    
1,371,157
    
1,371
    
313,629
    
-
    
315,000
  
 
    
   
   
   
   
   
   
   
   
 
Stock-based compensation
    
-
    
-
    
-
    
-
    
41,746
    
42
    
249,250
    
-
    
249,292
  
 
    
   
   
   
   
   
   
   
   
 
Cancellation and re-issuance of warrants
    
-
    
-
    
-
    
-
    
-
    
-
    
75,158
    
-
    
75,158
  
 
    
   
   
   
   
   
   
   
   
 
Reverse 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
    
-
    
4,814,160
  
 
    
   
   
   
   
   
   
   
   
 
Net 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
)
$
4,020,098
  

See accompanying notes. 

F-18

UFOOD RESTAURANT GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows
For the Fiscal Year Ended December 30, 2007 and December 31, 2006

 
  
2007
  
2006
  
 
  
 
  
 
  
Cash flows from operating activities:
  
 
  
 
  
Net loss
  
$
(5,451,414
)
$
(4,125,613
)
Adjustments to reconcile net loss to net cash used in operating activities:
          
Depreciation and amortization
    
429,586
    
222,744
  
Amortization of deferred financing costs
    
20,001
    
10,538
  
Provision for doubtful accounts
    
29,229
    
—
  
Warrants exchanged for debt guarantee
    
—
    
24,231
  
Adjustment to warrant exercise prices
    
75,155
    
—
  
Stock-based compensation
    
249,292
    
23,464
  
Loss on disposal of assets
    
666,838
    
—
  
Non-cash promotion expenses
    
424,000
    
—
  
Non-cash interest on bridge loans
    
119,650
    
—
  
Increase (decrease) in cash from changes in assets and liabilities:
          
Accounts receivable
    
(56,362
)
  
(19,201
)
Inventories
    
3,373
    
(107,344
)
Prepaid expenses and other current assets
    
17,595
    
6,797
  
Other assets and noncurrent liabilities
    
232,429
    
(87,498
)
Accounts payable
    
224,208
    
195,866
  
Franchisee deposits
    
(143,000
)
  
297,500
  
Accrued expenses and other current liabilities
    
24,436
    
18,773
  
Net cash used in operating activities
    
(3,134,984
)
  
(3,539,743
)
 
          
Cash flows from investing activities:
          
Proceeds from sale of assets
    
150,000
    
—
  
Acquisition of property and equipment
    
(992,447
)
  
(1,065,119
)
Acquisition of intangibles
    
—
    
(1,688
)
Net cash used in investing activities
    
(842,447
)
  
(1,066,807
)
 
          
Cash flows from financing activities:
          
Proceeds from issuance of notes payable
    
2,537,160
    
—
  
Proceeds from issuance of common stock, net
    
4,814,160
    
—
  
Proceeds from long-term debt
    
—
    
450,000
  
Proceeds from issuance of preferred stock
        
3,069,466
  
Payments on long-term debt
    
(715,094
)
  
(222,011
)
Payments on capital lease obligations
    
(63,072
)
  
(27,145
)
Increase in restricted cash
    
(1,083,612
)
  
—
  
Cash released from restrictions
    
—
    
1,400,000
  
Net cash provided by financing activities
    
5,489,542
    
4,670,310
  
 
          
Increase in cash and cash equivalents
    
1,512,111
    
63,760
  
Cash and cash equivalents – beginning of year
    
1,840,090
    
1,776,330
  
 
          
Cash and cash equivalents – end of year
  
$
3,352,201
  
$
1,840,090
  
 
See accompanying notes. 

F-19

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

1.
Nature of Operations

Nature of Operations

UFood Restaurant Group, Inc. was incorporated in the State of Nevada on February 8, 2006 as Axxent Media Corp. Prior to December 18, 2007, UFood was a development stage company headquartered in Vancouver, Canada. As Axxent Media Corp., the Company’s business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, the Company changed its name to UFood Franchise Company, and on September 25, 2007, changed its name to UFood Restaurant Group, Inc. (UFood or the Company).

On December 18, 2007, (Merger Date) pursuant to the terms of an Agreement and Plan of Merger and Reorganization, a wholly-owned subsidiary of the Company merged with and into KnowFat Franchise Company, Inc. (KnowFat). Following the merger (the Merger), UFood continued KnowFat’s business operations as a franchisor and operator of fast-casual food service restaurants that capitalize on consumer demands for great tasting food with healthy attributes. As of December 30, 2007, the Company’s operations consisted of five company-operated restaurants and three franchise-operated locations. On the Merger Date, each share of KnowFat common stock issued and outstanding immediately prior to the Merger was exchanged for 1.52350763 shares of UFood Common Stock. All share amounts have been adjusted to reflect the effect of the share exchange.

2.
Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements of UFood Restaurant Group, Inc. and its subsidiaries consist of the accounts of UFood Restaurant Group, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Certain reclassifications have been made to conform previously reported data to the current presentation.

Fiscal Year

Following the merger described in Note 3, UFood changed its fiscal year end from April 30 to a 52/53 week fiscal year ending on the Sunday closest to December 31 of each year. Our 2007 and 2006 fiscal years ended on December 30, 2007 and December 31, 2006, respectively.

Use of Estimates

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

Cash equivalents represent highly liquid instruments with original maturities of three months or less when purchased. Cash equivalents consist of money market accounts at December 31, 200 7 and 2006. At December 31, 2007 restricted cash was comprised of $83,612 used to collateralize a standby letter of credit and $1,000,000 received from the sale of equity securities and deposited in an escrow account to pay investor relations and public relations expenses.

Inventories

Inventories, which primarily consist of food products, paper goods and supplies and vitamins and supplements for resale, are stated at the lower of cost or market, with cost determined by the average cost method.

F-20

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

Deferred Financing Costs

Deferred financing costs represent costs paid to third parties in order to obtain long-term financing and have been included in other assets. Deferred financing costs are amortized over the life of the related debt. Amortization expense related to these costs were $20,001 and $10,538 for the years ended December 30, 2007 and December 31, 2006, respectively, and is included in interest expense.
Property and Equipment

Property, equipment and leaseholds are stated at cost. Depreciation is provided 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:

Leasehold improvements
    
5 years
  
Equipment
    
5 years
  
   
5 years
  
Website development costs
    
3 years
  

Upon retirement or sale, the cost of assets disposed and their related accumulated depreciation are removed from the accounts. Any resulting gain or loss is credited or charged to operations. Maintenance and repairs are charged to expense when incurred, while betterments are capitalized. The total amounts expensed for maintenance and repairs were $70,182 and $47,453 for the fiscal years ended December 30, 2007 and December 31, 2006, respectively.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets under Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are not amortized, but instead tested for impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Intangible assets with finite lives continue to be amortized over their useful lives. The Company performs its impairment assessment by comparing discounted cash flows from reporting units with the carrying value of the underlying net assets inclusive of goodwill. The Company performed its annual impairment tests as of the first day of the fourth quarter of fiscal years 2007 and 2006. Based upon the results of the first step, the Company determined that no impairment had occurred, as the fair value of the reporting unit exceeded the respective carrying value. At December 30, 2007, the Company had no indefinite-lived intangible assets.

Intangible assets with finite lives consist of costs incurred to obtain debt financing and are being amortized on a straight-line basis over the term of the related debt.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, when impairment indicators exist, the Company evaluates its long-lived assets for potential impairment. Potential impairment is assessed when there is evidence that events or changes in circumstances have occurred that indicate the carrying amount of an asset may not be recovered. The Company identified no indications of impairment.

Income Taxes

The provision for income taxes is determined in accordance with the provisions of SFAS No. 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.

F-21

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Effective January 1, 2007, the Company adopted the provisions of FIN No. 48 and the provisions of FIN No. 48 have been applied to all income tax positions commencing from that date. The cumulative effect of adopting FIN No. 48 was not material. Prior to fiscal 2007, the Company determined its tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies. The Company recorded estimated tax liabilities to the extent the contingencies were probable and could be reasonably estimated.

Revenue Recognition

The Company records revenue for company-owned store sales upon the delivery of the related food and other products to the customer.

The Company follows the accounting guidance of SFAS No. 45, Accounting for Franchise Fee Income . Franchisee deposits represent advances on initial franchise fees prior to the opening of the franchisee location. We recognize initial franchise fee revenue when all material services we are required to perform and all material conditions we are required to satisfy have been substantially completed, which is generally the opening of the franchised location. The Company defers direct costs related to franchise sales until the related revenue is recognized; however, the deferred costs shall not exceed anticipated revenue less estimated additional related costs. Such costs include training, facilities design, menu planning and marketing. Franchise royalty revenues are recognized in the same period the relevant franchisee sales occur.
 
Advertising Costs

The Company expenses a dvertising costs as incurred. Advertising expense amounted to $82,469 in 2007 and $68,163 in 2006.

Pre-Opening Costs

All pre-opening costs directly associated with the opening of new company-owned restaurant locations, which consist primarily of labor and food costs incurred during in-store training and preparation for opening, but exclude manager training costs which are included in other operating expenses, are expensed when incurred.

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. The reasonably assured lease term on most of the Company’s leases is the initial non-cancelable lease term, which generally equates to between 5 and 10 years. 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. The Company includes any rent escalations and other rent holidays in its determination of straight-line rent expense. Therefore, rent expense for new locations is charged to expense upon the commencement date of the lease.

Earnings Per Share Data

Earnings per share are based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for common stock equivalents, including stock options, restricted stock, and other stock-based compensation. Earnings per common share are computed in accordance with SFAS No. 128, Earnings Per Share, which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive securities outstanding during the year.

F-22

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include accounts receivable, accounts payable and other accrued expenses approximate their fair values due to the short-term maturity of these instruments.

Stock-Based Compensation

The Company maintains two stock-based incentive plans. The Company grants options to purchase common stock at an option price equal to the market value of the stock at the date of grant. Options generally vest over a three year period beginning on the date of grant and have a ten year term.

The Company has adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payment, which requires all stock-based compensation, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. The Company adopted this accounting treatment using the modified prospective transition method, as permitted under SFAS No. 123R; therefore results for prior periods have not been restated. The Company uses the Black-Scholes option pricing model which requires extensive use of accounting judgment and financial estimates, including estimates of the expected term participants will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term, and the number of options that will be forfeited prior to the completion of their vesting requirements. The provisions of SFAS No. 123R apply to new stock options and stock options outstanding, but not yet vested, on the date the Company adopted SFAS No. 123R.

Stock-based compensation expense recognized during the fiscal year ended December 30, 2007 totaled approximately $218,082 for stock options and $31,210 related to restricted stock. Stock-based compensation expense recognized during the fiscal year ended December 31, 2006 totaled approximately $23,464 for stock options. Stock-based compensation expense was included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Prior to adoption of SFAS No. 123R, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) 25, Accounting for Stock Issued to Employees, and related interpretations, and followed the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure” . Accordingly, prior to fiscal 2006, stock-based compensation was included as pro forma disclosure in the financial statement footnotes.

New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 . Under SFAS No. 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS No 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s future consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until December 28, 2008. The Company expects SFAS No. 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date. The Company is still assessing the impact of this standard on its future consolidated financial statements.

F-23

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
 
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be re-characterized as non-controlling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply restrospectively. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s future consolidated financial statements.

In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 110. SAB No. 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123R. SAB No. 110 is not expected to have a significant impact on our consolidated financial statements.

3.
Reverse Merger

On December 18, 2007, pursuant to the terms of an Agreement and Plan of Merger and Reorganization, the Company, through a wholly-owned subsidiary, merged with and into KnowFat Franchise Company, Inc. Following the merger, UFood continued KnowFat’s business operations as a franchisor and operator of fast-casual food service restaurants. Concurrently with the closing of the Merger and in contemplation of the Merger, the Company consummated a private offering (the Offering) of up to 8,000,000 units of its securities (Units) at a price of $1.00 per Unit. Each Unit consists of one share of Common Stock and a warrant to purchase one-half, or 50%, of a share of Common Stock.

Immediately prior to the Merger, UFood had 23,700,000 shares of Common Stock issued and outstanding and $2,000,000 principal amount of 9% Convertible Promissory Notes (Investor Notes) outstanding. On the Closing Date, the Investor Notes together with accrued interest of $40,087 automatically converted into 4,080,175 Units at a conversion rate of $0.50 per Unit. In conjunction with the Merger, 16,200,000 shares of UFood’s Common Stock issued and outstanding prior to the Merger were retired.

Immediately prior to the Merger, KnowFat had 5,621,648 shares of common stock issued and outstanding and 1,576,040 shares of Series A Preferred Stock (Series A Preferred Shares), 1,407,416 shares of Series B Preferred Stock (Series B Preferred Shares) and 719,440 shares of Series C Preferred Stock (Series C Preferred Shares and, collectively, with the Series A Preferred Shares and the Series B Preferred Shares, the Preferred Shares) issued and outstanding. KnowFat also had a $1,000,000 convertible promissory note outstanding (the Antokal Note).

In connection with the Merger, on the Closing Date, all of KnowFat’s issued and outstanding Preferred Shares and the Antokal Note converted into 3,710,642 and 2,168,693 shares, respectively, of KnowFat common stock. On the Closing Date and in connection with the Merger, each share of KnowFat’s issued and outstanding common stock before the merger, including the common stock issued upon conversion of the Preferred Shares and the Antokal Note, automatically converted into the right to receive 1.52350763 shares (the Conversion Ratio) of the Company’s common stock, par value $0.001 (Common Stock) per share.
 
In addition, on the Closing Date, all of the issued and outstanding options and warrants to purchase shares of KnowFat common stock were exchanged, respectively, for options (the New Options) and warrants (the New Warrants) to purchase shares of the Company’s Common Stock. The number of shares of Common Stock issuable under, and the price per share upon exercise of, the New Options were calculated based on the terms of the original KnowFat options, as adjusted by the Conversion Ratio. The number of shares of Common Stock issuable under the New Warrants was calculated based on the terms of the original warrants, as adjusted by the Conversion Ratio. Immediately prior to the consummation of the Merger, the exercise price of all outstanding KnowFat warrants was adjusted to $1.00, and such exercise price was not affected by the conversion ratio in the Merger.

F-24

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
 
As a result of the foregoing, on the Closing Date, an aggregate of 12,500,000 shares of Common Stock were issuable to former KnowFat stockholders and upon exercise of outstanding KnowFat options and warrants. Of these, 11,500,983 shares of Common Stock were issued, and an aggregate of 391,791 and 607,226 shares of Common Stock were reserved for issuance upon the exercise of the New Options and New Warrants, respectively. UFood’s stockholders before the merger retained 7,500,000 shares of Common Stock after the Merger.

The following table summarizes the effect of the reverse merger recapitalization adjustment on stockholders’ equity:
 
   
  
Common Stock
      
   
  
Shares
  
Par Value
  
Additional 
Paid-in Capital
  
UFood shares outstanding immediately prior to the Merger  
    
23,700,000
  
$
23,700
  
$
(23,700
)
   
              
UFood shares retired  
    
(16,200,000
)
  
(16,200
)
  
16,200
  
   
              
Reverse acquisition recapitalization adjustment  
    
7,500,000
  
$
7,500
  
$
(7,500
)
 
The Merger Agreement includes a post-merger adjustment to the number of shares of Common Stock issued to the former KnowFat stockholders in an amount up to 2,000,000 shares of Common Stock for any breach of the Merger Agreement discovered during the two-year period following the Closing Date. The Merger has been treated as a recapitalization of the Company for financial accounting purposes. Accordingly, the UFood’s financial statements before the merger have been replaced with the historical financial statements of KnowFat before the merger.

4.
Acquisitions
 
Downtown Crossing

On October 2, 2006, the Company, through a wholly-owned subsidiary, acquired the business assets of one of the Company’s franchisees. The purchase price of $1,125,445 was comprised of a cash payment of $25,000, a promissory note in the amount of $1, 075,000 and the assumption of certain current liabilities totaling $25,445.
The purchase price was allocated as follows:

Inventory
  
$
31,507
  
Goodwill
    
402,326
  
Property and equipment
    
630,783
  
Security deposits
    
27,605
  
Franchise fee
    
33,224
  
 
  
$
1,125,445
  

The agreement also requires monthly payments equal to 10% of gross cash revenue (a portion of which represents interest on the promissory note) until the promissory note is paid in full.

Landmark Center

On September 6, 2006, the Company, through a wholly-owned subsidiary, acquired the business assets of another franchisee. Upon the occurrence of a sales event, as defined in the asset purchase agreement, the Company is required to pay the seller an amount ranging from 40% to 50% of the sale proceeds received or $450,000, whichever is greater.
 
F-25
 
UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
 
The asset purchase agreement requires a quarterly royalty payment to the seller equal to 5% of the store’s gross cash revenue, as defined, and includes a restrictive covenant requiring the Company’s wholly-owned subsidiary to maintain net equity of not less than $450,000.
 
5.
Disposal of Assets

During 2007, the Company recorded a loss on disposal of assets of $666,838 resulting from the closure of one restaurant and the sale of a second restaurant. The disposition of the two stores was accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

In April 2007, the Company recorded a loss of $493,032 in connection with the closure of a restaurant in Woburn, Massachusetts. The loss represents the net present value of the remaining lease obligation and the write-off of goodwill and equipment.

In September 2007, the Company sold its restaurant in Shrewsbury, Massachusetts, for $150,000 of cash and a note receivable of $36,333. The note receivable is non-interest bearing and is due in 2008. The Company recorded a loss of $173,806 in connection with the sale.

6.
Goodwill

During 2007, goodwill decreased by $428,190 due to the write-off of goodwill associated with the closure of one restaurant and the sale of another restaurant.
 
7.
Notes Payable

During 2007, KnowFat secured two tranches of bridge financing as follows:

Antokal Note

In April 2007, prior to the Merger transaction described in Note 3, KnowFat borrowed $1,000,000 from Alan Antokal, a stockholder, pursuant to the terms of a 12% Secured Convertible Subordinated Promissory Note (the “Antokal Note”). The Antokal Note, was secured by substantially all of KnowFat’s assets and was subordinate in right of payment to the prior payment of all of KnowFat’s obligations to its senior lender. The Antokal Note was due April 23, 2008 but converted into 2,168,693 shares of KnowFat common stock immediately prior to the Merger.

Investor Notes

On September 24, 2007, in connection with the Merger and the Offering of Units described in Note 10, UFood sold $1,035,000 principal amount of 9% Convertible Promissory Notes and on October 4, 2007, UFood sold an additional $965,000 of Investor Notes. The proceeds from the sale of Investor Notes, net of transaction costs of $462,840, were used to provide bridge financing to KnowFat prior to the Merger. The Investor Notes were due 120 days from the date of issuance. On the Closing Date, in connection with the Merger, the Investor Notes together with accrued interest converted into 4,080,175 Units.

The Company retained a placement agent (Placement Agent) to sell the Investor Notes and paid the Placement Agent a commission of 10% of the funds raised from the sale of the Investor Notes and an expense allowance of $75,000. In addition, the Placement Agent received a warrant (Placement Agent Warrants) to purchase 800,000 shares of Common Stock. The Placement Agent Warrants are exercisable for seven years at an exercise price of $1.00 per share.

F-26

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

8.
Long-Term Debt

Long-term debt consists of the following at December 30, 2007 and December 31, 2006:

 
2007
  
2006
  
 
  
 
  
 
  
Term 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 (7.25% at December 31, 2007). The note is secured by substantially all assets of the Company.
  
$
1,042,080
  
$
1,392,084
  
 
          
Downtown 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.
    
880,628
    
1,045,628
  
 
          
Landmark 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
    
450,000
  
 
          
Unsecured, non-interest bearing note payable. Due in equal monthly installments of $13,021 through September 2008. Interest imputed on the note using a discount rate of 5% totaled $59,597, which is being amortized over the term of the note. The unamortized discount was $1,926 and $11,957 at December 31, 2007 and 2006, respectively.
    
152,099
    
249,363
  
 
          
Indebtedness incurred in connection with the acquisition of the two franchisee locations. No stated interest rate; payable in 36 monthly installments of $2,142 through February 2008.
    
14,996
    
27,852
  
 
          
   
65,881
    
93,135
  
 
          
 
    
2,605,684
    
3,258,062
  
 
          
Less current portion
    
1,874,993
    
2,045,722
  
 
          
Long-term debt
  
$
730,691
  
$
1,212,340
  

F-27

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

Maturities of long-term debt at December 31, 2007 are as follows:

Year ending December 31,
  
     
  
 
  
     
  
 
$
1,874,993
  
2009
    
379,760
  
2010
    
350,931
  
 
      
 
  
$
2,605,684
  

9.
Capital Lease Obligations

The Company leases certain equipment under capital leases. The equipment has been recorded at the present value of the total lease payments using discount rates ranging from 13.6% to 18.7%.

Future minimum lease payments under these leases are as follows:

Year ending December 31,
  
     
  
 
  
     
  
 
$
70,698
  
2009
    
55,989
  
2010
    
37,841
  
2011
    
3,921
  
 
    
168,449
  
Less imputed interest
    
33,862
  
 
    
134,587
  
Less current portion
    
51,582
  
 
      
Long-term portion of capital lease obligations
  
$
83,005
  

The recorded cost and accumulated amortization of the equipment acquired are $ 249,888 and $106,951, respectively as of December 30, 2007. Amortization expense in 2007 and 2006 was $60,972 and $26,903, respectively.

10.
Capital Stock

On December 18, 2007, the Company, through a wholly-owned subsidiary, merged with and into KnowFat Franchise Company, Inc. (see Note 3).

Share Transactions Prior to the Merger

During 2007, prior to the Merger, KnowFat issued 1,412,903 shares of common stock comprised of 41,746 shares issued to consultants and vendors and 1,371,157 shares issued to George Foreman Ventures LLC (GFV) pursuant to the terms of a Services Agreement which became effective June 12, 2007. The 41,746 shares issued to consultants and vendors were valued at $31,237, or $0.75 per share.

Under the terms of the Services Agreement with GFV, KnowFat also agreed to (i) issue GFV an additional 152,351 shares of common stock promptly following the sale of the 600 th franchise, provided the sale of such franchise occurs by December 31, 2009 and (ii) pay GFV a royalty equal to 0.2% of aggregate net sales, in exchange for the performance of certain services by George Foreman and a limited license to use Mr. Foreman’s name and likeness in connection with the promotion of restaurants operated by KnowFat and its franchisees. The 1,371,157 shares of common stock issued to GFV vest over four years in accordance with the following schedule:

F-28

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
 
Vesting Date
  
Number of Shares
  
 
  
 
  
June 12, 2007
    
685,578
  
June 13, 2008
    
304,702
  
June 13, 2009
    
152,351
  
June 13, 2010
    
152,351
  
June 11, 2011
    
76,175
  

In the event there is a change of control after December 18, 2007, as defined in the Services Agreement, GFV has the right to return 50% of the shares of common stock received in exchange for a prospective increase in the royalty rate to 0.5%

Advertising, marketing and promotion expenses for the year ended December 30, 2007 include $315,000 representing the fair value of the 685,578 shares that vested on June 12, 2007. Fair value was determined to be equal to the fair value of the common shares included in the Offering of Units (described below).

Shares Issued in Connection with the Merger

In connection with the Merger described in Note 3, on the Closing Date, 1,576,040 shares of Series A Preferred Stock and 719,440 shares of Series C Preferred Stock converted on a 1 for 1 basis into 2,295,480 shares of KnowFat common stock and 1,407,416 shares of Series B Preferred Stock converted on a 1.005504 for 1 basis into 1,415,162 shares of KnowFat common stock. In addition, the Antokal Note converted into 2,168,693 shares of KnowFat common stock.

All dividends on the Preferred Shares and accrued interest on the Antokal Note were forfeited upon conversion. The amount of cumulative but undeclared dividends on the Closing Date and at December 31, 2006 was approximately $1,897,000 and $956,000, respectively.

Following the conversion of the Preferred Shares and the Antokal Note, on the Closing Date, all of KnowFat’s common stock, par value $0.001 per share, issued and outstanding before the merger were exchanged for 11,500,983 shares of UFood’s Common Stock, par value $0.001 per share.

On the Closing Date and in connection with the Merger, $2,000,000 of Investor Notes issued by UFood in 2007 together with accrued interest of $40,087 automatically converted into 4,080,175 Units at a conversion rate of $0.50 per Unit.

Offering of Units

Concurrently with the closing of the Merger and in contemplation of the Merger, the Company completed the initial closing of a private offering (the Offering) of 5,720,000 units of its securities (Units), at a price of $1.00 per Unit. Each Unit consists of one share of Common Stock and a warrant to purchase one-half, or 50%, of a share of Common Stock. The Company subsequently consummated a second closing of 440,000 Units on December 21, 2007. The warrants (Investor Warrants) are exercisable for a period of five years at an exercise price of $1.25 per whole share of Common Stock.

In connection with the Offering, the Company retained a placement agent and paid the Placement Agent a commission of 10% of the funds raised from the investors in the Offering plus an expense allowance of $225,000. In addition, the Placement Agent received warrants to purchase a number of shares of Common Stock equal to 20% of the shares of Common Stock included in the Units sold to investors in the Offering. The Placement Agent warrants are exercisable for seven years at an exercise price of $1.00 per share. The Placement Agent was paid commissions of $616,000 and received warrants to purchase 1,232,000 shares of Common Stock in connection with the first and second closings of the Offering.
 
Within 90 days of the final closing of the Offering, the Company is expected to file a registration statement, to become effective in an additional 90 days from the filing date, registering for resale all shares of Common Stock issued in the Offering, including Common Stock (i) included in the Units; (ii) issuable upon exercise of Investor Warrants; (iii) issuable upon conversion of the Investor Notes; and (iv) issuable upon exercise of warrants issued to purchasers of the Investor Notes in connection with the conversion of their Investor Notes. The Company is obligated to pay monetary penalties equal to one and one-quarter percent (1.25%) of the purchase price paid by the holders of registrable securities for each full month that (i) the Company is late in filing the registration statement or (ii) the registration statement is late in being declared effective; provided, that in no event shall the aggregate of any such penalties exceed fifteen percent (15%) of the gross purchase price paid by the holders of registrable securities.

F-29

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

Warrants

At December 30, 2007, warrants to purchase 7,759,314 shares of UFood Common Stock were issued and outstanding as follows:

Description
  
Number of
Warrants
  
Exercise
Price
  
New Warrants
    
607,226
  
$
1.00
  
Placement Agent warrants
    
2,032,000
  
$
1.00
  
Investor Notes warrants
    
2,040,088
  
$
1.25
  
Investor Warrants
    
3,080,000
  
$
1.25
  
Total
    
7,759,314
      

In connection with the Merger, all of KnowFat’s issued and outstanding warrants converted into New Warrants to purchase shares of the Company’s Common Stock. The number of shares of Common Stock issuable under the New Warrants was calculated based on the terms of the original KnowFat warrants, as adjusted by the Conversion Ratio. Immediately prior to the consummation of the Merger, the exercise price of all outstanding KnowFat warrants was adjusted to $1.00, and such exercise price was not affected by the conversion ratio in the Merger.

As a result of the foregoing, on the Closing Date, 281,482 KnowFat warrants issued in the connection with the sale of Series B preferred stock and 141,211 KnowFat warrants issued in connection with the sale of Series C preferred stock were exchanged for 422,693 New Warrants with an exercise price of $1.00. The Company recognized an expense of $75,158 as a result of the change in the exercise price to $1.00.
In addition, the warrant issued to an officer of the Company in 2006 to purchase up to 184,533 shares of KnowFat common stock for his personal guaranty of the Company’s obligations to TD BankNorth, N.A. was exchanged for a New Warrant with an exercise price of $1.00.

In connection with the Company’s sale of $2,000,000 of Investor Notes and the sale of 6,160,000 Units, the Placement Agent was issued warrants to purchase 800,000 and 1,232,000 shares, respectively, of UFood Common Stock at an exercise price of $1.00. The warrants issued to the Placement Agent expire seven years from the date they were issued.
 
In connection with the conversion of the $2,000,000 of Investor Notes, 2,040,088 warrants were issued to the purchasers of the Investor Notes. The Investor Note warrants have an exercise price of $1.25 and expire in five years.

The sale of 6,160,000 Units included the issuance of 3,080,000 warrants. The Investor Warrants have an exercise price of $1.25 and expire in five years.

11.
Stock-Based Compensation

At December 30, 2007, the Company has two share-based, shareholder approved employee compensation plans, the 2004 Stock Option Plan (2004 Plan) and the 2007 Equity Incentive Plan (2007 Plan, and together with the 2004 Plan, the Equity Plans), which are described below. During 2007 and 2006, the Company recognized $249,292 and $23,464 of compensation expense for awards under the Equity Plans.

The Company estimates the fair value of stock options using a Black Scholes option pricing model with the assumptions noted in the following table. Key inputs used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.

The fair value of each stock option grant was estimated on the date of grant using the following assumptions:

F-30

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
  
2007
  
2006
  
 
  
 
  
 
  
Expected term (years)
    
6
    
6
  
Expected volatility
    
45
%
  
40
%
Risk-free interest rate  
    
4.37
%
  
4.71
%
Expected annual dividend
    
None
    
None
  
 
The expected term is based on the weighted average midpoint between vesting and the contractual term. Expected volatility is based on the historical volatility of published common stock prices over the last six years of comparable publicly held companies. The risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock options granted for the years ended December 30, 2007 and December 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The 2004 Plan

Under the terms of the 2004 Plan, the Company was authorized to grant incentive stock options (ISO’s), non-qualified stock options and restricted stock for up to 304,702 shares of common stock in the aggregate, to employees, officers, directors, consultants and agents of the Company. The Company believes that such awards align the interests of its employees with those of its shareholders. In general, stock option awards under the 2004 Plan are granted with an exercise price equal to the fair value of the Company’s stock at the date of grant, vest over a three-year period and expire ten years from the date of grant. As a result of the Merger, no awards will be made under the 2004 Plan after December 18, 2007.

A summary of option activity under the 2004 Plan during 2007 and 2006 is presented below:
 
Options
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining 
Contractual
Term
  
Aggregate
 Intrinsic
Value
  
Outstanding at January 1, 2006
    
163,096
  
$
0.45
    
9.1
      
Granted
    
63,095
  
$
0.75
    
10.0
      
Exercised
    
—
    
-
          
Forfeited
    
—
    
-
          
Outstanding at December 31, 2006
    
226,191
  
$
0.54
    
8.4
  
$
113,397
  
Granted
    
148,461
  
$
0.66
    
10.0
      
Exercised
    
—
    
-
          
Forfeited
    
(69,950
)
$
0.36
    
8.4
      
Outstanding at December 30, 2007
    
304,702
  
$
0.61
    
8.8
  
$
146,257
  
 
                  
Exercisable at December 30, 2007
    
304,702
  
$
0.61
    
8.8
  
$
146,257
  

At December 30, 2007, all of the options outstanding under the 2004 Plan were vested. The weighted average grant date fair value of options granted during 2007 and 2006 was $0.36 and $0.20, respectively. There was no unrecognized compensation expense related to options outstanding under the 2004 Plan at December 30, 2007.

Upon consummation of the Merger described in Note 3, the exercise price of 26,661 options granted during 2006 was reduced from $4.27 per share to $1.00 per share. In addition, all options outstanding under the 2004 Plan became fully vested. As a result of these modifications, the Company recognized additional compensation expense of $4,631 during the year ended December 30, 2007.

F-31

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

The 2007 Plan

The 2007 Plan was approved in contemplation of the Merger. There were no awards under the 2007 Plan prior to December 18, 2007, the Closing Date of the Merger. Awards of ISO’s, non-qualified stock options, stock appreciation rights, restricted stock units, restricted stock or performance units may be made under the 2007 Plan of up to a maximum of 3,000,000 shares of Common Stock to employees, directors, consultants and agents of the Company. The Company believes awards under the 2007 Plan align the interests of its employees with those of its shareholders. At December 30, 2007, 1,950,000 stock options were outstanding under the 2007 Plan. The outstanding stock options have an exercise price of $1.00 per share, have a term of 10 years and vest over a three year period. Options to purchase 625,000 shares vested on the date of grant and 475,000, 475,000 and 375,000 options will vest in fiscal 2008, 2009 and 2010, respectively.

Activity under the 2007 Plan from December 18, 2007, the Merger Date, through December 30, 2007 is presented below:

 
  
Number of
Options
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
  
 
  
     
  
   
  
   
  
   
  
Outstanding at December 17, 2007
    
-0-
  
$
—
          
Granted
    
1,950,000
    
1.00
          
Exercised
    
—
    
-
    
-
      
Forfeited
    
—
    
-
    
-
      
Outstanding at December 30, 2007
    
1,950,000
  
$
1.00
    
10.0
  
$
175,500
  
 
                  
Exercisable at December 30, 2007
    
625,000
  
$
1.00
    
10.0
  
$
56,250
  

The weighted average grant date fair value of options granted during 2007 under the 2007 Plan was $0.27.

At December 30, 2007 there was $362,748 of total unrecognized compensation cost related to non-vested options granted under the 2007 Plan. This cost will be recognized over approximately three years.

On December 6, 2007, the Company’s board of directors approved the grant of 87,090 non-qualified stock options to an employee. The options have an exercise price of $0.66 per share, are exercisable for 10 years and are fully vested. The Company recognized compensation expense of $15,649 in connection with this option award.

On February 12, 2008, the Company’s board of directors approved a 3,000,000 increase in the number of shares of Common Stock reserved for issuance under the 2007 Plan to 6,000,000 shares. The increase is subject to approval by a majority of shares represented at the Company’s annual meeting.

12.
Income Taxes

On January 1, 2007, the Company adopted the provisions of FIN No. 48. FIN No. 48 requires that the impact of tax positions taken by the Company be recognized in the financial statements if they are more likely than not of being sustained based upon the technical merits of the position. The Company has a valuation allowance against the full amount of its net deferred taxes. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all, of its deferred tax assets will not be realized. The implementation of FIN No. 48 had no impact on the Company’s financial statements due to the valuation allowances that have historically been provided against all deferred tax assets.

No provision for current income taxes has been recorded for 2007 and 2006 due to the Company’s cumulative net losses. Significant components of deferred tax assets are net operating loss carryforwards, start-up costs and organizational costs capitalized for tax purposes, and deferred revenue. Significant components of deferred tax liabilities are depreciation of property and equipment. The net deferred tax assets are fully reserved by a valuation allowance due to the uncertainty of realizing the tax benefit of the deferred tax assets.
  
F-32

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

Net deferred tax assets (liabilities) at December 30, 2007 and December 31, 2006 are as follows:
 
 
  
2007
  
2006
  
Deferred tax assets
          
Federal
  
$
4,923,000
  
$
3,182,000
  
State
    
905,000
    
876,000
  
Total deferred tax assets
    
5,828,000
    
4,058,000
  
Valuation allowance
    
(5,828,000
)
  
(4,058,000
)
Net deferred tax assets
  
$
-
  
$
-
  

The components of income tax benefit (expense) are as follows:
 
 
  
2007
  
2006
  
Federal
          
Deferred
          
Net operating loss carryforward
  
$
1,678,000
  
$
1,337,000
  
Other
    
61,000
    
57,000
  
 
    
1,739,000
    
1,394,000
  
State
          
Deferred
          
Net operating loss carryforward
    
317,000
    
361,000
  
Other
    
(286,000
)
  
16,000
  
 
    
31,000
    
377,000
  
 
          
Tax benefit before adjustment to valuation allowance
    
1,770,000
    
1,771,000
  
Adjustment to valuation allowance
    
(1,770,000
)
  
(1,771,000
)
Net tax benefit
  
$
-
  
$
-
  

The Company’s effective income tax rate differs from the federal statutory income tax rate as follows for the years ended December 31, 2007 and 2006.

 
2007
  
2006
  
 
  
 
  
 
  
Federal tax provision rate
    
34
%
  
34
%
State tax provision, net of federal provision
    
6
%
  
6
%
Change in valuation allowance
    
(40
)%
  
(40
)%
 
     -    
-
  

Management has evaluated the evidence bearing upon the realization of its deferred tax assets and has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. As a result, management has recorded a full valuation allowance. If the Company should generate sustained future taxable income against which these tax attributes might be applied, some portion or all of the valuation allowance would be reversed.

The Company’s income tax returns have not been audited by the Internal Revenue Service (IRS) or any state taxing authority. The years 2004 through 2007 remain open to examination by the IRS and state taxing authority. The Company believes it is not subject to any tax exposure beyond the preceding discussion. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date FIN No. 48 was adopted, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any significant interest expense recognized during the year ended December 30, 2007.

F-33

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
 
Federal and state net operating loss carryforwards expire in 2027 and 2012, respectively. Ownership changes, as defined in Section 382 of the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that may be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

13.
Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk include cash and cash equivalents, which occasionally exceed current federal deposit insurance limits. Substantially all of the cash and cash equivalents are maintained in a certain large commercial bank. Senior management continually reviews the financial stability of this institution.

14.
Commitments and Contingencies

Leases

The Company rents store and office locations under non-cancelable operating leases and tenant at will arrangements. The agreements expire on various dates through December 2016, and some include options to extend. The leases require the Company to pay its share of the operating expenses of the leased properties, including taxes, utilities and insurance.

Future minimum payments at December 30, 2007 under non-cancelable leases are as follows:

Year ending December 31,
  
 
  
 
  
 
  
 
$
727,000
  
2009
    
632,000
  
2010
    
602,000
  
2011
    
616,000
  
2012
    
633,000
  
Thereafter
    
1,270,000
  
 
      
 
  
$
4,480,000
  

Employment Agreements

On October 15, 2007, in contemplation of the Merger described in Note 3, the Company entered into employment agreements with its chief executive and its vice president of business development. Each agreement is for a term of three years and provides for the payment of a base salary and benefits, an annual bonus to be determined by the Company’s Board of Directors, an equity award under the Company’s 2007 Equity Incentive Plan and, in the case of the Company’s chief executive, a payment for each franchise sold.

The agreements further provide that if the executive’s employment is terminated by the Company without cause, or by the executive as a result of constructive termination by the Company, or as a result of the executive’s death or disability, the Company is obligated to pay severance (consisting of salary and benefits as in effect at the time of termination) to the executive (or the executive’s legal representatives) for a period equal to the lesser of 12 months or the then remaining balance of the employment term. One of the employment agreements provides that if the executive terminates his employment voluntarily at a point more than 30 days after the effective date of the registration statement by which the Units sold in the Offering are registered for resale, the executive is entitled to the same termination benefits he would be entitled to if his employment is terminated by the Company without cause.

F-34

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements

Legal matters

In November 2007, the Company received a letter from counsel to a former franchisee regarding potential claims against the Company and certain of its officers and directors. The letter also states a desire for the parties to reach a mutually-satisfactory negotiated resolution to the dispute. A draft demand for arbitration, which has not been filed, was included with the letter and claims that the Company and certain of its officers and directors made false and misleading statements (and material omissions of facts) in connection with the sale of the franchise in violation of the Minnesota Franchise Act. The draft demand seeks damages in the approximate amount of $2,000,000. The Company believes that it complied with all applicable franchise rules and regulations in its dealings with the former franchisee and intends to vigorously defend any claims that may be brought.

KFLG Watertown, Inc. (KFLG), a wholly-owned subsidiary of the Company, received a Default Letter (the Default Letter) on April 2, 2008, from BAA Boston, Inc. (BAAB) claiming certain defaults under KFLG’s Sublease Agreement with BAAB for retail premises (the Premises) at Logan International Airport in Boston, Massachusetts (the Sublease Agreement). The Default Letter claims that KFLG is in default of its obligations under the Sublease Agreement due to, among other things, KFLG’s failure to timely make certain subtenant improvements. The Default Letter demands that KFLG pay $104,000 in liquidated damages to BAAB and pay legal fees and expenses of BAAB in the amount of $28,822. This matter is only in the claim stage and no legal proceeding has been commenced. The Company believes it made the subtenant improvements on a timely basis and has denied BAAB’s allegations that it is in default of the Sublease Agreement. The Company has been in contact with representatives of BAAB to try and resolve this matter. In the event the Company is unable to resolve this matter, BAAB has indicated it will seek to enforce any and all of its rights and remedies available under the Sublease Agreement including the possible termination of the Sublease.

In connection with the build-out of the Premises at Logan International Airport, demands have been made, legal proceedings have been commenced and liens have been filed against the Company’s subsidiaries and their properties by certain subcontractors that performed work on the Premises in connection with payments for services allegedly past due. The general contractor on the project is responsible for the amounts claimed by the subcontractors. The Company has paid the general contractor and intends to assert claims against the general contractor for, among other things, the amounts claimed by the subcontractors.

The Company is subject to legal proceedings and claims which arise in the normal course of business. In the opinion of management, the ultimate liabilities with respect to these actions will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.

15.
Related Party Transactions

In October 2007, in contemplation of the Merger, UFood entered into an employment agreement with its chief executive officer (Note 14). Under the terms of the agreement, the Company agreed to pay the executive a fee of $10,000 upon the consummation by the Company of the sale of a franchise restaurant. To the extent any franchise transaction is part of an Area Development Agreement, $5,000 of the fee is payable in cash and the remainder is payable in shares of the Company’s Common Stock. The franchise and development fee arrangement included in the executive’s employment agreement replaced a similar arrangement covering the period preceding the Merger, except that franchise and development fees earned prior to the Merger were payable 100% in cash. During 2007 and 2006, the Company recorded franchise and development fee expenses of $-0- and $125,000, respectively.

The Company retained a Placement Agent in connection with the sale of the Investor Notes (Note 7) and the Offering of Units (Note 10). At December 30, 2007, the Placement Agent directly and indirectly through affiliates owned 3,700,000 shares of Common Stock and warrants to purchase 2,082,000 shares of Common Stock.

F-35

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements


16.
Supplemental Disclosures of Cash Flow Information:
 
 
  
2007
  
2006
  
 
  
 
  
 
  
Cash paid during the year for interest
  
$
182,422
  
$
131,603
  
 
          
Summary of non-cash investing and financing activities
          
Accrued preferred stock dividends
  
$
941,365
  
$
606,334
  
Conversion of promissory notes into Common Stock
  
$
2,656,809
  
$
—
  
Conversion of preferred stock into Common Stock
  
$
4,968,803
  
$
—
  
Property and equipment acquired with capital lease
  
$
33,420
  
$
140,655
  
Goodwill acquired with long-term debt
  
$
—
  
$
402,327
  
Property and equipment acquired with long-term debt
  
$
—
  
$
658,388
  
Inventory acquired with long-term debt
  
$
—
  
$
6,506
  
Deposits acquired in business combination
  
$
—
  
$
33,224
  
Accounts payable assumed in business combinations
  
$
—
  
$
25,445
  
Long-term debt assumed / incurred in business combinations
  
$
—
  
$
1,075,000
  

17.
Earnings per share

The amounts used for basic and diluted per share calculations are as follows:
 
  
2007
  
  2006
  
Net loss
  
$
(5,451,414
)
$
(4,125,613
)
Preferred stock dividend requirements
    
(941,365
)
  
(606,334
)
Net loss allocable to common stockholders
  
$
(6,392,779
)
$
(4,731,947
)
Weighted average number of shares outstanding - basic and diluted
    
9,433,081
    
7,919,388
  
Basic and diluted per common share
  
$
(0.68
)
$
(0.60
)

Diluted earnings (loss) per share are not presented since the effect of the assumed exercise of options and warrants to purchase common stock would have been anti-dilutive. A total of 125,469 and 24,625 potential common shares from the assumed exercise of options and warrants were excluded from the calculation of diluted net loss per share for the years ended December 30, 2007 and December 31, 2006, respectively, because their inclusion would have been anti-dilutive.

18.
Segment Data
 
The Company operates two business segments; Store Operations and Franchise Operations. The Store Operations segment comprises the operating activities of restaurants owned or operated by the Company. The Franchise Operations segment is comprised of the operating activities of the franchise business unit which licenses qualified operators to conduct business under the Knowfat and UFood Grill tradenames and also costs to monitor the operations of these business units. Under the terms of the franchise agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Knowfat and UFood Grill tradenames.

F-36

UFOOD RESTAURANT GROUP AND SUBSIDIARY
Notes to Consolidated Financial Statements
 
The accounting policies of the segments are the same as those described in Note 2. Interest expense has been allocated based on operating results and total assets employed in each segment.
 
Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals of the reportable segments’ revenues, net loss and assets agree with the comparable amounts contained in the Company’s audited financial statements.
 
Segment information for the Company’s two business segments follows:

 
  
2007
  
2006
  
Revenues:
          
Store operations
  
$
4,543,194
  
$
3,273,103
  
Franchise operations
    
361,689
    
418,591
  
Total revenue
  
$
4,904,883
  
$
3,691,694
  
 
          
Segment loss:
          
Store operations
  
$
(999,385
)
$
(401,840
)
Franchise operations
    
(522,137
)
  
(618,856
)
Total segment loss
  
$
(1,521,522
)
$
(1,020,696
)
 
          
Advertising, marketing and promotion
  
$
671,440
  
$
548,330
  
Depreciation and amortization
    
429,586
    
222,744
  
Unallocated general and administrative expenses
    
2,384,581
    
2,227,089
  
Interest (income) expense
    
369,130
    
97,867
  
Other (income) expenses, net
    
75,155
    
8,887
  
Net loss
  
$
(5,451,414
)
$
(4,125,613
)
 
          
Depreciation and amortization:
          
 
$
372,404
  
$
186,818
  
Franchise operations
    
57,181
    
35,926
  
Total depreciation and amortization
  
$
429,586
  
$
222,744
  
 
          
Capital expenditures:
          
Store operations
  
$
937,859
  
$
966,428
  
Franchise operations
    
88,008
    
98,691
  
Total capital expenditures
  
$
1,025,867
  
$
1,065,119
  
 
          
Segment assets:
          
Store operations
  
$
3,834,155
  
$
2,587,638
  
Franchise operations
    
4,749,391
    
3,479,884
  
Total segment assets
  
$
8,583,546
  
$
6,067,522
  
 
18.
Subsequent Events
 
Subsequent to December 30, 2007, the Company completed three additional closings, including a final closing on March 31, 2008, of a private Offering of its securities to accredited investors (see Note 10). The Company sold a total of 4,781,000 Units, at a price of $1.00 per Unit, in the first quarter of fiscal 2008 and issued 2,950,500 Investor Warrants to the investors who purchased Units. In addition, the Company paid the Placement Agent commissions totaling $478,100 and issued the Placement Agent warrants to purchase 956,200 shares of Common Stock.

Subsequent to December 30, 2007, the Company paid $800,000 to extinguish the $880,628 note payable issued in connection with the Company’s acquisition of the Downtown Crossing restaurant and store (see Note 8).

F-37
 
26,035,260 Shares of Common Stock

Ufood Logo
 
UFood Restaurant Group, Inc.

PROSPECTUS
 
                      , 2008
 

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13. Other Expenses of Issuance and Distribution.

Set forth below is an estimate (except for registration fees, which are actual) of the approximate amount of the fees and expenses payable by us in connection with the issuance and distribution of the shares of our common stock.
 
EXPENSE  
AMOUNT
  
 
  
 
  
Registration Fee
  
$
 1,381  
Legal Fees and Expenses
     65,000  
Accounting Fees and Expenses
    
10,000
  
Miscellaneous Fees and Expenses
     5,000  
 
      
Total
  
$
 81,381  

Item 14. Indemnification of Directors and Officers.

Nevada Revised Statutes (NRS) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors, officers, employees and agents. The person entitled to indemnification must have conducted himself in good faith, and must reasonably believe that his conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe that his conduct was unlawful.

Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he has met the standards for indemnification and will personally repay the expenses if it is determined that such officer or director did not meet those standards.

Our bylaws include an indemnification provision under which we have the power to indemnify our current and former directors, trustees, officers, employees and other agents against expenses (including attorneys’ fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by any such person, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. Our bylaws further provide for the advancement of all expenses incurred in connection with a proceeding upon receipt of an undertaking by or on behalf of such person to repay such amounts if it is determined that the party is not entitled to be indemnified under our bylaws. These indemnification rights are contractual, and as such will continue as to a person who has ceased to be a director, trustee, officer, employee or other agent, and will inure to the benefit of the heirs, executors and administrators of such a person.

Item 15. Recent Sales of Unregistered Securities.

Sales by KnowFat
In August 2005, KnowFat sold units consisting of 923,800 shares of series B convertible preferred stock and warrants to purchase 184,760 shares of KnowFat common stock to certain investors for an aggregate consideration of $4,619,000. The shares and warrants were issued to accredited investors as defined under Regulation D promulgated by the SEC and otherwise in accordance with the provisions of Regulation D promulgated by the SEC. None of the securities were sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved.
 
In November 2006, KnowFat sold units consisting of 472,226 shares of series C convertible preferred stock and warrants to purchase 92,688 shares of KnowFat common stock to certain investors for an aggregate consideration of $3,069,466. The shares and warrants were issued to accredited investors as defined under Regulation D and otherwise in accordance with the provisions of Regulation D. None of the securities were sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved.
 
II-1
 
In September 2006, KnowFat entered into agreements with George Foreman Ventures, LLC, pursuant to which KnowFat was granted the limited right to use George Foreman’s name and likeness in connection with the promotion of restaurants operated by KnowFat and its franchisees in exchange for: (i) 900,000 shares of KnowFat common stock; (ii) 100,000 additional shares of KnowFat common stock following the sale of the 600th franchise of an outlet offering our products, provided such sale occurs by December 31, 2009; and (iii) 0.2% of the aggregate net sales of the franchise and company owned stores during the term of the agreements. The sale was exempt from registration under Section 4(2) of the Securities Act.
 
In October 2006 and September 2007, KnowFat issued an aggregate of 4,234 shares of its common stock to certain of its vendors in consideration for the services provided by such vendors to KnowFat. The issuance was exempt from registration under Section 4(2) of the Securities Act.
 
Sales by Axxent Media Corporation

In September and October 2007, Axxent Media Corporation sold $2,000,000 principal amount of its 9% convertible promissory notes to accredited investors. All of the gross proceeds that Axxent received from the note offering were used to provide a bridge loan to KnowFat to meet KnowFat’s capital needs prior to the closing of the merger and the private placement. The convertible notes bore interest at the rate of 9% per annum and were for a term of 180 days, and automatically converted into securities offered in the private placement upon the closing of the merger and the private placement. The aggregate principal amount of the convertible notes, plus accrued and unpaid interest, converted into 4,040,088 shares of our common stock and warrants to purchase 2,040,088 shares of our common stock. The convertible notes were sold to accredited investors as defined under Regulation D and non-U.S. persons as defined under Regulation S, and otherwise in accordance with the provisions of Regulation D and/or Regulation S. In connection with the note offering, we paid the placement agent for the note offering a cash commission of $200,000, and issued to that placement agent warrants to purchase 800,000 shares of our common stock at an exercise price of $1.00 per share.

Shares Issued in Connection with the Merger
 
Simultaneously with the closing of the merger, all of the issued and outstanding shares of KnowFat, consisting of (i) 1,034,481 shares of series A preferred stock converted, on a one-to-one basis, (ii) 923,800 shares of series B preferred stock converted, one a 1-to-1.005504 basis and (iii) 472,226 shares of series C preferred stock converted, on a one-to-one basis, into shares of KnowFat common stock. On the closing date, the holders of common stock of KnowFat (including the converted shares of preferred stock) surrendered all of their issued and outstanding shares and received 11,500,983 shares of our common stock. Also on the closing date, (a) the holders of the issued and outstanding warrants to purchase KnowFat common stock received the new warrants to purchase shares of our common stock, and (b) the holders of issued and outstanding options to purchase KnowFat common stock received new options to purchase shares of our common stock. 607,226 and 391,791 shares of our common stock, respectively, are reserved for issuance on exercise of the new warrants and the new options. The number of shares of our common stock issuable under, and the price per share upon exercise of, the new options were calculated based on the terms of the original options of KnowFat, as adjusted by the conversion ratio in the merger. The new options became immediately exercisable upon consummation of the merger. The number of shares of our common stock issuable under the new warrants was calculated based on the terms of the original warrants of KnowFat, as adjusted by the conversion ratio in the merger. Immediately prior to the consummation of the merger, the exercise price of all outstanding KnowFat warrants was adjusted to $1.00, and such exercise price was not affected by the conversion ratio in the merger.

Our pre-merger stockholders retained 7,500,000 shares of our common stock in the merger.
 
The transactions described above were exempt from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D. None of the securities were sold through an underwriter and, accordingly, there were no underwriting discounts or commissions involved.

Shares Issued in Connection with the Private Placement
 
Concurrently with the closing of the merger and in contemplation of the merger, we consummated a private offering of 6,160,000 units of our securities, at a price of $1.00 per unit. Each unit consists of one share of our common stock and a warrant to purchase one-half, or 50%, of a share of our common stock. The investors collectively purchased the units for total cash consideration of $6,160,000.
  
II-2
 
In January 2008, we sold 863,000 units at a price of $1.00 per unit, in February 2008, we sold 1,927,000 units at a price of $1.00 per unit and in March 2008 we sold 1,991,000 units at a price of $1.00 per unit. Each unit consists of one share of our common stock and a warrant to purchase one-half of one share of our common stock. The investors collectively purchased these units for aggregate cash consideration of $4,781,000.

All of the units were sold only to accredited investors, as defined under Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and non-U.S. persons, as defined under Regulation S under the Securities Act and otherwise in accordance with the provisions of Rule 506 of Regulation D and/or Regulation S. In the offering, no general solicitation was made by us or any person acting on our behalf. The units were sold pursuant to transfer restrictions, and the certificates for shares of common stock and warrants underlying the units sold in the offering contain appropriate legends stating that such securities are not registered under the Securities Act and may not be offered or sold absent registration or an exemption from registration.

We paid the placement agent retained in connection with the offering a commission of 10% of the funds raised from the investors in the offering plus an expense allowance. In addition, the placement agent received warrants to purchase a number of shares of common stock equal to 20% of the shares of common stock included in the units sold to investors in the offering. As a result of the foregoing, the placement agent was paid commissions aggregating $1,094,100 and received warrants to purchase a total of 2,188,200 shares of our common stock in connection with the offering.

The offering is more fully described in the Company’s Form 8-K, filed with the Securities and Exchange Commission (the “SEC”) on December 26, 2007, the Company’s Form 8-K, filed with the SEC on February 8, 2008, and the Company’s Form 8-K, filed with the SEC on March 31, 2008, each of which is incorporated herein by reference.

Shares and Warrants Issued in Connection with Corporate Awareness Campaign

In May 2008, we commenced a corporate awareness campaign in the investment community. The campaign encompasses investor relations and public relations services, including traditional media outlets like television, radio, and print, as well as “guerilla marketing” and the internet. The campaign aims to build awareness for our brand with shareholders, franchisees and customers. In connection with this campaign, we entered into service agreements with a number of investor relations and public relations firms, in connection with which we issued to the service providers an aggregate of 740,000 shares of our common stock and warrants to purchase an aggregate of 2,916,666 shares of our common stock in partial payment for their services. The transactions described above were exempt from registration under Section 4(2) of the Securities Act.
 
II-3
 
Item 16. Exhibits.  

Exhibit No.
 
 
Description        
   2.1
 
 
Agreement and Plan of Merger and Reorganization, dated as of December 18, 2007, by and among UFood Restaurant Group, Inc., KnowFat Acquisition Corp. and KnowFat Franchise Company, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
   2.2
 
 
Certificate of Merger (incorporated by reference to Exhibit 2.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
         3.1(a)
 
 
Amended and Restated Articles of Incorporation of UFood Restaurant Group, Inc. (f/k/a Axxent Media Corporation and UFood Franchise Company) (incorporated by reference to Exhibit 3.1(a) to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 22, 2007)
 
 
 
 
        3.1(b)
 
 
Amendment to Articles of Incorporation of UFood Restaurant Group, Inc. (incorporated by reference to Exhibit 3.1(b) to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 26, 2007)
 
 
 
 
   3.2
 
 
Amended and Restated Bylaws of UFood Restaurant Group, Inc. (f/k/a Axxent Media Corporation and UFood Franchise Company) (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on July 31, 2006)
 
 
 
 
   4.1
 
 
Form of Investor Warrant of UFood Restaurant Group, Inc., issued as of December 18, 2007 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
   4.2
 
 
Form of Lock-Up Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
     4.3*
 
 
Form of Warrant of UFood Restaurant Group, Inc., issued as of December 18, 2007, to former holders of Warrants of KnowFat Franchise Company, Inc.
 
 
 
 
     5.1†
 
 
Opinion of Gottbetter & Partners, LLP
 
 
 
 
10.1
 
 
Form of Registration Rights Agreement, dated as of December 18, 2007, by and between UFood Restaurant Group, Inc., and the investors in the Offering (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
10.2
 
 
Split-Off Agreement, dated as of December 18, 2007, by and among UFood Restaurant Group, Inc., Brent Hahn, Axxent Media, Inc., and KnowFat Franchise Company, Inc.(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
10.3
 
 
General Release Agreement, dated as of December 18, 2007, by and among UFood Restaurant Group, Inc., Brent Hahn, Axxent Media, Inc., and KnowFat Franchise Company, Inc.(incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
10.4
 
 
Employment Agreement between KnowFat Franchise Company, Inc., and George Naddaff (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
10.5
 
 
Employment Agreement between KnowFat Franchise Company, Inc., and Eric Spitz (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
10.6
 
 
KnowFat Franchise Company, Inc., 2004 Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
II-4
 
10.7
 
 
UFood Restaurant Group, Inc., 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to the Company’s Form 10-QSB filed with the Securities and Exchange Commission on December 13, 2007)
 
 
 
 
10.8
 
 
Form of Stock Option Agreement by and between UFood Restaurant Group, Inc., and participants under the 2004 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
10.9
 
 
Form of Stock Option Agreement by and between UFood Restaurant Group, Inc., and participants under the 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
   10.10
 
 
Escrow Agreement by and between UFood Restaurant Group, Inc., and Gottbetter & Partners, LLP, dated December 18, 2007 (incorporated by reference to Exhibit 10.10 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
   10.11
 
 
Escrow Agreement by and between UFood Restaurant Group, Inc., George Naddaff, Eric Spitz and Gottbetter & Partners, LLP, dated December 18, 2007 (incorporated by reference to Exhibit 10.11 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 26, 2007)
 
 
 
 
   10.12
 
 
Securities Purchase Agreement by and between UFood Franchise Company, Inc., and the Buyers (as defined therein), dated September 24, 2007 (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-QSB filed with the Securities and Exchange Commission on December 13, 2007)
 
 
 
 
   10.13
 
 
Form of Investor Note issued by UFood Franchise Company, Inc. (incorporated by reference to Exhibit 10.13 to the Company’s Form 10-QSB filed with the Securities and Exchange Commission on December 13, 2007)
 
 
 
 
   10.14
 
 
Form of Placement Agent Warrant issued as of October 4, 2007 (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-QSB filed with the Securities and Exchange Commission on December 13, 2007)
 
 
 
 
   10.15
 
 
Placement Agency Agreement by and between UFood Franchise Company, Inc., and Spencer Trask Ventures, Inc., dated as of August 24, 2007 (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-QSB filed with the Securities and Exchange Commission on December 13, 2007)
 
 
 
 
   10.16
 
 
Subordination Agreement by and between T.D. Banknorth, N.A. and UFood Franchise Company, Inc., dated as of September 24, 2007 (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-QSB filed with the Securities and Exchange Commission on December 13, 2007)
 
 
 
 
   10.17
 
 
Employment agreement between UFood Restaurant Group, Inc., and Charles A. Cocotas (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-k filed with the Securities and Exchange Commission on February 19, 2008)
 
 
 
 
   10.18
 
     
Placement Agency Agreement by and between UFood Restaurant Group, Inc., KnowFat Franchise Company, Inc., and Spencer Trask Ventures, Inc., dated October 17, 2007 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008)
 
 
 
 
   10.19
 
 
Amendment No. 1 to Placement Agency Agreement, dated February 14, 2008, by and between UFood Restaurant Group, Inc., KnowFat Franchise Company, Inc., and Spencer Trask Ventures, Inc., dated October 17, 2007 (incorporated by reference to Exhibit 10.22 to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008)
 
 
 
 
   10.20
 
 
Form of Subscription Agreement between UFood Restaurant Group, Inc., Spencer Trask Ventures, Inc., and Private Placement Investors (incorporated by reference to Exhibit 10.23 to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008)
 
II-5
 
   10.21
 
 
Form of Warrant Issued to Spencer Trask Ventures, Inc., in connection with the Offering (incorporated by reference to Exhibit 10.24 to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008)
 
 
 
 
   10.22
 
 
Finder’s Fee Agreement between UFood Restaurant Group, Inc., and Spencer Trask Ventures, Inc., dated December 18, 2007 (incorporated by reference to Exhibit 10.25 to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008)
 
 
 
 
   10.23
 
 
UFood Restaurant Group, Inc., Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.26 to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 19, 2008)
 
 
 
 
   10.24*
 
 
Services Agreement dated September 6, 2006, between KnowFat Franchise Company, Inc., and George Foreman Ventures, LLC
 
 
 
 
   10.25*
 
 
Promotion License Agreement dated September 6, 2006, between KnowFat Franchise Company, Inc., and George Foreman Ventures, LLC
       
 10.26*     Letter Agreement dated June 12, 2007, between KnowFat Franchise Company Inc, and  George Foreman Ventures, LLC 
 
 
 
 
10.27*
    
Credit Agreement dated as of May 27, 2005, between KFLG Watertown, Inc., and TD Banknorth, N.A.
       
 10.28*
    
Guarantee and Security Agreement, dated as of September 6, 2006, made by Knowfat Of Landmark Center, Inc., in favor of TD Banknorth, N.A.
       
10.29*
    
First Amendment to Credit Agreement dated as of December 31, 2005, between KFLG Watertown, Inc., and TD Banknorth, N.A.
       
10.30*
    
Second Amendment to Credit Agreement dated as of May 31, 2006, between KFLG Watertown, Inc., and TD Banknorth, N.A.
       
10.31*
    
Third Amendment to Credit Agreement dated as of July 31, 2006, between KFLG Watertown, Inc., and TD Banknorth, N.A.
       
10.32*
    
Fourth Amendment to Credit Agreement dated as of October 2, 2006, between KFLG Watertown, Inc., and TD Banknorth, N.A.
       
10.33*
    
Media Services Agreement dated as of April 8, 2008, between Crosscheck Media Services and UFood Restaurant Group, Inc.
       
10.34*
    
Consulting Agreement dated as of April 21, 2008, between New Century Capital Consultants and UFood Restaurant Group, Inc.
       
10.35*
    
Consulting Agreement dated as of April 21, 2008, between Stara Zagora Kompanija, LTD, UFood Restaurant Group, Inc., and Neptune Media, LLC
       
10.36*
    
Consulting Agreement dated as of April 9, 2008, between MarketByte LLC and UFood Restaurant Group, Inc.
       
10.37*
    
Consulting Agreement dated as of April 9, 2008, between TGR Group LLC and UFood Restaurant Group, Inc.
 
 
    
10.38*
    
Consulting Agreement dated as of  June 16, 2008, between Aviatech and UFood Restaurant Group, Inc.
 
11.1
 
 
Statement re. Computation of Per Share Earnings (omitted in accordance with section (b)(11) of Item 601 of Regulation S-K; the computation of per share earnings is set forth in Part I in Note 8, Earnings per Share, to the Consolidated Financial Statements for the Three Months Ended March 30, 2008, and April 1, 2007, and in Note 17, Earnings per Share, to the 2007 Consolidated Financial Statements)
 
 
 
 
14.1
 
 
UFood Restaurant Group, Inc., Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on February 19, 2008)
 
 
 
 
16.1
 
 
Letter to the Securities and Exchange Commission from Manning Elliot LLP, dated March 6, 2008, regarding a change in Certifying Accountant (incorporated by reference to Exhibit 16.1 to the Company’s Form 8-K/A filed with the Securities and Exchange Commission on March 11, 2008)
 
 
 
 
21.1
 
 
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008)
 
 
 
 
  23.1†
 
 
Consent of Gottbetter & Partners, LLP (included in its opinion filed as Exhibit 5.1)
 
II-6
 
   23.2*
 
 
Consent of Carlin, Charron & Rosen, LLP*
 
 
 
 
   24.1†
 
 
Power of Attorney (included on signature page)
 
* Filed herewith

† Previously filed

II-7

Item 17. Undertakings.

The undersigned registrant hereby undertakes:
 
1.
 
  i.
 
 ii.
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;
 
iii.
 
2.
 
3.
 
4.
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
 
5.
 
  i.
 
 ii.
 
iii.
 
iv.
 
II-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in Newton, Massachusetts, on July 7, 2008.

UFood Restaurant Group, Inc.
  
   
By:
   /s/ Glenn E. Davis
  
Name:       Glenn E. Davis
Title:         Chief Financial Officer


In accordance with the requirements of the Securities Act of 1933, as amended, this registration statement was signed by the following persons in the capacities and on the dates stated:

 
Title
  
Date
         
*
      
July 8, 2008
George Naddaff
  
Chairman and Chief Executive Officer
    
   
(Principal Executive Officer)
    
         
*
      
July 8, 2008
Charles A. Cocotas
  
President, Chief Operating Officer
    
 
  
and Director
    
         
/s/ Glenn E. Davis
      
July 8, 2008
Glenn E. Davis
  
Chief Financial Officer
    
 
  
(Principal Financial Officer)
    
         
*
      
July 8, 2008
Mark Giresi
  
Director
    
         
*
      
July 8, 2008
Robert Grayson
  
Director
    
         
*
      
July 8, 2008
Jeffrey Ross
  
Director
    
         
*By: /s/ Glenn E. Davis        
Glenn E. Davis        
Attorney-in-Fact        
 
 


EXHIBIT 4.3
Warrant Certificate No.              

NEITHER THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS, AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) AN EXEMPTION FROM SUCH REGISTRATION EXISTS AND THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS.

Effective Date: December 18, 2007
Void After: November 2, 2015

UFOOD RESTAURANT GROUP, INC.

WARRANT TO PURCHASE COMMON STOCK

UFood Restaurant Group, Inc., a Nevada corporation (the “Company”), for value received, hereby issues to ________________________ (the “Holder”) this Warrant (the “Warrant”) to purchase, ___________ shares (each such share as from time to time adjusted as hereinafter provided being a “Warrant Share” and all such shares being the “Warrant Shares”) of the Company’s Common Stock (as defined below), at the Exercise Price (as defined below), as adjusted from time to time as provided herein, on or before November 2, 2015 (the “Expiration Date”), all subject to the following terms and conditions.

As used in this Warrant, (i) “Business Day” means any day other than Saturday, Sunday or any other day on which commercial banks in the City of New York, New York, are authorized or required by law or executive order to close; (ii) “Common Stock” means the common stock of the Company, par value $0.001 per share, including any securities issued or issuable with respect thereto or into which or for which such shares may be exchanged for, or converted into, pursuant to any stock dividend, stock split, stock combination, recapitalization, reclassification, reorganization or other similar event; (iii) “Exercise Price” means $1.00 per share of Common Stock, subject to adjustment as provided herein; and (iv) “Affiliate” means any person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, a person, as such terms are used and construed in Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”).

1. DURATION AND EXERCISE OF WARRANTS

(a) Exercise Period. The Holder may exercise this Warrant in whole or in part on any Business Day on or before 5:00 P.M., Eastern Time, on the Expiration Date, at which time this Warrant shall become void and of no value.


(b) Exercise Procedures.

(i) While this Warrant remains outstanding and exercisable in accordance with Section 1(a), the Holder may exercise this Warrant in whole or in part at any time and from time to time by:

(A) delivery to the Company of a duly executed copy of the Notice of Exercise attached as Exhibit A;

(B) surrender of this Warrant to the Secretary of the Company at its principal offices or at such other office or agency as the Company may specify in writing to the Holder; and

(C) payment of the then-applicable Exercise Price per share multiplied by the number of Warrant Shares being purchased upon exercise of the Warrant (such amount, the “Aggregate Exercise Price”) made in the form of cash, or by certified check, bank draft or money order payable in lawful money of the United States of America.
(ii) Upon the exercise of this Warrant in compliance with the provisions of this Section 1(b), the Company shall promptly issue and cause to be delivered to the Holder a certificate for the Warrant Shares purchased by the Holder. Each exercise of this Warrant shall be effective immediately prior to the close of business on the date (the “Date of Exercise”) that the conditions set forth in Section 1(b)(i) have been satisfied. On the first Business Day following the date on which the Company has received each of the Notice of Exercise and the Aggregate Exercise Price (the “Exercise Delivery Documents”), the Company shall transmit an acknowledgment of receipt of the Exercise Delivery Documents to the Company’s transfer agent (the “Transfer Agent”). On or before the third Business Day following the date on which the Company has received all of the Exercise Delivery Documents, the Company shall (X) provided that the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of the Holder, credit such aggregate number of shares of Common Stock to which the Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and dispatch by overnight courier to the address as specified in the Notice of Exercise, a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder is entitled pursuant to such exercise. Upon delivery of the Exercise Delivery Documents, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the certificates evidencing such Warrant Shares. If this Warrant is submitted in connection with any exercise pursuant to Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than the actual number of Warrant Shares being acquired upon such an exercise, then the Company shall as soon as practicable and in no event later than three (3) Business Days after any exercise and at its own expense, issue a new Warrant of like tenor representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant is exercised.

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(iv) If the Company shall fail for any reason or for no reason to issue to the Holder, within three (3) Business Days of receipt of the Exercise Delivery Documents, a certificate for the number of shares of Common Stock to which the Holder is entitled and register such shares of Common Stock on the Company’s share register or to credit the Holder’s balance account with DTC for such number of shares of Common Stock to which the Holder is entitled upon the Holder’s exercise of this Warrant, and if on or after such Business Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of shares of Common Stock issuable upon such exercise that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three (3) Business Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate (and to issue such shares of Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such shares of Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the closing bid price on the Date of Exercise.

(c) Partial Exercise. This Warrant shall be exercisable, either in its entirety or, from time to time, for part only of the number of Warrant Shares referenced by this Warrant. If this Warrant is exercised in part, the Company shall issue, at its expense, a new Warrant, in substantially the form of this Warrant, referencing such reduced number of Warrant Shares that remain subject to this Warrant.

(d) Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute in accordance with Section 14.

2. ISSUANCE OF WARRANT SHARES

(a) The Company covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be (i) duly authorized, fully paid and non-assessable, and (ii) free from all liens, charges and security interests, with the exception of claims arising through the acts or omissions of any Holder and except as arising from applicable federal and state securities laws.

(b) The Company shall register this Warrant upon records to be maintained by the Company for that purpose in the name of the record holder of such Warrant from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner thereof for the purpose of any exercise thereof, any distribution to the Holder thereof and for all other purposes.

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(c) The Company will not, by amendment of its articles of incorporation, by-laws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all action necessary or appropriate in order to protect the rights of the Holder to exercise this Warrant, or against impairment of such rights.

3. ADJUSTMENTS OF EXERCISE PRICE, NUMBER AND TYPE OF WARRANT SHARES

(a) The Exercise Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3(a); provided, that notwithstanding the provisions of this Section 3, the Company shall not be required to make any adjustment if and to the extent that such adjustment would require the Company to issue a number of shares of Common Stock in excess of its authorized but unissued shares of Common Stock, less all amounts of Common Stock that have been reserved for issuance upon the conversion of all outstanding securities convertible into shares of Common Stock and the exercise of all outstanding options, warrants and other rights exercisable for shares of Common Stock. If the Company does not have the requisite number of authorized but unissued shares of Common Stock to make any adjustment, the Company shall use its commercially best efforts to obtain the necessary stockholder consent to increase the authorized number of shares of Common Stock to make such an adjustment pursuant to this Section 3(a).

(i) Subdivision or Combination of Stock. In case the Company shall at any time subdivide (whether by way of stock dividend, stock split or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined (whether by way of stock combination, reverse stock split or otherwise) into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares shall be proportionately decreased. The Exercise Price and the Warrant Shares, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 3(a)(i).

(ii) Dividends in Stock, Property, Reclassification. If at any time, or from time to time, the holders of Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefore:

(A) any shares of stock or other securities that are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution, or

4

(B) additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, combination of shares or similar corporate rearrangement (other than shares of Common Stock issued as a stock split or adjustments in respect of which shall be covered by the terms of Section 3(a)(i) above),

then and in each such case, the Exercise Price and the number of Warrant Shares to be obtained upon exercise of this Warrant shall be adjusted proportionately, and the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to above) that such Holder would hold on the date of such exercise had such Holder been the holder of record of such Common Stock as of the date on which holders of Common Stock received or became entitled to receive such shares or all other additional stock and other securities and property. The Exercise Price and the Warrant Shares, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described in this Section 3(a)(ii).

(iii) Reorganization, Reclassification, Consolidation, Merger or Sale. If any recapitalization, reclassification or reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets or other transaction shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or other assets or property (an “Organic Change”), then, as a condition of such Organic Change, lawful and adequate provisions shall be made by the Company whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant) such shares of stock, securities or other assets or property as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable assuming the full exercise of the rights represented by this Warrant. In the event of any Organic Change, appropriate provision shall be made by the Company with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument reasonably satisfactory in form and substance to the Holder executed and mailed or delivered to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. If there is an Organic Change, then the Company shall cause to be mailed to the Holder at its last address as it shall appear on the books and records of the Company, at least 10 calendar days before the effective date of the Organic Change, a notice stating the date on which such Organic Change is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares for securities, cash, or other property delivered upon such Organic Change; provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to exercise this Warrant during the 10-day period commencing on the date of such notice to the effective date of the event triggering such notice. In any event, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall be deemed to assume such obligation to deliver to such Holder such shares of stock, securities or assets even in the absence of a written instrument assuming such obligation to the extent such assumption occurs by operation of law. 

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(b) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 3, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each Holder of this Warrant a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall promptly furnish or cause to be furnished to such Holder a like certificate setting forth: (i) such adjustments and readjustments; and (ii) the number of shares and the amount, if any, of other property which at the time would be received upon the exercise of the Warrant.

(c) Certain Events. If any event occurs as to which the other provisions of this Section 3 are not strictly applicable but the lack of any adjustment would not fairly protect the purchase rights of the Holder under this Warrant in accordance with the basic intent and principles of such provisions, or if strictly applicable would not fairly protect the purchase rights of the Holder under this Warrant in accordance with the basic intent and principles of such provisions, then the Company's Board of Directors will, in good faith, make an appropriate adjustment to protect the rights of the Holder; provided, that no such adjustment pursuant to this Section 3(c) will increase the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 3.

4. TRANSFERS AND EXCHANGES OF WARRANT AND WARRANT SHARES

(a) Registration of Transfers and Exchanges. Subject to Section 4(c), upon the Holder’s surrender of this Warrant, with a duly executed copy of the Form of Assignment attached as Exhibit B, to the Secretary of the Company at its principal offices or at such other office or agency as the Company may specify in writing to the Holder, the Company shall register the transfer of all or any portion of this Warrant. Upon such registration of transfer, the Company shall issue a new Warrant, in substantially the form of this Warrant, evidencing the acquisition rights transferred to the transferee and a new Warrant, in similar form, evidencing the remaining acquisition rights not transferred, to the Holder requesting the transfer.

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(b) Warrant Exchangeable for Different Denominations. The Holder may exchange this Warrant for a new Warrant or Warrants, in substantially the form of this Warrant, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder, each of such new Warrants to be dated the date of such exchange and to represent the right to purchase such number of Warrant Shares as shall be designated by the Holder. The Holder shall surrender this Warrant with duly executed instructions regarding such re-certification of this Warrant to the Secretary of the Company at its principal offices or at such other office or agency as the Company may specify in writing to the Holder.

(c) Restrictions on Transfers. This Warrant may not be transferred at any time without (i) registration under the Securities Act or (ii) an exemption from such registration and a written opinion of legal counsel addressed to the Company that the proposed transfer of the Warrant may be effected without registration under the Securities Act, which opinion will be in form and from counsel reasonably satisfactory to the Company.

(d) Permitted Transfers and Assignments. Notwithstanding any provision to the contrary in this Section 4, the Holder may transfer, with or without consideration, this Warrant or any of the Warrant Shares (or a portion thereof) to the Holder’s Affiliates without obtaining the opinion from counsel that may be required by Section 4(c)(ii), provided, that the Holder delivers to the Company and its counsel certification, documentation, and other assurances reasonably required by the Company’s counsel to enable the Company’s counsel to render an opinion to the Company’s Transfer Agent that such transfer does not violate applicable securities laws.

5. MUTILATED OR MISSING WARRANT CERTIFICATE

If this Warrant is mutilated, lost, stolen or destroyed, upon request by the Holder, the Company will, at its expense, issue, in exchange for and upon cancellation of the mutilated Warrant, or in substitution for the lost, stolen or destroyed Warrant, a new Warrant, in substantially the form of this Warrant, representing the right to acquire the equivalent number of Warrant Shares; provided, that, as a prerequisite to the issuance of a substitute Warrant, the Company may require satisfactory evidence of loss, theft or destruction as well as an indemnity from the Holder of a lost, stolen or destroyed Warrant.

6. PAYMENT OF TAXES

The Company will pay all transfer and stock issuance taxes attributable to the preparation, issuance and delivery of this Warrant and the Warrant Shares (and replacement Warrants) including, without limitation, all documentary and stamp taxes; provided, however, that the Company shall not be required to pay any tax in respect of the transfer of this Warrant, or the issuance or delivery of certificates for Warrant Shares or other securities in respect of the Warrant Shares to any person or entity other than to the Holder.
 
7. FRACTIONAL WARRANT SHARES

No fractional Warrant Shares shall be issued upon exercise of this Warrant. The Company, in lieu of issuing any fractional Warrant Share, shall round up the number of Warrant Shares issuable to nearest whole share.

7

8. NO STOCK RIGHTS AND LEGEND

No holder of this Warrant, as such, shall be entitled to vote or be deemed the holder of any other securities of the Company that may at any time be issuable on the exercise hereof, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, the rights of a stockholder of the Company or the right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or give or withhold consent to any corporate action or to receive notice of meetings or other actions affecting stockholders (except as provided herein), or to receive dividends or subscription rights or otherwise (except as provide herein).

Each certificate for Warrant Shares initially issued upon the exercise of this Warrant, and each certificate for Warrant Shares issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS, AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) AN EXEMPTION FROM SUCH REGISTRATION EXISTS AND THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.”
 
9. NOTICES

All notices, consents, waivers, and other communications under this Warrant must be in writing and will be deemed given to a party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid); (b) sent by facsimile or e-mail with confirmation of transmission by the transmitting equipment; (c) received or rejected by the addressee, if sent by certified mail, return receipt requested, if to the registered Holder hereof; or (d) seven days after the placement of the notice into the mails (first class postage prepaid), to the Holder at _________, or if to the Company, to it at 255 Washington Street, Suite 100, Newton, MA 02458, Attention: George Naddaff, Chief Executive Officer (or to such other address, facsimile number, or e-mail address as the Holder or the Company as a party may designate by notice the other party) with a copy to Robinson & Cole LLP, 695 East Main Street, Stamford, CT 06904, Attention: Richard A. Krantz, Esq.

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10. SEVERABILITY

If a court of competent jurisdiction holds any provision of this Warrant invalid or unenforceable, the other provisions of this Warrant will remain in full force and effect. Any provision of this Warrant held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

11. BINDING EFFECT

This Warrant shall be binding upon and inure to the sole and exclusive benefit of the Company, its successors and assigns, the registered Holder or Holders from time to time of this Warrant and the Warrant Shares.

12. SURVIVAL OF RIGHTS AND DUTIES

This Warrant shall terminate and be of no further force and effect on the earlier of 5:00 P.M., Eastern Time, on the Expiration Date or the date on which this Warrant has been exercised in full.

13. GOVERNING LAW

This Warrant will be governed by and construed under the laws of the Commonwealth of Massachusetts without regard to conflicts of laws principles that would require the application of any other law.

14. DISPUTE RESOLUTION

In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two Business Days of receipt of the Notice of Exercise giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within three Business Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two Business Days, submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

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15. NOTICES OF RECORD DATE

Upon (a) any establishment by the Company of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or right or option to acquire securities of the Company, or any other right, or (b) any capital reorganization, reclassification, recapitalization, merger or consolidation of the Company with or into any other corporation, any transfer of all or substantially all the assets of the Company, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, or the sale, in a single transaction, of a majority of the Company’s voting stock (whether newly issued, or from treasury, or previously issued and then outstanding, or any combination thereof), the Company shall mail to the Holder at least ten (10) Business Days, or such longer period as may be required by law, prior to the record date specified therein, a notice specifying (i) the date established as the record date for the purpose of such dividend, distribution, option or right and a description of such dividend, option or right, (ii) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up, or sale is expected to become effective and (iii) the date, if any, fixed as to when the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, transfer, consolation, merger, dissolution, liquidation or winding up.

16. RESERVATION OF SHARES

The Company shall reserve and keep available out of its authorized but unissued shares of Common Stock for issuance upon the exercise of this Warrant, free from pre-emptive rights, such number of shares of Common Stock for which this Warrant shall from time to time be exercisable. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation. Without limiting the generality of the foregoing, the Company covenants that it will use commercially reasonable efforts to take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and use commercially reasonable efforts to obtain all such authorizations, exemptions or consents, including but not limited to consents from the Company’s stockholders or Board of Directors or any public regulatory body, as may be necessary to enable the Company to perform its obligations under this Warrant.

17. NO THIRD PARTY RIGHTS

This Warrant is not intended, and will not be construed, to create any rights in any parties other than the Company and the Holder, and no person or entity may assert any rights as third-party beneficiary hereunder.

[SIGNATURE PAGE FOLLOWS]


EXHIBIT 4.3
Warrant Certificate No.             
 
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of the date first set forth above.

UFOOD RESTAURANT GROUP, INC.
   
By:
 
Name:          
George A. Naddaff
Title:
Chief Executive Officer
 
 
EXHIBIT 4.3
Warrant Certificate No.             
 
EXHIBIT A

NOTICE OF EXERCISE

(To be executed by the Holder of Warrant if such Holder desires to exercise Warrant)

To UFood Restaurant Group, Inc.:

The undersigned hereby irrevocably elects to exercise this Warrant and to purchase thereunder, ___________________ full shares of UFood Restaurant Group, Inc. common stock issuable upon exercise of the Warrant and delivery of $_________ (in cash as provided for in the foregoing Warrant) and any applicable taxes payable by the undersigned pursuant to such Warrant.
The undersigned requests that certificates for such shares be issued in the name of:

_________________________________________
(Please print name, address and social security or federal employer
identification number (if applicable))

_________________________________________

_________________________________________

If the shares issuable upon this exercise of the Warrant are not all of the Warrant Shares which the Holder is entitled to acquire upon the exercise of the Warrant, the undersigned requests that a new Warrant evidencing the rights not so exercised be issued in the name of and delivered to:

_________________________________________
(Please print name, address and social security or federal employer
identification number (if applicable))

_________________________________________

_________________________________________

 
Name of Holder (print):   _______________________
(Signature):   ________________________________
(By:)   _____________________________________
(Title:) _____________________________________ 
Dated:   _____________________________________
 


EXHIBIT B

FORM OF ASSIGNMENT

FOR VALUE RECEIVED, ___________________________________ hereby sells, assigns and transfers to each assignee set forth below all of the rights of the undersigned under the Warrant (as defined in and evidenced by the attached Warrant) to acquire the number of Warrant Shares set opposite the name of such assignee below and in and to the foregoing Warrant with respect to said acquisition rights and the shares issuable upon exercise of the Warrant:

Name of Assignee
  
Address
  
Number of Shares
         
         
         
         
 
If the total of the Warrant Shares are not all of the Warrant Shares evidenced by the foregoing Warrant, the undersigned requests that a new Warrant evidencing the right to acquire the Warrant Shares not so assigned be issued in the name of and delivered to the undersigned.
 
Name of Holder (print):   _______________________
(Signature):   ________________________________
(By:)   _____________________________________
(Title:) _____________________________________ 
Dated:   _____________________________________




Exhibit 10.25

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 

Ex 10.24 GFV Services Agreement

 
 
 



Exhibit 10.25

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 

Ex 10.25 GFV Promotion License Agreement

 
 
 


Exhibit 10.26

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Exhibit 10.31

THIRD AMENDMENT TO CREDIT AGREEMENT

This Third Amendment (this “Third Amendment” is made as of July 31, 2006 by and between KFLG WATERTOWN, INC., a Massachusetts corporation, with an address at 255 Washington Street, Suite 290, Newton, MA 02458 (the “Borrower”), and TD BANKNORTH, N.A., a national banking association with an office at 370 Main Street, Worcester, Massachusetts 01608 (the “Lender”).

RECITALS

A. The Lender and the Borrower are parties to that certain Credit Agreement, dated as of May 27, 2005, as amended by that certain First Amendment to Credit Agreement, dated as of December 31, 2005, and as further amended by that certain Second Amendment to Credit Agreement dated as of May 31, 2006 (as the same is and may hereafter be amended from time to time, the “Credit Agreement”) Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement.
 
B. The Borrower has requested that the Lender make certain modifications to the terms and conditions of the Credit Agreement as described herein.
 
C. Subject to certain terms and conditions, the Lender is willing to agree to the same, as hereinafter set forth.
 
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

I. AMENDMENTS TO CREDIT AGREEMENT.
 
A. Section 5.9 of the Credit Agreement entitled “Additional Collateral; Subsidiaries; New Units” is hereby amended by deleting subsection (b) in its entirety and by substituting the following therefor:
 
“(b) Not form or acquire any direct or indirect Subsidiary, except: (i) the Borrower as a wholly-owned Subsidiary of the Guarantor; (ii) KnowFat of Downtown Crossing, Inc., as a wholly-owned Subsidiary of the Borrower; and (iii) KnowFat of Landmark Center, Inc., as a wholly-owned Subsidiary of the Borrower.”
 
B. Section 5.9 of the Credit Agreement entitled “Additional Collateral; Subsidiaries; New Units” is hereby further amended by deleting subsection (d) in its entirety and by substituting the following therefor:

“(d) Insure that all Units opened after the date hereof are owned by the Borrower; provided, however, that KnowFat of Landmark Center, Inc. may own the Unit located at Landmark Center, 2001 Brookline Avenue, Boston, Massachusetts (the “Landmark Center Restaurant”). Except for the Landmark Center Restaurant, any interest in any restaurant or Unit now or hereafter acquired by the Guarantor shall be an asset owned directly by the Borrower.”

 
C. Section 6.1(a) of the Credit Agreement entitled “Minimum Additional New Equity” is hereby deleted in its entirety and the following is substituted therefor:
 
“(a) Minimum Additional New Equity Fail to cause the Guarantor to raise the Additional New Equity by December 31, 2006.”
 
D. Section 6.2 of the Credit Agreement entitled “Indebtedness” is hereby amended by deleting the word “and” at the end of subsection (e) thereof, substituting a semi-colon for the period at the end of subsection (f) thereof, and adding the following new subsections (g) and (h) immediately following subsection (f) thereof as follows:
 
“(g) Indebtedness and obligations of KnowFat of Landmark Center, Inc. (“KnowFat Landmark”) to KF Partners Boston Limited Partnership, a Massachusetts limited partnership (“LP”) and Corbett Management Group, LLC, a Massachusetts limited liability company and the general partner of LP (“GP”) pursuant to a certain Asset Purchaser Agreement among LP, GP and KnowFat Landmark dated as of September 6, 2006;
 
(h) Indebtedness and obligations of the Guarantor to LP and GP pursuant to that certain Guaranty of the Guarantor in favor of GP and LP dated as of September 6, 2006.”
 
E. Section 6.3 of the Credit Agreement entitled “Liens” is hereby amended by deleting the word “and” at the end of subsection (f) thereof, substituting a semi-colon for the period at the end of subsection (g) thereof, and adding the following new subsection (h) immediately following subsection (g) thereof as follows:
 
“ (h) Liens granted by KnowFat Landmark in favor of LP and/or GP pursuant to a certain Security Agreement from KnowFat Landmark dated as of September 6, 2006 securing the Indebtedness and obligations described in Section 6.2(g) hereof.”
 
F. Section 8.2 of the Credit Agreement entitled “Notices” is hereby amended by deleting the notice address for the Borrower in its entirety and by substituting the following therefor:

“Borrower:
KFLG Watertown, Inc.
 
255 Washington Street
 
Suite 290
 
Newton, Massachusetts 02458
 
Attention: Eric Spitz
 
Telecopy: 617-787-6010
 
Telephone: 617-787-6000”
 
- 2 -
 
II. OTHER AMENDMENTS TO LOAN DOCUMENTS
 
A. Section 5.1 of the Guarantee and Security Agreement between the Lender and the Guarantor (the “Guarantee”) entitled “Minimum Cash Balance” is hereby deleted in its entirety and the phrase “Intentionally Omitted” is substituted therefor.
 
B. Schedule A to the Guarantee is hereby amended to delete the Notice Address for the Guarantor in its entirety and by substituting the following Notice Address therefor:
 
KnowFat Franchise Company, Inc.   
255 Washington Street
Suite 290
Newton, Massachusetts 02458
Attention: Eric Spitz
Telecopy: 617-787-6010
Telephone: 617-787-6000    
 
C. Schedule D to the Guarantee is hereby amended to reflect that the chief executive office of the Guarantor is at: 255 Washington Street, Suite 290, Newton, Massachusetts 02458.
 
D. The Borrower agrees that it will not permit any amendment to any of the following agreements without the prior written consent of the Lender: (a) the Asset Purchase Agreement among KF Partners Boston Limited Partnership, Corbett Management Group, LLC and KnowFat Landmark Center, Inc. dated as of September 6, 2006; (b) the Security Agreement in favor of KF Partners Boston Limited Partnership and Corbett Management Group, LLC from KnowFat Landmark Center, Inc. dated as of September 6, 2006; and (c) the Guaranty of the Guarantor in favor of KF Partners Boston Limited Partnership and Corbett Management Group, LLC dated as of September 6, 2006.”
 
E. Notwithstanding any representation, warranty or covenant contained in the Credit Agreement or any of the other Loan Documents to the contrary, the Lender agrees and acknowledges that the priority of the Permitted Liens in favor of LP and GP shall be governed by a certain Lien Subordination Agreement between the Lender and LP and GP dated September 6. 2006.
 
III. NO FURTHER AMENDMENTS.
 
Except as specifically amended herein, all terms and conditions of the Credit Agreement shall remain in fill force and effect as originally constituted and is hereby ratified and affirmed in all respects, and the indebtedness of the Borrower to the Lender evidenced hereby and by the Note is hereby reaffirmed in all respects This Third Amendment constitutes an amendment to and modification of the Credit Agreement On and after the date hereof, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this Third Amendment, and each reference in any Loan Document between the Borrower and the Lender or, the Guarantor and the Lender, to the credit Agreement, “thereunder”, “thereof’ or words of like import referring the Credit Agreement shall mean a reference to the Credit Agreement as amended by this Third Amendment.

- 3 -
 
IV. REPRESENTATIONS, WARRANTIES AND COVENANTS.
 
The Borrower represents, warrants and covenants as follows as of the date hereof:

A. Each of the representations and warranties contained in the Credit Agreement, as amended by this Third Amendment, and the other Loan Documents are true and correct as of the date hereof. No material adverse change has occurred in the assets, liabilities, financial condition, business or prospects of the Borrower or the Guarantor from that disclosed in the management-prepared financial statements most recently distributed to the Lender. No Default or Event of Default has occurred or is continuing.
 
B. The Credit Agreement, as amended by this Third Amendment, constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action at law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right thereunder.
 
C. The execution and delivery of this Third Amendment and the other documents, if any, by the Borrower and the transactions contemplated hereby are within the corporate power and authority of the Borrower and have been authorized by all necessary corporate proceedings, and do not and will not (i) contravene any provision of the charter documents or by-laws of the Borrower or any law, rule or regulation applicable to the Borrower; (ii) contravene any provision of, or constitute an event o f default or event that, but for the requirement that time elapse or notice be given (or both) would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Borrower; or (iii) result in or require the imposition of any encumbrance or lien on any of the properties, assets or rights of the Borrower (other than pursuant to any Security Document executed in connection with the Credit Agreement).
 
D. The Borrower and the Lender acknowledge and agree that but for this Third Amendment, the Borrower would have been in default under the terms and conditions o f the Credit Agreement; and that the terms and conditions set forth herein and the avoidance of such a default constitute fair and adequate consideration mutually exchanged by the Borrower and the Lender in their execution and delivery of this Third Amendment.
 
V. CONDITIONS.
 
A. This Third Amendment shall become effective on the first date on which the Borrower shall have executed and/or delivered to the Lender (or shall have caused to be executed and delivered to the Lender by the appropriate persons) the following:
 
1. This Third Amendment;
 
2. A Guarantee and Security Agreement from KnowFat of Landmark Center, Inc. in favor of the Lender; and
 
- 4 -
 
3. Such other supporting documents and certificates as the Lender or its counsel may reasonably request.
 
B. All legal matters incident to the transactions contemplated hereby shall be satisfactory to counsel for the Lender.
 
VI. CONFIRMATION OF SECURITY.
 
The Obligations of the Borrower to the Lender, including, without limitation, the liabilities and obligations of the Borrower under the Credit Agreement, as amended hereby, and the Notes, are secured by, and entitled to all benefits of, the Security Agreement, the Guarantee and Security Agreement, any Mortgage, any Leasehold Security Document, and any other collateral granted by the Borrower or Guarantor to the Lender. The Covered Parties confirm and reaffirm that each has granted to Lender a security interest in, among other property, its deposit accounts and all credits or proceeds thereto and all monies, checks and other instruments held or deposited therein.

VII. MISCELLANEOUS
 
A. The Borrower represents, warrants, and agrees that, to its know1edge, the Borrower has no claims, defenses, counterclaims or offsets against the Lender in connection with the Credit Agreement or the Obligations, and, to the extent that any claim, defense, counterclaim, or offset may exist, the Borrower thereby affirmatively WAIVES AND RELEASES the Lender from the same.
 
B. This Third Amendment shall take effect as a sealed instrument under the laws of The Commonwealth of Massachusetts.
 
C. This Third Amendment may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, all of which counterparts shall together constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Third Amendment by facsimile shall be effective as delivery of a manually executed counterpart of this Third Amendment.

[SIGNATURE PAGE FOLLOWS]

- 5 -


IN WITNESS WHEREOF, the Lender and the Borrower have caused this Third Amendment to be duly executed as a sealed instrument by their duly authorized representatives, all as of the day and year first above written.
 

KFLG WATERTOWN, INC.
   
By:
  
Name:
Title:
   
TD BANKNORTH, N.A.
   
By:
  
Name:
Title:

 
By its signature below, KnowFat Franchise Company, Inc. hereby agrees and acknowledges that it shall not grant any liens or security interests on any of its assets in favor of KF Partners Boston Limited Partnership (“LP”) or Corbett Management Group, LLC (“GP”) to secure any of its obligations to LP or GP under its Guaranty in favor of LP and GP dated as of September 6, 2006.

KNOWFAT FRANCHISE COMPANY, INC.
   
By:
  
Name:
Title:

[Signature Page to Third Amendment to Credit Agreement]

    

Exhibit 10.27

Execution Copy
 
 
$1,600,000
 
CREDIT AGREEMENT
 
between
 
KFLG WATERTOWN, INC.
 
as Borrower,
 
and
 
TD BANKNORTH, N.A.,
 
as Lender
 
Dated as of May 27, 2005
 
 
 
TABLE OF CONTENTS

   
Page
SECTION 1.
DEFINITIONS
1
     
1.1
Certain Defined Terms.
1
1.2
Other Definitional Provisions.
11
     
SECTION 2.
AMOUNT AND TERMS OF COMMITMENTS
12
     
2.1
Initial Term Loan.
12
2.2
Additional Term Loans.
12
2.3
Procedure for Term Loan Borrowing.
12
2.4
Fees.
12
2.5
Repayment of the Loans.
13
2.6
Prepayment Penalty.
13
2.7
Mandatory Prepayments.
13
2.8
Interest Rates and Payment Dates; Payments.
14
2.9
Computation of Interest and Fees.
15
2.10
Requirements of Law.
15
2.11
Taxes.
16
2.12
Indemnity.
16
     
SECTION 3.
REPRESENTATIONS AND WARRANTIES
17
     
3.1
Financial Condition.
17
3.2
No Change.
17
3.3
Existence; Compliance with Law.
17
3.4
Power; Authorization; Enforceable Obligations.
17
3.5
No Legal Bar.
17
3.6
Litigation.
18
3.7
No Default.
18
3.8
Ownership of Property; Liens.
18
3.9
Intellectual Property; Licenses.
18
3.10
Taxes.
18
3.11
Federal Regulations.
18
3.12
ERISA.
18
3.13
Investment Company Act; Other Regulations.
19
3.14
Subsidiaries.
19
3.15
Use of Proceeds.
19
3.16
Environmental Matters.
19
3.17
Accuracy of Information, etc.
20
3.18
Security Documents.
21
3.19
Solvency.
21
3.20
Regulation H.
21
3.21
Indebtedness Outstanding.
21
3.22
Anti-Terrorism Laws.
21
3.23
Depository and Other Accounts.
22
3.24
Obligations to Seller.
22
 
 
SECTION 4.
CONDITIONS PRECEDENT
22
     
4.1
Conditions to Initial Extension of Credit.
22
4.2
Conditions to Each Extension of Credit.
24
 
    
SECTION 5.
AFFIRMATIVE COVENANTS
24
     
5.1
Financial Statements; Field Audits.
24
5.2
Certificates; Other Information.
26
5.3
Payment of Obligations.
26
5.4
Maintenance of Existence; Compliance.
27
5.5
Maintenance of Property; Insurance.
27
5.6
Inspection of Property; Books and Records; Discussions.
27
5.7
Notices.
27
5.8
Compliance with Laws.
28
5.9
Additional Collateral; Subsidiaries; New Units.
28
5.10
Depository Accounts; Additional Accounts.
28
5.11
Communications with Accountants.
28
     
SECTION 6.
NEGATIVE COVENANTS
28
     
6.1
Financial Condition Covenants.
29
6.2
Indebtedness.
29
6.3
Liens.
30
6.4
Fundamental Changes.
30
6.5
Disposition of Property.
30
6.6
Restricted Payments.
31
6.7
Stock.
31
6.8
Investments.
31
6.9
Modifications of Certain Debt Instruments.
31
6.10
Transactions with Affiliates and Insiders.
31
6.11
Sales and Leasebacks.
32
6.12
Changes in Fiscal Periods.
32
6.13
Negative Pledge Clauses.
32
6.14
Clauses Restricting Subsidiary Distributions.
32
6.15
Lines of Business; Location of Business.
32
6.16
Use of Proceeds.
32
6.17
Full Funding.
32
     
SECTION 7.
EVENTS OF DEFAULT
32
     
SECTION 8.
MISCELLANEOUS
35
     
8.1
Amendments and Waivers.
35
8.2
Notices.
35
8.3
No Waiver; Cumulative Remedies.
35
8.4
Survival of Representations and Warranties.
36
8.5
Payment of Expenses and Taxes.
36
8.6
Successors and Assigns; Participations and Assignments.
36
8.7
Adjustments; Set-off.
37
8.8
Counterparts.
37
 
- ii -
 
8.9
Severability.
37
8.10
Integration.
37
8.11
Governing Law.
38
8.12
Submission To Jurisdiction; Waivers.
38
8.13
Acknowledgements.
38
8.14
WAIVERS OF JURY TRIAL.
38
8.15
USA Patriot Act Notice.
38
8.16
Replacement Note.
39
 
- iii -
 
   
3.4
Consents, Authorizations, Filings and Notices
3.6
Litigation
3.14
Subsidiaries and Capital Stock
3.18
UCC Filings
3.21(a)
Indebtedness to Remain Outstanding
3.21(b)
Indebtedness to be Paid
3.21(c)
Liens to be Terminated
3.21(d)
Liens to Remain Outstanding
3.23
Deposit Accounts
6.2(c)
Existing Indebtedness
6.3(e)
Existing Liens
   
EXHIBITS:
   
A
Form of Security Agreement
B
Form of Guarantee and Security Agreement
C
Form of Compliance Certificate
D
Form of Closing Certificate
E
Form of Term Note
Form of Subordination Agreement
G
Form of Notice of Borrowing
 
 
CREDIT AGREEMENT (this “Agreement”), dated as of May 27, 2005, between KFLG WATERTOWN, INC., a Massachusetts corporation (the “Borrower”), and TD BANKNORTH, N.A., as lender (the “Lender”).
 
WHEREAS, the Borrower and the Lender wish to enter into this Agreement to establish the credit facilities described herein, and to set forth the terms, conditions and covenants to apply to the Borrower and any subsidiary or subsidiaries the Borrower may form or acquire after the date hereof,
 
NOW, THEREFORE, the parties hereto hereby agree as follows:
 
SECTION 1. DEFINITIONS
 
1.1  Certain Defined Terms. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1.

“Additional Term Loans”: as defined in Section 2.2.
 
“Affiliate”: as to any Person, any other Person that, directly or indirectly (including through any Relative (as defined below)), is in control of, is controlled by, or is under common control with, such Person and, in the case of a Person who is a natural person, any spouse, child, grandparent, or grandchild (each, a “Relative”) of such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.
 
“Applicable Margin”: the Applicable Margin will be determined pursuant to the table set forth below:

Before New Equity Date, as to Prime Rate Loans:
    
1.5
%
On and after New Equity Date, as to Prime Rate Loans:
    
0
%
Before New Equity Date, as to COF Loans:
    
4.0
%
On or after New Equity Date, as to COF Loans:
    
2.5
%
 
Changes in the Applicable Margin resulting from the contribution of the New Equity shall become effective on the date (the “Adjustment Date”) that is three Business Days after the date on which financial statements are delivered to the Lender reflecting such new cash equity.
 
“Asset Purchase Agreements”: the Asset Purchase Agreement dated as of August 11, 2004, by and among the Guarantor and the Seller, as assigned to Borrower by Guarantor as of August 11, 2004, and the Asset Purchase Agreement dated as of January 28, 2005 by and among the Guarantor and the Seller, each as assigned to Borrower by Guarantor as of January 28, 2005.
 
 
“Board”: the Board of Governors of the Federal Reserve System of the United States (or any successor).
 
“Borrowing Date”: any Business Day specified by the Borrower in its Notice of Borrowing as a date on which such Borrower requests the Lender to make Loans hereunder.
 
“Business”: as defined in Section 3.16(b).
 
“Business Day”: a day other than a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts are authorized or required by law to close.
 
“Capital Expenditures”: for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition, rental, construction, use, leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that should be reflected in the category of property, plant or equipment or intangibles under GAAP on a consolidated balance sheet of such Person and its Subsidiaries, but excluding expenditures for equipment installed at the site of, and leased to, any customer of such Person or any of such Person’s Subsidiaries.
 
“Capital Lease Obligations”: as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.
 
“Capital Stock”: any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person other than a corporation and any and all warrants, rights or options to purchase any of the foregoing.
 
“Cash Equivalents”: (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by the Lender; (c) commercial paper of an issuer rated at least A-1 by Standard & Poor’s Ratings Services (“S&P”) or P-1 by Moody’s Investors Service, Inc. (“Moody’s”), or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition; or (d) money market mutual or similar funds that invest exclusively in assets satisfying the requirements of clauses (a) through (c) of this definition.
 
“Change of Control”: the occurrence of any of the following:
 
(a) (i) George Naddaff and Eric Spitz directly and Tim Kurtz directly or indirectly through Seller (which is controlled by Tim Kurtz) shall cease to own, beneficially and of record, in the aggregate not less than the shares such individuals own on the Closing Date, and George Naddaff, Eric Spitz and Gary Jacobus directly and Tim Kurtz directly or indirectly through Seller (which is controlled by Tim Kurtz) shall cease to own not less than 40% of all of the outstanding Capital Stock of the Guarantor entitled to vote for the Board of Directors (or other major decision) on a fully diluted basis, or (ii) any Person shall acquire a Lien on any Capital Stock of the Guarantor if a Change of Control under the foregoing clause (i) would result from the ownership by such Person of such Capital Stock;
 
- 2 -
 
(b) during any period of up to 24 consecutive months, commencing after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Borrower or the Guarantor shall cease for any reason to constitute a majority of the board of directors of the Borrower or the Guarantor, as applicable; or
 
(c) any Person or two or more Persons acting in concert other than George Naddaff and Eric Spitz shall have acquired by contract or otherwise, or shall have ventured into a contract or arrangement that, upon consummation, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Borrower or the Guarantor or to control voting interests of the Borrower or the Guarantor representing 30% or more of the combined voting power of all voting interests of the Borrower or the Guarantor; or
 
(d) George Naddaff or Eric Spitz shall cease to (i) exercise the primary management functions of the Guarantor and the Borrower and (ii) make all significant decisions for the Guarantor and the Borrower, each as determined by the Lender, unless in the case of the death or permanent disability of either such individual another individual satisfactory to Lender in writing has replaced any such individual; or
 
(e) the Guarantor shall fail to own 100% of the issued and outstanding Capital Stock of the Borrower, free and clear of all Liens (other than Liens of the Loan Documents), or shall otherwise fail to control the Borrower.
 
“Closing Date”: the date on which the conditions precedent set forth in Section 4.1 shall have been satisfied.
 
“Code”: the Internal Revenue Code of 1986, as amended from time to time.
 
“COF Loan”: any Loan the interest on which is calculated by reference to the COF Rate.
 
“COF Rate”: the per annum rate of interest, as quoted and offered by the Lender to the Borrower from time to time, which the Lender is required to pay, or is offering to pay, for wholesale liabilities of the like tenor (including for any regularly-scheduled principal amortization with respect thereto) for the remaining term of the Loan, adjusted for reserve requirements and requirements of such other local government and regulatory agencies, all as conclusively determined by the Lender, as quoted and offered by the Lender to the Borrower from time to time.
 
“Collateral”: all property, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document.
 
“Commitment”: the Lender’s commitment to make the Initial Term Loan and the Additional Term Loans in an aggregate principal amount not to exceed $1,600,000.
 
“Commonly Controlled Entity”: an entity, whether or not incorporated, that is under common control with any Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes any Borrower and that is treated as a single employer under Section 414 of the Code.
 
“Compliance Certificate”: a certificate duly executed by a Responsible Officer substantially in the form of Exhibit C.
 
- 3 -
 
“Consolidated Capital Expenditures”: for any period, the consolidated Capital Expenditures of the Borrower and its Subsidiaries for such period, determined in accordance with GAAP.
 
“Consolidated Debt Service”: for any period, the sum (without duplication) of (a) all amounts paid or payable in respect of principal, interest and fees on Indebtedness (other than Subordinated Debt) of the Borrower and its Subsidiaries during such period, on a consolidated basis, and (b) Capitalized Lease Obligations of the Borrower and its Subsidiaries for such period.
 
“Consolidated Debt Service Coverage Ratio”: at any date, the ratio of (a) Consolidated Operating Cash Flow for the four-quarter period ending on the last day of the fiscal quarter most recently ended to (b) Consolidated Debt Service for such period.
 
“Consolidated EBITDA”: for any period, Consolidated Net Income for such period plus, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, (c) depreciation and amortization expense, (d) expenses constituting Specified Consulting Fees paid to the Seller for consulting services and, (e) to the extent approved by the Lender, extraordinary, unusual or non-recurring expenses or losses, and mus, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (i) interest income, (ii) any extraordinary, unusual or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (iii) any other non-cash income, all as determined on a consolidated basis in accordance with GAAP.
 
“Consolidated Maintenance Capital Expenditures”: for any period, the Consolidated Capital Expenditures for the maintenance of Existing Units.
 
“Consolidated New Unit Capital Expenditures”: for any period, the Consolidated Capital Expenditures for the building or purchasing or maintaining of new Units prior to their becoming Existing Units.
 
“Consolidated Net Income”: for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a wholly-owned Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or other distributions and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or other distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under any Loan Document) or Requirement of Law applicable to such Subsidiary.
 
“Consolidated Operating Cash Flow”: for any period, Consolidated EBITDA for such period minus, the sum of (i) cash taxes paid in such period, (ii) any Restricted Payments or loans by the Borrower to the Guarantor (except for those expressly permitted hereunder) and (iii) Consolidated Maintenance Capital Expenditures for such period.
 
“Consolidated Senior Funded Debt”: at any date, the consolidated Indebtedness of the Borrower and its Subsidiaries less, Subordinated Debt at such date and less at any date prior to September 30, 2006, Consolidated Unrestricted Cash at such date.
 
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“Consolidated Senior Funded Debt to EBITDA Ratio”: at any date, the ratio of (a) the Consolidated Senior Funded Debt at such date to (b) Consolidated EBITDA for the four-quarter period ending on the last day of the fiscal quarter most recently ended.
 
“Consolidated Unrestricted Cash”: all cash and Cash Equivalents of the Borrower and the Guarantor, excluding any cash or Cash Equivalents subject to any Lien or other restriction or the use thereof.
 
“Consulting Agreements”: the Management Consulting Agreement dated as of August 11, 2004, by and among the Borrower and the Seller and the Management Consulting Agreement dated as of January 28, 2005 by and among the Guarantor and the Seller, as assigned to Borrower by Guarantor as of January 28, 2005.
 
“Contractual Obligation”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
 
“Covered Parties”: the Guarantor, the Borrower and any Subsidiaries of either thereof formed or acquired by the Borrower after the date hereof. “Covered Party” shall have a corresponding meaning.
 
“Default”: any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied.
 
“Disposition”: with respect to any property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof. The terms “Dispose” and “Disposed of” shall have corresponding meanings.
 
“Dollars” and “$”: dollars in lawful currency of the United States.
 
“Drawdown Period”: within one year of the Closing Date.
 
“Environmental Laws”: any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect.
 
“ERISA”: the Employee Retirement Income Security Act of 1974, as amended from time to time.
 
“Event of Default”: any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied.
 
“Existing Unit”: any Unit that has been operating for six months or more.
 
“Facility”: each of the Initial Term Loan and the Additional Term Loans made thereunder.
 
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“GAAP”: generally accepted accounting principles in the United States as in effect from time to time, except that for purposes of Section 6.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent reviewed financial statements referred to in Section 3.1. In the event that any accounting change shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower and the Lender agree to enter into negotiations in order to amend such provisions of this Agreement so as to reflect equitably such accounting changes with the desired result that the criteria for evaluating the Borrower’s financial condition shall be the same after such accounting changes as if such accounting changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower and the Lender, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such accounting changes had not occurred
 
“Governmental Authority”: any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.
 
“Guarantee and Security Agreement”: the Guaranty and Security Agreement, to be executed by the Guarantor, substantially in the form of Exhibit B.
 
“Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation of (a) the guaranteeing person or (b) another Person (including any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the “primary obligations”) of any other third Person (the “primary obligor”) in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business.
 
“Guarantor”: Knowfat Franchise Company, Inc.
 
“Indebtedness”: of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of such Person’s business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party or applicant under or in respect of acceptances, letters of credit, surety bonds or similar arrangements, (g) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (f) above and (h) all obligations of the kind referred to in clauses (a) through (g) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on property (including accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor.
 
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“Indebtedness to be Paid”: as defined in Section 3.21.
 
“Initial Term Loan”: as defined in Section 2.1.
 
“Insolvent”: with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA, and “Insolvency” shall have a corresponding meaning.
 
“Intellectual Property”: all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
 
“Interest Payment Date”: as to any Loan, the first day of each calendar month to occur while such Loan is outstanding and the final maturity date of such Loan, and the date of any repayment or prepayment made in respect thereof.
 
“Investments”: as defined in Section 6.8.
 
“Leased Properties”: the real properties from time to time leased by the Covered Parties.
 
“Leasehold Security Document”: with respect to any Leased Property, such leasehold mortgage, landlord consent and waiver, leasehold assignment or similar document as the Lender may require.
 
“Lien”: any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing).
 
“Liens to be Terminated”: as defined in Section 3.21.
 
“Loan”: as defined in Section 2.2.
 
“Loan Documents”: this Agreement, the Security Documents, the Subordination Agreement, any other subordination agreement executed in connection with any Subordinated Debt, the Notes, any interest rate hedging agreement entered into by the Borrower and the Lender (or any Affiliate of the Lender) and each other certificate, document or instrument executed and delivered in connection with any of the foregoing.
 
“Loan Party” or “Loan Parties”: each Covered Party or Affiliate thereof that is a party to a Loan Document, or all of them, as the case may be.
 
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“Material Adverse Effect”: a material adverse effect on (a) the business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise), profits or prospects of any Loan Party or (b) the validity or enforceability of this Agreement or any of the other Loan Documents, the ability of any Loan Party to perform hereunder or thereunder, or the rights or remedies of the Lender hereunder or thereunder.
 
“Materials of Environmental Concern”: any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.
 
“Maturity Date”: the fifth anniversary of the Closing Date.
 
“Mortgage”: as defined in Section 5.9.
 
“Multiemployer Plan”: a Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
 
“Net Cash Proceeds”: (a) in connection with any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents of such Recovery Event, net of amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset that is the subject of such Recovery Event (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (b) in connection with any incurrence of Indebtedness or issuance of any new equity or additional capital contributions, the cash proceeds received from such incurrence or issuance, net of attorneys’ fees, accountants’ fees, commissions and other customary fees and expenses actually incurred in connection therewith.
 
“New Equity”: new equity of the Guarantor, consisting of either common or preferred stock, or additional capital contributions, in either case resulting in the receipt by the Guarantor of unrestricted Net Cash Proceeds of at least $3,000,000.
 
“New Equity Date”: the date on which the Borrower has received the Net Cash Proceeds of the New Equity required by Section 6.1(a).
 
“Note”: the promissory note, in substantially the form of Exhibit E hereto evidencing the Loans.
 
“Notice of Borrowing”: as specified in Section 2.3.
 
“Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Lender that are required to be paid by the Borrower pursuant hereto) or otherwise.
 
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“Operating Account”: the Borrower’s operating account with the Lender as designated by the Lender, established for the purpose of effecting Loans hereunder.
 
“Other Taxes”: as defined in Section 2.11(b).
 
“PBGC”: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).
 
“Person”: an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.
 
“Plan”: at a particular time, any employee benefit plan that is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.
 
“Prime Rate”: for any day, the rate per annum established by the Lender from time to time as its “prime rate”. Any change in the Prime Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate.
 
“Prime Rate Loan”: any Loan the interest on which is calculated by reference to the Prime Rate.
 
“Properties”: as defined in Section 3.16(a).
 
“Recovery Event”: any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of any Covered Party.
 
“Regulation U”: Regulation U of the Board as in effect from time to time.
 
“Reinvestment Deferred Amount”: with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by any Covered Party in connection therewith that are not applied to prepay the Loans as a result of the delivery of a Reinvestment Notice.
 
“Reinvestment Event”: any Recovery Event in respect of which the Borrower has delivered a Reinvestment Notice.
 
“Reinvestment Notice”: a written notice executed by a Responsible Officer certifying that no Event of Default has occurred and is continuing and that the Borrower intends and expects to use all or a specified portion of the Net Cash Proceeds of a Recovery Event to acquire or repair assets replacing or repairing those that were subject to the applicable Recovery Event.
 
“Reinvestment Prepayment Amount”: with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire or repair assets useful in the applicable Covered Party’s business.
 
“Reinvestment Prepayment Date”: with respect to any Reinvestment Event, the earliest of (a) the date occurring 90 days after such Reinvestment Event, (b) any date on or following the date of the applicable Reinvestment Notice on which any Event of Default shall have occurred and be continuing, designated as a Reinvestment Prepayment Date in a notice by the Lender to the Borrower, and (c) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire or repair the assets subject to the applicable Recovery Event with all or any portion of the relevant Reinvestment Deferred Amount.
 
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“Reorganization”: with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.
 
“Reportable Event”: any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. § 4043.
 
“Requirement of Law”: as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
 
“Responsible Officer”: a Chief Executive Officer, Chief Financial Officer, President or Controller of the Borrower.
 
“Restricted Payments”: as defined in Section 6.6.
 
“Satisfactory Equity Commitment”: a commitment by a Person to purchase Capital Stock of the Guarantor, such commitment (and the terms thereof) and Person to be in all respects satisfactory to the Lender in its sole discretion.
 
“Security Agreement”: the Security Agreement to be executed and delivered by the Borrower and the Lender, substantially in the form of Exhibit A.
 
“Security Documents”: the Security Agreement, the Guarantee and Security Agreement, any Mortgage, any Leasehold Security Document, and all other security documents hereafter delivered to the Lender granting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document, collectively.
 
“Seller”: Low Fat No Fat Gourmet Café, Inc., a Massachusetts corporation.
 
“Seller Debt”: the regularly scheduled payments owed by Borrower to Seller pursuant to the Asset Purchase Agreements and the Consulting Agreements.
 
“Single Employer Plan”: any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan.
 
“Solvent”: when used with respect to any Person, means that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) “debt” means liability on a “claim”, and (ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.
 
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“Specified Consulting Fees”: amounts paid to the Seller under the Consulting Agreement that constitute Subordinated Debt, as defined under the Subordination Agreement.
 
“Subordinated Debt”: Indebtedness of the Borrower approved by the Lender and subject to a written subordination agreement in favor of, and in all respects satisfactory to, the Lender, each in the sole discretion of the Lender, including without limitation the Indebtedness owed to Seller subordinated pursuant to the Subordination Agreement.
 
“Subordination Agreement”: shall mean the subordination agreement to be executed by the Seller, the Borrower and the Lender, substantially in the form of Exhibit F.
 
“Subsidiary”: as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. Until the Borrower shall have any Subsidiaries, references to the Borrower and its Subsidiaries shall be construed as references to the Borrower.
 
“Taxes”: as defined in Section 2.11(a).
 
“Unit”: a singular restaurant in which the Guarantor or the Borrower has any equity interest direct or indirect.
 
“United States”: the United States of America.
 
1.2  Other Definitional Provisions.
 
(a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto.
 
(b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, (i) accounting terms relating to any Covered Party not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, (ii) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, (iii) the word “incur” shall be construed to mean incur, create, issue, assume, become liable in respect of or suffer to exist (and the words “incurred” and “incurrence” shall have correlative meanings), (iv) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, leasehold interests and contract rights, and (v) references to agreements or other Contractual Obligations shall, unless otherwise specified, be deemed to refer to such agreements or Contractual Obligations as amended, supplemented, restated or otherwise modified from time to time.
 
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(c) The words “hereof”, “herein” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.
 
(d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
 
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
 
2.1  Initial Term Loan. Subject to the terms and conditions hereof, the Lender agrees to make a term loan in the principal amount of $1,000,000 on the Closing Date (the “Initial Term Loan”).
 
2.2  Additional Term Loans. Subject to the terms and conditions hereof, the Lender agrees to lend to Borrower additional term loans, in minimum increments of $100,000, in an amount not to exceed $600,000, which together with the Initial Term Loan does not exceed the Commitment (the “Additional Term Loans” and, together with the Initial Term Loan, the “Loans”), provided that (i) such Additional Term Loans shall be advanced only during the Drawdown Period; (ii) the Borrower shall be in compliance with this Agreement before and after the funding of the requested Additional Term Loan and shall have supplied the Lender a certificate detailing such compliance; and (iii) if such Additional Term Loan is requested prior to the [New Equity Date], the Borrower shall have obtained Satisfactory Equity Commitments in an amount not less than ten times the aggregate principal amount of all Additional Term Loans outstanding after giving effect to the advancement of such Additional Term Loans.

2.3  Procedure for Term Loan Borrowing. The Borrower shall give the Lender irrevocable notice in the form of Exhibit G (a “Notice of Borrowing”), which notice must be received by the Lender prior to 11:00 A.M., Boston time, on the Borrowing Date as to the Initial Term Loan or on the fifth Business Day prior to the Borrowing Date as to Additional Term Loans. The Notice of Borrowing will specify the amount of Loan to be borrowed and the requested Borrowing Date.
 
2.4  Fees.
 
(a) The Borrower agrees to pay to the Lender a closing fee of $15,000 on the Closing Date. Such fee shall be earned in full when paid and shall not be refundable under any circumstances.
 
(b) On any Borrowing Date in which Borrower requests that Lender make an Additional Term Loan, Borrower shall pay an administrative fee of $250 upon the closing of such Additional Term Loan.
 
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(c) The Borrower agrees to pay a fee to the Lender on the seventh day after the New Equity Date, calculated as follows based on the aggregate principal amount of Loans advanced prior to such date:
 
Total Amount Borrowed
  
Fee Owed to Lender
  
       
$1,000,000 or less
  
$
0
  
$1,000,001 to $1,150,000
  
$
20,000
  
$1,150,001 to $1,300,000
  
$
40,000
  
$1,301,000 to $1,450,000
  
$
55,000
  
$1,451,000 to $1,600,000
  
$
70,000
  

Such fee shall be earned in full when paid and shall not be refundable under any circumstances.

2.5  Repayment of the Loans. The Loans shall be payable in consecutive monthly installments of $33,333.33 commencing on June 1, 2006 and on the first Business Day of each calendar month thereafter. The remaining outstanding principal amount of the Loan shall be payable in full on the Maturity Date. Amounts paid or prepaid with respect to the Loans may not be reborrowed. The amount of any principal prepayment of the Loans shall be applied to reduce the then remaining installments of the Loans in inverse order of maturity.
 
2.6  Prepayment Penalty. The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty except for any prepayment fee that may be due under the following sentence. Any such prepayment shall be made together with all other amounts due and owing under the Loan Documents at the time of prepayment (including, without limitation, any amounts owing pursuant to Section 2.12) and, if the date of such prepayment is on or before the second anniversary of the date hereof, a prepayment fee in the amount of $80,000. Prepayments shall be made upon irrevocable notice by the Borrower delivered to the Lender no later than 11:00 A.M., Boston time, one Business Day prior thereto, which notice shall specify the date and amount of prepayment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued and unpaid interest to such date on the amount prepaid. Partial prepayments of any Loan shall be in an aggregate principal amount of $100,000 or a whole multiple of $50,000 in excess thereof.
 
2.7  Mandatory Prepayments.
 
(a) Except for Indebtedness expressly permitted under Section 6.2, if any Indebtedness described in clause (a) or (c) of the definition of “Indebtedness” shall be issued or incurred by any Covered Party, then, an amount equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of such incurrence toward the prepayment of the Loans.
 
(b) If on any date any Covered Party shall receive Net Cash Proceeds from any Recovery Event then, unless (i) no Event of Default has occurred and is continuing and (ii) a Reinvestment Notice shall be delivered in respect thereof, such Net Cash Proceeds shall be applied on such date toward the prepayment of the Loans. In addition, on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Loans.
 
(c) If at any time the aggregate outstanding principal amount of the Loans exceeds the Commitment, the Borrower will immediately prepay or repay the Loans in an amount necessary to cause the outstanding principal amount of the Loans not to exceed the Commitment.
 
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(d) Each such prepayment of the Loans under this Section 2.6 shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid and all amounts due and owing in respect thereof under Section 2.12.
 
(e) Any prepayment or repayment of COF Loans on any date other than the regularly scheduled payments of principal thereof on the scheduled dates due hereunder or on the Maturity Date shall also be accompanied by a fee equal to the “Yield Maintenance Fee” in an amount computed as follows:
 

The current cost of funds, specifically the bond equivalent yield for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent yield) with a maturity date closest to the remaining term of such COF Loans, shall be subtracted from the COF Rate, or default rate if applicable. If the result is zero or a negative number, there shall be no Yield Maintenance Fee due and payable. If the result is a positive number, then the resulting percentage shall be multiplied by the scheduled outstanding principal balance for each remaining monthly period of this note. Each resulting amount shall be divided by 360 and multiplied by the number of days in the monthly period. Said amounts shall be reduced to present values calculated by using the above reference current costs of funds divided by 12 and the COF Loan’s remaining term in months. The resulting sum of present values shall be the yield maintenance fee due to the Lender upon prepayment of the principal of the COF Loans plus any accrued interest due as of the prepayment date.
 
Unless the Lender expressly agrees otherwise, partial payments will not affect the payment schedule required hereunder.
 
2.8  Interest Rates and Payment Dates; Payments.
 
(a) Until the date on which the Loan is fully advanced, each Loan shall bear interest at a rate per annum equal to the Prime Rate plus the Applicable Margin. On and after the date on which the Loan is fully advanced, interest on the unpaid principal balance of the Loan shall accrue, at the Borrower’s option, at the Prime Rate plus the Applicable Margin or at the COF Rate, plus the Applicable Margin, in any case as selected by the Borrower pursuant to a Notice of Conversion to COF Rate, provided such Notice of Conversion to COF Rate is delivered to the Lender within 60 days after the date on which the Loan is fully advanced and provided no Event of Default then exists hereunder.
 
(b) If any Event of Default shall have occurred and be continuing, all outstanding Obligations (whether or not overdue) shall bear interest at a rate per annum equal to the rate that would otherwise be applicable to the Loans pursuant to the foregoing provisions of this Section plus 5.00% during the continuance of such Event of Default (both before and after judgment).
 
(c) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (b) of this Section shall be payable from time to time on demand.
 
(d) The Borrower hereby authorizes the Lender to charge, on each date on which any amount is due hereunder, the Borrower’s Operating Account or any other deposit accounts from time to time maintained by the Borrower with the Lender for the purpose of effecting payments of amounts due to the Lender hereunder.
 
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2.9  Computation of Interest and Fees.
 
(a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year. Any change in the interest rate on a Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change becomes effective.
 
(b) Each determination of an interest rate by the Lender pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower in the absence of manifest error.
 
2.10  Requirements of Law.
 
(a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by the Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority:
 
(i) shall subject the Lender to any tax of any kind whatsoever with respect to this Agreement or any Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Taxes covered by Section 2.11 and changes in the rate of tax on the overall net income of such Lender);
 
(ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of the Lender; or
 
(iii) shall impose on the Lender any other condition;
 
and the result of any of the foregoing is to increase the cost to the Lender of making, converting into, continuing or maintaining Loans, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay the Lender, upon its demand, any additional amounts necessary to compensate the Lender for such increased cost or reduced amount receivable.
 
(b) If the Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by the Lender or any corporation controlling the Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on the Lender’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which the Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration the Lender’s or such corporation’s policies with respect to capital adequacy), then from time to time the Borrower shall pay to such Lender upon demand such additional amount or amounts as will compensate the Lender or such corporation for such reduction.
 
(c) A certificate as to any additional amounts payable pursuant to this Section submitted by the Lender to the Borrower shall be conclusive in the absence of manifest error. The obligation of the Borrower pursuant to this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
 
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2.11  Taxes.
 
(a) Any and all payments by the Borrower hereunder or under the other Loan Documents shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes that are imposed on the Lender’s overall net income by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) by the state under the laws of which the Lender is organized (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the other Loan Documents being hereinafter referred to as “Taxes”). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to the Lender, (i) the sum payable by the Borrower shall be increased as may be necessary so that after the Borrower has made all required deductions (including deductions applicable to additional sums payable under this Section 2.11), the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make all such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.
 
(b) In addition, the Borrower shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or under the other Loan Documents or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as “Other Taxes”).
 
(c) The Borrower shall indemnify the Lender for and hold it harmless against the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.11, imposed on or paid by the Lender and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 10 days from the date the Lender makes written demand therefor.
 
(d) Within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the Lender the original or a certified copy of a receipt evidencing such payment.
 
(e) The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
 
2.12  Indemnity. The Borrower agrees to indemnify the Lender for, and to hold the Lender harmless from, any loss or expense that the Lender may sustain or incur as a consequence of default by the Borrower in making any prepayment of Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement. If the Lender elects to declare the Loans to be immediately due and payable, then any amounts payable under this Section 2.12 shall become due and payable in the same manner as though the Borrower had exercised such right of prepayment. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by the Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.
 
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SECTION 3. REPRESENTATIONS AND WARRANTIES
 
To induce the Lender to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Lender that:
 
3.1  Financial Condition. The consolidated balance sheet of the Guarantor as at December 31, 2004, and the related consolidated statements of income and cash flows for the fiscal year ended on such date, reviewed and accompanied by a report in form and substance satisfactory to the Lender from Carlin, Charron & Rosen, LLP, present fairly the consolidated financial condition of the Guarantor as at such date, and the consolidated results of its operations and cash flows for the fiscal year then ended. The unaudited consolidated balance sheets of each of the Guarantor and the Borrower as at March 31, 2005, and, in each case, the related unaudited consolidated statements of income and cash flows for the month ended on such date, present fairly the consolidated financial condition the Guarantor and the Borrower, as applicable, as at such date, and the consolidated results of its operations and its cash flows for the month then ended. All such financial statements have been prepared in accordance with GAAP (subject to normal year-end audit adjustments and the absence of footnotes) applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). The Borrower has no material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, or other material obligations that are not reflected in the most recent financial statements referred to in this paragraph. During the period from December 31, 2004 to and including the date hereof there has been no Disposition by any Covered Party of any material part of its business or property.
 
3.2  No Change. Since December 31, 2004, there have been no developments or events that, individually or in the aggregate, have had or could reasonably be expected to have a Material Adverse Effect.
 
3.3  Existence; Compliance with Law. Each Covered Party (a) is duly organized or formed, as the case may be, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, (b) has the power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation, partnership or limited liability company, as the case may be, and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law, except to the extent that the failure to comply therewith could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
 
3.4  Power; Authorization; Enforceable Obligations. Each Loan Party has the power and authority, and the legal right, to execute, deliver and perform the Loan Documents to which it is a party and, in the case of the Borrower, to obtain extensions of credit hereunder. Each Loan Party has taken all necessary organizational action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the extensions of credit on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the Loans hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the other Loan Documents, except (i) consents, authorizations, filings and notices described in Schedule 3.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect and (ii) the filings referred to in Section 3.18. Each Loan Document has been duly executed and delivered on behalf of each Loan Party party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of each Loan Party party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
 
3.5  No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of any Loan Party and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to any Loan Party could reasonably be expected to have a Material Adverse Effect.
 
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3.6  Litigation. No litigation, action, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower or the Guarantor, threatened by or against any Loan Party or against any of their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) that could reasonably be expected to have a Material Adverse Effect. As of the Closing Date, all pending or, to the knowledge of the Borrower or the Guarantor, threatened litigations, actions, investigations or proceedings by or against any Loan Party are listed on Schedule 3.6.
 
3.7  No Default. No Loan Party is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.
 
3.8  Ownership of Property; Liens. Each Covered Party has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, including without limitation all assets covered by the Asset Purchase Agreements. Borrower holds title to all such assets covered by the Asset Purchase Agreements. None of such property is subject to any Lien except as would be permitted by Section 6.3.
 
3.9  Intellectual Property; Licenses. Each Loan Party owns, or is licensed to use, all Intellectual Property and other licenses necessary for the conduct of its business as currently conducted. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does any Loan Party know of any valid basis for any such claim. The use of Intellectual Property by each Loan Party does not infringe on the rights of any Person in any material respect.
 
3.10  Taxes. Each Loan Party has filed or caused to be filed all Federal, state and other material tax returns that are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority; no tax Lien has been filed, and, to the knowledge of the Borrower or the Guarantor, no claim is being asserted, with respect to any such tax, fee or other charge.
 
3.11  Federal Regulations. No part of the proceeds of any Loans, and no other extensions of credit hereunder, will be used for “buying” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect or for any purpose that violates the provisions of the Regulations of the Board. If requested by the Lender, the Borrower will furnish to the Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U.
 
3.12  ERISA. Neither a Reportable Event nor an “accumulated funding deficiency” (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.
 
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3.13  Investment Company Act; Other Regulations. No Loan Party is (a) an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935 or the Federal Power Act, as amended. No Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness.
 
3.14  Subsidiaries.
 
(a) (i) The Borrower has no Subsidiaries, (ii) as of the date hereof, the authorized, issued and outstanding Capital Stock of each of the Borrower and the Guarantor is as set forth on, Schedule 3.14 and (ii) the ownership interests in the Borrower and the Guarantor are duly authorized, validly issued, fully paid and nonassessable and, as of the date hereof, are owned beneficially and of record by the Persons set forth on Schedule 3.14, free and clear of all Liens other than Liens of the Security Documents.
 
(b) Except as set forth on Schedule 3.14 or the issuance of New Equity contemplated hereunder, no Covered Party has issued any securities convertible into, or options or warrants for, any common or preferred equity securities thereof and there are no agreements, voting trusts or understandings binding upon any Covered Party with respect to the voting securities of any Covered Party or affecting in any manner the sale, pledge, assignment or other disposition thereof, including any right of first refusal, option, redemption, call or other right with respect thereto, whether similar or dissimilar to any of the foregoing.
 
(c) The organizational documents of each Covered Party that is:
 
(i) a corporation, business trust, joint stock company or similar Person, provide that all Capital Stock issued by it must be represented by a certificate; or
 
(ii) a partnership or limited liability company, do not provide that any Capital Stock issued by such Subsidiary constitutes a security governed by Article 8 of the UCC.
 
3.15  Use of Proceeds. The proceeds of the Initial Term Loan shall be used to pay the Indebtedness to be Paid and for general corporate purposes (excluding the building of any new Units). The proceeds of the Additional Term Loans shall be used for general corporate purposes (excluding the building of new Units other than one new Unit) and, to the extent permitted herein, to make loans to the Guarantor.

3.16  Environmental Matters.
 
(a) The facilities and properties owned, leased or operated by any Covered Party (the “Properties”) do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances that constitute or constituted a violation of, or could give rise to liability under, any Environmental Law;
 
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(b) no Loan Party has received or to the knowledge of Borrower or Guarantor is aware of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the business operated by any Covered Party (the “Business”), nor does the Borrower or the Guarantor have knowledge or reason to believe that any such notice will be received or is being threatened;
 
(c) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location that could give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law;
 
(d) no judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower or the Guarantor, threatened, under any Environmental Law to which any Covered Party is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business;
 
(e) there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of any Covered Party in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws;
 
(f) the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the Business; and
 
(g) no Covered Party has assumed any liability of any other Person under Environmental Laws.
 
3.17  Accuracy of Information, etc. No statement or information contained in this Agreement, any other Loan Document or any other document, certificate or statement furnished by or on behalf of any Loan Party to the Lender for use in connection with the transactions contemplated by this Agreement or the other Loan Documents contains or contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements contained herein or therein not misleading. The projections and pro forma financial information furnished to the Lender are based upon good faith estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Lender that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein. There is no fact known to the Borrower or the Guarantor that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents or in any other documents, certificates and statements furnished to the Lender for use in connection with the transactions contemplated hereby and by the other Loan Documents.
 
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3.18  Security Documents. Each of the Security Documents is effective to create in favor of the Lender a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. When financing statements in appropriate form are filed in the offices specified on Schedule 3.18, the Security Documents shall each constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations, in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged Stock, Liens permitted by Section 6.3).

3.19  Solvency. Each Loan Party is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent.
 
3.20  Regulation H. No Leased Property or property subject to any Mortgage involves improved real property that is located in an area that has been identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968.
 
3.21  Indebtedness Outstanding.
 
(a) Set forth on Schedule 3.21(a) hereto is a list and description of all Indebtedness of the Borrower (other than the Loans) that will be outstanding immediately after the Closing Date.
 
(b) Set forth on Schedule 3.21(b) hereto is a list and description of all Indebtedness of the Borrower that will be repaid, defeased, transferred or otherwise terminated on or prior to the Closing Date (the “Indebtedness to Be Paid”).
 
(c) Set forth on Schedule 3.21(c) hereto is a list and description of all Liens of the Borrower that will be repaid, defeased, transferred or otherwise terminated on or prior to the Closing Date (the “Liens to be Terminated”).
 
(d) Set forth on Schedule 3.21(d) hereto is a list and description of all Liens of the Borrower (other than the Liens of the Loan Documents) that will be outstanding immediately after the Closing Date.
 
3.22  Anti-Terrorism Laws.
 
(a) No Loan Party and, to the knowledge of the Borrower or the Guarantor, no Affiliate of any Loan Party is in violation of any laws relating to terrorism or money laundering (“Anti-Terrorism Laws”), including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the “Executive Order”), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56.
 
(b) No Loan Party and, to the knowledge of the Borrower or the Guarantor, no Affiliate of any Loan Party, and none of their respective brokers or other agents acting or benefiting in any capacity in connection with the Loans, is any of the following:
 
(i) a Person or entity that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;
 
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(ii) a Person or entity owned or controlled by, or acting for or on behalf of, any Person or entity that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;
 
(iii) a Person or entity with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;
 
(iv) a Person or entity that commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order; or
 
(v) a Person or entity that is named as a “specially designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website or any replacement website or other replacement official publication of such list.
 
(c) No Loan Party and, to the knowledge of the Borrower or the Guarantor, no Affiliate of any Loan Party, and none of their respective brokers or other agents acting in any capacity in connection with the Loans, (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Person described in clause (b) above, (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order, or (iii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.
 
3.23  Depository and Other Accounts. Schedule 3.23 attached hereto lists all banks and other financial institutions and depositories at which the Covered Parties maintain or will maintain deposit accounts, trust accounts, tax or trust receivable accounts or other accounts of any kind or nature into which funds of the Covered Parties (including funds in which any Covered Party maintains a contingent or residual interest) are from time to time deposited, and such Schedule 3.23 correctly identifies the name and address of each depository, the name in which each account is held, the purpose of the account and the complete account number.
 
3.24  Obligations to Seller. Other than the payment of the Seller Debt subordinated pursuant to the Subordination Agreement, neither Borrower nor Guarantor owe any obligations or liabilities to Seller (other than in its capacity solely as a shareholder of Guarantor) and all other obligations of Borrower or Guarantor under the Asset Purchase Agreements have been performed in full.

SECTION 4. CONDITIONS PRECEDENT
 
4.1  Conditions to Initial Extension of Credit. The agreement of the Lender to make the Initial Term Loan requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date, of the following conditions precedent:
 
(a) Credit Agreement and Other Loan Documents. The Lender shall have received (i) this Agreement, executed and delivered by the Borrower, (ii) the Security Agreement, executed and delivered by the Borrower and the Lender, (iii) the Guarantee and Security Agreement, executed by the Guarantor, (v) the Subordination Agreement, executed and delivered by the Borrower and the Seller, and (vi) other documents required by the Lender as listed on the closing agenda distributed by Lender's counsel in connection therewith.
 
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(b) Indebtedness to be Paid. The Lender shall have received satisfactory evidence that the Indebtedness to be Paid shall have been paid in full and that any related credit, loan or similar agreements, together with any related guarantees and other documentation, shall have been terminated, and arrangements satisfactory to the Lender shall have been made for the termination of all Liens to be Terminated, including without limitation all Liens granted in connection with the Indebtedness to be Paid.
 
(c) Insurance. The Lender shall have received insurance certificates satisfying the requirements of the Security Agreement and the Guarantee and Security Agreement.
 
(d) Financial Statements. The Lender shall have received (i) the financial statements referred to in Section 3.1, (ii) a monthly budget of the Borrower and its Subsidiaries for the fiscal year ending December 31, 2005, (iii) satisfactory projections for the Borrower through the 2010 fiscal year, and (iv) a pro forma Compliance Certificate. The pro forma Compliance Certificate referred to in clause (iv) above shall give effect to the Initial Term Loan hereunder and the repayment of the Indebtedness to be Paid. All materials furnished pursuant to this Section 4.1(d) shall be satisfactory to the Lender.
 
(e) Approvals. All governmental and material third party approvals necessary in connection with the continuing operations of the Covered Parties and the transactions contemplated hereby shall have been obtained and be in full force and effect.
 
(f) Lien Searches. The Lender shall have received the results of a recent lien search in each of the jurisdictions where assets of the Loan Parties are located and the jurisdiction where each Loan Party is located under Article 9 of the UCC, and such search shall reveal no liens on any of the assets of the Loan Parties except for Liens to be Terminated and Liens that would be permitted by Section 6.3.
 
(g) Fees. The Lender shall have received all fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel), on or before the Closing Date. All such amounts will be paid with proceeds of Loans made on the Closing Date and will be reflected in the funding instructions given by the Borrower to the Lender on or before the Closing Date.
 
(h) Closing Certificate; Certified Certificate of Incorporation; Good Standing Certificates. The Lender shall have received (i) a certificate of the Borrower, dated the Closing Date, substantially in the form of Exhibit D, with appropriate insertions and attachments, including the certificate of incorporation of the Borrower, certified by the relevant authority of the jurisdiction of organization of such Loan Party, and (ii) a good standing certificate for the Borrower from its jurisdiction of organization and each jurisdiction where it is required to be qualified as a foreign corporation.
 
(i) Legal Opinions. The Lender shall have received a favorable legal opinion satisfactory to Lender, from Robinson & Cole, LLP, counsel to the Borrower and the Guarantor.
 
(j) Pledged Stock; Stock Powers; Pledged Notes. The Lender shall have received (i) the certificates representing the shares of Capital Stock (if any) pledged pursuant to the Security Agreement and pursuant to the Guarantee and Security Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof and (ii) each promissory note (if any) pledged to the Lender pursuant to the Security Agreement and pursuant to the Guarantee and Security Agreement, endorsed (without recourse) in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof.
 
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(k) Filings, Registrations and Recordings. Each document (including any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Lender to be filed, registered or recorded in order to create in favor of the Lender a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens that would be expressly permitted by Section 6.3), shall be in proper form for filing, registration or recordation.
 
(l) Solvency Certificate. The Lender shall have received a satisfactory solvency certificate from a Responsible Officer that shall demonstrate that, after giving effect to the transactions contemplated hereby, the Borrower is Solvent.
 
(m) Operating Account. The Borrower shall have opened the Operating Account at the Lender. The Guarantor shall have opened an operating account at the Lender.
 
4.2  Conditions to Each Extension of Credit. The agreement of the Lender to make any extension of credit requested to be made by it on any date (including its initial extension of credit) is subject to the satisfaction of the following conditions precedent:
 
(a) Representations and Warranties. Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date.
 
(b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date.
 
(c) Compliance Certificate. The Borrower shall have submitted to the Lender a Compliance Certificate showing on a pro forma basis the making of any Loans requested, in form required by the Lender.
 
Each borrowing hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in this Section 4.2 have been satisfied.
 
SECTION 5. AFFIRMATIVE COVENANTS
 
The Borrower hereby agrees that, so long as any Loan or other amount is owing to the Lender hereunder, the Borrower shall and shall cause each of the other Covered Parties to:
 
5.1  Financial Statements; Field Audits.
 
(a) Furnish to the Lender:
 
(i) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such year and the related consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, which shall be prepared by management and accompanied by a certificate of the chief financial officer, in form and substance reasonably satisfactory to the Lender;
 
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(ii) as soon as available, but in any event within 120 days after the end of each fiscal year of the Guarantor, a copy of the consolidated balance sheet of the Guarantor and its Subsidiaries as at the end of such year and the related consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, audited by and accompanied by a report, in form and substance reasonably satisfactory to the Lender, from Carlin, Charron & Rosen, LLP, or other independent certified public accountants satisfactory to the Lender;
 
(iii) as soon as available, but in any event not later than 45 days after the end of each quarterly period of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year and the corresponding figures from the Borrower’s budget for such period, in each case certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments);
 
(iv) as soon as available, but in any event not later than 45 days after the end of each quarterly period of each fiscal year of the Guarantor, the unaudited consolidated balance sheet of the Guarantor and its Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year and the corresponding figures from the Guarantor’s budget for such period together with a report on franchisee royalties received with respect to such quarter and a statement as to the number of franchise agreements in effect and whether any of such franchise agreements are then in default, in each case certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments);
 
(v) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower and the Guarantor, a listing of the equity owners of the Borrower and the Guarantor and their respective ownership interests;
 
(vi) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower and the Guarantor, a copy of any additional leases (both Capitalized Lease Obligations and operating leases) entered into by the Borrower and the Guarantor during the fiscal year;
 
(vii) as soon as available, but in any event on or before April 15 of each fiscal year of the Borrower and the Guarantor (or such later date to which the filing thereof has been extended), a copy of the filed tax returns of the Borrower and Guarantor; and
 
(viii) as soon as available, but in any event within 15 days after the end of each month, cash flow and income statements on a per Unit basis for the Borrower and the Guarantor.
 
All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied (except as approved by such accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistently throughout the periods reflected therein and with prior periods.
 
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(b) The Covered Parties will permit the Lender to inspect and audit the books and records and any of the properties or assets of the Covered Parties (in each instance, at the Borrower’s expense).
 
5.2  Certificates; Other Information. Furnish to the Lender:
 
(a) concurrently with the delivery of the financial statements referred to in Section 5.1(a)(ii) and, if applicable, Section 5.1(a)(i), a certificate of the independent certified public accountants reviewing such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate;
 
(b) concurrently with the delivery of any financial statements pursuant to Section 5.1(a)(iii) and (iv), (i) a certificate of a Responsible Officer stating that, to the best of each such Responsible Officer’s knowledge, each Loan Party during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) (x) a Compliance Certificate containing all information and calculations necessary for determining compliance by each Covered Party with the provisions of this Agreement and the Guarantee and Security Agreement referred to therein as of the last day of the month, fiscal quarter or fiscal year of the Borrower, as the case may be, and (y) to the extent not previously disclosed to the Lender, a description of any change in the jurisdiction of organization of any Loan Party (or, if such Loan Party is not a registered organization (as defined in Article 9 of the UCC as in effect in any applicable jurisdiction) its chief executive office) and a list of any Intellectual Property acquired by any Loan Party since the date of the most recent report delivered pursuant to this clause (y) (or, in the case of the first such report so delivered, since the Closing Date);
 
(c) as soon as available, and in any event no later than 30 days before the end of each fiscal year of the Borrower, a detailed monthly budget for the Borrower (with Unit by Unit detail) in form and substance reasonably satisfactory to the Lender for the following fiscal year (including a projected consolidated balance sheet of the Borrower and its Subsidiaries as of the end of the following fiscal year, the related consolidated statements of projected cash flow, projected changes in financial position and projected income and a description of the underlying assumptions applicable thereto), and, as soon as available, significant revisions, if any, of such budget;
 
(d) promptly upon the effectiveness thereof, copies of any formal, material modification to any business plan of the Borrower; and
 
(e) promptly, such additional financial and other information as the Lender may from time to time reasonably request.
 
5.3  Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the relevant Covered Party and except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect.
 
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5.4  Maintenance of Existence; Compliance. Preserve, renew and keep in full force and effect its organizational existence; maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply in all material respects with all Contractual Obligations and Requirements of Law, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect.
 
5.5  Maintenance of Property; Insurance. (a) Keep all material property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted and (b) maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business.
 
5.6  Inspection of Property; Books and Records; Discussions. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) permit representatives of the Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Covered Parties with officers and employees of the Covered Parties and with their independent certified public accountants.
 
5.7  Notices. Promptly give notice to the Lender of:
 
(a) the occurrence of any Default or Event of Default;
 
(b) any (i) material default or material event of default under any Contractual Obligation of any Covered Party or (ii) material litigation, investigation or proceeding that may exist at any time between any Covered Party and any Governmental Authority;
 
(c) any litigation or proceeding affecting any Covered Party (i) in which the uninsured amount involved is $50,000 or more, (ii) in which injunctive or similar relief is sought or (iii) which relates to any Loan Document;
 
(d) the following events, as soon as possible and in any event within 30 days after any Covered Party knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC, any Covered Party or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan;
 
(e) the occurrence of any event requiring a prepayment of the Loans;
 
(f) the acquisition of any real or personal property, or the acquisition or formation of any Subsidiary, requiring action under Section 5.9;
 
(g) any development or event that has had or could reasonably be expected to have a Material Adverse Effect; or
 
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(h) the occurrence of any default under any franchise agreement or material lease or other material agreement.
 
Each notice pursuant to this Section 5.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the relevant Covered Party proposes to take with respect thereto.
 
5.8  Compliance with Laws. (a) Comply in all material respects with all Requirements of Law, including without limitation all applicable health, securities and franchise laws and regulations, and all applicable restrictions imposed by all Governmental Authorities, applicable to it and its property, (b) conform with and duly observe in all material respects all laws, rules and regulations and all other valid requirements of any regulatory authority with respect to the conduct of its business; and (c) obtain and maintain all material licenses, permits, certifications and approvals of all applicable Governmental Authorities as are required for the conduct of its business as currently conducted and herein contemplated.
 
5.9  Additional Collateral; Subsidiaries; New Units.
 
(a) With respect to any property (or leasehold interest therein) acquired after the Closing Date by any Covered Party, execute and deliver any documentation (which, in the case of any owned real property, may include a first priority mortgage, in form and substance satisfactory to the Lender (a “Mortgage”)) as the Lender may deem necessary or advisable to grant to the Lender a perfected first priority security interest in such property (or leasehold interest).
 
(b) Not form or acquire any direct or indirect Subsidiary, except the Borrower as a wholly-owned Subsidiary of the Guarantor.
 
(c) Use its best efforts, before entering into any new lease with respect to any Leased Properties, obtain from the landlord relating thereto a lien waiver and consent in favor of the Lender, in form and substance satisfactory to the Lender.
 
(d) Insure that all Units opened after the date hereof are owned by the Borrower. Any interest in any restaurant or Unit now or hereafter acquired by the Guarantor shall be an asset owned directly by the Borrower.
 
5.10  Depository Accounts; Additional Accounts. Commencing on the 30th day after the Closing Date, maintain all operating, depository and disbursement bank accounts with the Lender, except as otherwise permitted by Section 4(j) of the Security Agreement.
 
5.11  Communications with Accountants. The Borrower authorizes the Lender to communicate directly with the Borrower’s independent certified public accountants and has instructed those accountants in writing to disclose to and discuss with the Lender any and all prepared financial statements and all other supporting financial documents and schedules delivered to the Lender by any Loan Party.
 
SECTION 6. NEGATIVE COVENANTS
 
The Borrower hereby agrees that, so long as any Loan or other amount is owing to the Lender hereunder, the Borrower shall not, and shall not permit any of the other Covered Parties to, directly or indirectly:
 
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6.1  Financial Condition Covenants.
 
(a) Minimum New Equity. Fail to cause the Guarantor to raise the New Equity by September 30, 2005.
 
(b) Consolidated Debt Service Coverage Ratio. Commencing with the four-quarter period ending December 31, 2005 and for each four-quarter period thereafter, permit the Consolidated Debt Service Coverage Ratio at any time to be less than 1.25 to 1.0, tested on the last day of each fiscal quarter of the Borrower.
 
(c) Consolidated Senior Funded Debt to EBITDA Ratio. Permit the Consolidated Senior Funded Debt to EBITDA Ratio (i) at any time during the period from December 31, 2005 to December 30, 2006 to be more than 2.5 to 1 and (ii) at any time during the period after December 31, 2006 to be more than 2.0 to 1.0, tested, in each case, on the last day of each fiscal quarter of the Borrower.
 
(d) Consolidated Maintenance Capital Expenditures. Permit the Consolidated Maintenance Capital Expenditures of the Borrower for any four-quarter period to exceed the product of $20,000 times the number of Existing Units as of the last day of such four-quarter period, tested on the last day of such four-quarter period; provided, however, for the purposes of this Section 6.1(d) there shall be excluded from the calculation of Consolidated Maintenance Capital Expenditures (i) the aggregate amount thereof incurred prior to the date of this Agreement on the Existing Unit in Watertown, Massachusetts and (ii) $50,000 per each Existing Unit existing as of the date of this Agreement incurred in the fiscal year ending December 31, 2005.
 
(e) Consolidated New Unit Capital Expenditures. Until the New Equity Date, the Borrower will not make any Consolidated New Unit Capital Expenditures. After the New Equity Date, the Borrower will not build, purchase or otherwise acquire or develop new Units unless (i) all expenditures in connection therewith are fully funded by Borrower in a manner reasonably satisfactory to the Lender, (ii) both before and after giving effect to such activity, no Default or Event of Default shall have occurred and be continuing and (iii) prior to undertaking the same, the Borrower shall have supplied the Lender with a certificate, executed by a Responsible Officer, detailing such compliance.
 
6.2  Indebtedness. Create, issue, incur, assume, become liable in respect of or suffer to exist any Indebtedness, except:
 
(a) Indebtedness of any Loan Party pursuant to any Loan Document;
 
(b) Indebtedness to the Borrower, provided that the aggregate principal amount of the Indebtedness of the Guarantor to the Borrower shall not exceed the lesser of $400,000 or the aggregate amount of Additional Term Loans, and the Guarantor shall have no Indebtedness to the Borrower prior to the New Equity Date;
 
(c) Indebtedness outstanding on the date hereof and listed on Schedule 6.2(c), but not any refinancings, refundings, renewals or extensions thereof;
 
(d) Subordinated Debt;
 
(e) the Seller Debt, in an outstanding principal amount not exceeding the outstanding principal amount otherwise due or to become due thereunder, as in effect on the date hereof; and
 
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(f) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted by Section 6.3(f) in an aggregate principal amount not to exceed 100,000 at any one time outstanding with respect to Existing Units existing as of the date hereof and $200,000 at any one time outstanding with respect to new Units opening after the date hereof.
 
6.3  Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, whether now owned or hereafter acquired, except:

(a) Liens for taxes not yet due or that are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP;
 
(b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith by appropriate proceedings;
 
(c) pledges or deposits in connection with workers’ compensation, unemployment insurance and other social security legislation, other than any Lien imposed by ERISA;
 
(d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;
 
(e) Liens in existence on the date hereof listed on Schedule 6.3(e), securing Indebtedness permitted by Section 6.2(c), provided that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased;
 
(f) Liens securing Indebtedness of any Covered Party incurred as permitted under Section 6.2(f) to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, and (iii) the amount of Indebtedness secured thereby is not increased; and
 
(g) Liens created pursuant to the Security Documents.
 
6.4  Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of its property or business.
 
6.5  Disposition of Property. Dispose of any of its property, whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary’s Capital Stock to any Person, except:
 
(a) the Disposition of obsolete or worn out property in the ordinary course of business; and
 
(b) the sale of inventory in the ordinary course of business.
 
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6.6  Restricted Payments.
 
(a) Without the prior written consent of the Lender, declare, make, or pay any distribution of any kind whatsoever or dividend (other than dividends payable solely in common stock (or equivalent interests) of the Person making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any Capital Stock of any Covered Party, whether now or hereafter outstanding; or
 
(b) make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of any Covered Party (collectively, “Restricted Payments”), except that any Subsidiary of the Borrower may make Restricted Payments to the Borrower.
 
6.7  Stock. Issue or permit to be outstanding any Capital Stock not expressly provided for in its certificate of incorporation as in effect on the Closing Date (or, in the case of any Subsidiary, as approved by the Lender).
 
6.8  Investments. Make any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase any Capital Stock, bonds, notes, debentures or other debt securities of, or any assets constituting a business unit of, or make any other investment in, any Person (all of the foregoing, “Investments”), except:
 
(a) extensions of trade credit in the ordinary course of business;
 
(b) Investments in Cash Equivalents;
 
(c) loans and advances from the Guarantor to employees of Guarantor not to exceed $100,000 in the aggregate in the ordinary course of business (including for travel, entertainment and relocation expenses) at any one time outstanding; and
 
(d) in the case of the Borrower, loans to the Guarantor after the New Equity Date to the extent allowed under Section 6.2(b), provided that the aggregate principal amount of all loans extended by the Borrower to the Guarantor shall be evidenced by demand promissory notes endorsed over to the Lender as Collateral, in form and substance satisfactory to the Lender, and shall not exceed the lesser of (i) $400,000 or (ii) the aggregate principal amount of Additional Term Loans advanced hereunder.
 
6.9  Modifications of Certain Debt Instruments. Amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms of any Indebtedness.
 
6.10  Transactions with Affiliates and Insiders. Enter into any transaction, including any purchase, sale, lease or exchange of property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than the Borrower or the Guarantor) of such Covered Party except:
 
(a) normal and reasonable compensation of officers and other employees, and normal and reasonable reimbursement of expenses and indemnification of officers and directors;
 
(b) any consulting agreement with Seller, provided that such payments to Seller will be subordinated on the terms set forth in the Subordination Agreement; and
 
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(c) any such other transaction not covered by subsection (a) or (b) above that is (i) otherwise permitted under this Agreement, (ii) in the ordinary course of business of the relevant Covered Party, and (iii) upon fair and reasonable terms no less favorable, in the reasonable judgment of the Lender, to the relevant Covered Party than it would obtain in a comparable arm’s length transaction with a Person that is not an Affiliate.
 
6.11  Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by any Covered Party of real or personal property that has been or is to be sold or transferred by such Covered Party to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of such Covered Party.
 
6.12  Changes in Fiscal Periods. Permit the fiscal year of the Borrower to end on a day other than December 31 or change the Borrower’s method of determining fiscal quarters.
 
6.13  Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of any Covered Party to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, other than (a) this Agreement and the other Loan Documents and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation may only be effective against the assets financed thereby).

6.14  Clauses Restricting Subsidiary Distributions. Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Borrower to (a) make Restricted Payments in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any other Subsidiary of the Borrower, (b) make loans or advances to, or other Investments in, the Borrower or any other Subsidiary of the Borrower or (c) transfer any of its assets to the Borrower or any other Subsidiary of the Borrower, except for such encumbrances or restrictions existing under or by reason of any restrictions existing under the Loan Documents.
 
6.15  Lines of Business; Location of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in such Covered Party is engaged on the date of this Agreement, or conduct any part of its business outside of the United States of America.
 
6.16  Use of Proceeds. Use the proceeds of the Loans, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose.
 
6.17  Full Funding. Fail to satisfy the conditions to draw down or fail to draw down the entire Commitment by the last day of the Drawdown Period.
 
SECTION 7. EVENTS OF DEFAULT
 
If any of the following events shall occur and be continuing:
 
(a) the Borrower shall fail to pay any principal of or interest on any Loan when due in accordance with the terms hereof; or the Borrower shall fail to pay any other amount payable hereunder or under any other Loan Document, within three Business Days after any such other amount becomes due in accordance with the terms hereof; or
 
(b) any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made; or
 
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(c) any Loan Party shall default in the observance or performance of any agreement contained in Section 5 or 6 of this Agreement or Section 4 of the Security Agreement; or
 
(d) any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 15 days; or
 
(e) any Covered Party shall (i) default in making any payment of any principal of any Indebtedness (including any Guarantee Obligation, but excluding the Loans) on the scheduled or original due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; provided, that a default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $25,000; or
 
(f) (i) any Covered Party shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Covered Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Covered Party any case, proceeding or other action of a nature referred to in clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any Covered Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Covered Party shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Covered Party shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or
 
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(g) (i) any Person shall engage in any “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any “accumulated funding deficiency” (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of any Covered Party or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) any Covered Party or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Lender, reasonably be expected to have a Material Adverse Effect; or
 
(h) one or more judgments or decrees shall be entered against any Covered Party involving in the aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $50,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or
 
(i) any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party or any Affiliate of any Loan Party shall so assert, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; or
 
(j) the guarantee contained in the Guarantee and Security Agreement or in any other guarantee of the Obligations shall cease, for any reason, to be in full force and effect or any Covered Party shall so assert; or
 
(k) any Change of Control shall occur; or
 
(l) any obligations subordinated pursuant to any Subordination Agreement or any other subordination agreement executed in favor of the Lender shall cease, for any reason, to be validly subordinated to the obligations of the Loan Parties under the Loan Documents as provided in the applicable Subordination Agreement or other subordination agreement or any Covered Party or Person who is a party to it shall so assert; or
 
(m) the Landlord under any real property lease for any Unit shall take any action to terminate such lease, without the prior written consent of Lender;
 
then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Loans shall immediately terminate (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: the Lender may, by notice to the Borrower declare the Loans (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower.
 
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SECTION 8. MISCELLANEOUS
 
8.1  Amendments and Waivers. Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented, waived or modified except by a writing duly executed by the Borrower and the Lender.
 
8.2  Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Borrower or the Lender, or to such other address as may be hereafter notified by the parties hereto:
 
Borrower:
KFLG Watertown, Inc.
 
20 Guest Street, Suite 450
 
Brighton Landing East
 
Brighton, MA 02135
 
Attention: Eric Spitz
 
Telecopy: 617-787-6010
 
Telephone: 617-787-6000
   
Lender:
TD Banknorth, N.A.
 
370 Main Street
 
Worcester, MA 01608
 
Attention: Douglas Bulfinch
 
Telecopy: 978-524-2071
 
Telephone: 978-524-2075
   
With a copy to:
Edwards & Angell, LLP
 
101 Federal Street
 
Boston, Massachusetts 02110
 
Attention: Susan E. Siebert, Esq.
 
Telecopy: (888) 325-9131
 
Telephone: (617) 951-2220
 
provided that any notice, request or demand to or upon the Lender shall not be effective until received.
 
The Lender or the Borrower may, in their discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
 
8.3  No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising on the part of the Lender any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
 
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8.4  Survival of Representations and Warranties. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder.
 
8.5  Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Lender for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including the reasonable fees and disbursements of counsel to the Lender and filing and recording fees and expenses, with statements with respect to the foregoing to be submitted to the Borrower prior to the Closing Date (in the case of amounts to be paid on the Closing Date) and from time to time thereafter on a quarterly basis or such other periodic basis as the Lender shall deem appropriate, (b) to pay or reimburse the Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including the fees and disbursements of counsel (including the allocated fees and expenses of in-house counsel) to the Lender, (c) to pay, indemnify, and hold the Lender harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, that may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold the Lender and its respective officers, directors, employees, affiliates, agents and controlling persons (each, an “Indemnitee”) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the negotiation, execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of any Covered Party or any of the Properties and the reasonable fees and expenses of legal counsel in connection with claims, actions or proceedings by any Indemnitee against any Loan Party under any Loan Document (all the foregoing in this clause (d), collectively, the “Indemnified Liabilities”), provided, that the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee under the Loan Documents. Without limiting the foregoing, and to the extent permitted by applicable law, the Borrower agrees not to assert and to cause its Subsidiaries not to assert, and hereby waives and agrees to cause its Subsidiaries to waive, all rights for contribution or any other rights of recovery with respect to all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. All amounts due under this Section 8.5 shall be payable not later than 30 days after written demand therefor. The agreements in this Section 8.5 shall survive repayment of the Loans and all other amounts payable hereunder.
 
8.6  Successors and Assigns; Participations and Assignments.
 
(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of their respective rights or obligations hereunder without the prior written consent of the Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void).
 
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(b) (i) The Lender may assign to one or more assignees (each, an “Assignee”) all or a portion of its rights and obligations under this Agreement (including Loans at the time owing to it); provided, however in the event the Assignee is not a financial institution and no Event of Default then exists hereunder, the Lender shall obtain Borrower's consent to such Assignee (which consent shall not be unreasonably withheld or delayed).
 
(ii) The Lender may sell participations to one or more participants (each, a “Participant”), all or a portion of its rights and obligations under this Agreement. The Borrower agrees that each Participant shall be entitled to the benefits of this Agreement to the same extent as if it held its interest directly.
 
(c) The Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release the Lender from any of its obligations hereunder or substitute any such pledgee or Assignee for the Lender as a party hereto. The Borrower, upon receipt of written notice from the Lender, agrees to issue Notes to the Lender to facilitate transactions of the type described in this Section.
 
8.7  Adjustments; Set-off. In addition to any rights and remedies of the Lender provided by law, the Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Lender, any of its affiliates or any branch or agency of either thereof to or for the credit or the account of any Covered Party, whether or not the Lender is otherwise fully secured. The Lender agrees promptly to notify the Borrower after any such setoff and application made by the Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application.
 
8.8  Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.
 
8.9  Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
 
8.10  Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower and the Lender with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents.
 
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8.11  Governing Law.  This Agreement and the rights and obligations of the parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the laws of The Commonwealth of Massachusetts.
 
8.12  Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally:
 
(a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of The Commonwealth of Massachusetts, the courts of the United States for the District of Massachusetts, and appellate courts from any thereof;
 
(b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;
 
(c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address specified hereunder;
 
(d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and
 
(e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages.
 
8.13  Acknowledgements. The Borrower hereby acknowledges that:
 
(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents;
 
(b) the Lender has no fiduciary relationship with or duty to the Borrower or any other Covered Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Lender, on one hand, and the Covered Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
 
(c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among Covered Parties and the Lender.
 
8.14  WAIVERS OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
 
8.15  USA Patriot Act Notice. The Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow the Lender to identify the Borrower in accordance with the Act.
 
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8.16  Replacement Note. Upon receipt of an appropriate and reasonably acceptable affidavit of an officer of the Lender as to the loss, theft, destruction or mutilation of any Note or of any other Loan Document which is not of public record and, in the case of any such mutilation, upon surrender and cancellation of such Note or other Loan Document and receipt of the indemnity described below, the Borrower will, and will cause other Loan Parties to, issue, in lieu thereof, a replacement Note or other Loan Document in the same principal amount (as to any Note) and in any event of like tenor and upon such issuance the original Note or other Loan Document shall be deemed cancelled. In connection with any such issuance of a replacement Note or other Loan Document, the Lender shall issue a written indemnification (which need not be secured) in favor of the Loan Parties with respect to such lost, stolen or destroyed Note or other Loan Document in form and substance reasonably satisfactory to the Loan Parties.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

 
KFLG WATERTOWN, INC.
   
   
 
By:
  
   
Name:
   
Title:
   
   
 
TD BANKNORTH, N.A.
     
     
 
By:
  
   
Name:
   
Title:
 

Exhibit 10.29

 
FIRST AMENDMENT TO
CREDIT AGREEMENT


This Amendment (this "Amendment") is made as of December 31, 2005 by and between KFLG WATERTOWN, INC., a Massachusetts corporation, with an address at 20 Guest Street, Suite 450, Brighton Landing East, Brighton, MA 02135 (the "Borrower"), and TD BANKNORTH, N.A., a national banking association with an office at 370 Main Street, Worcester, Massachusetts 01608 (the "Lender").

RECITALS

A. The Lender and the Borrower are parties to that certain Credit Agreement dated as of May 27, 2005 (as the same is and may hereafter be amended from time to time, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement.

B. The Borrower has requested that the Lender amend the financial covenants and make certain other modifications to the terms and conditions of the Credit Agreement as described herein.

C. Subject to certain terms and conditions, the Lender is willing to agree to the same, as hereinafter set forth.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

I. AMENDMENTS TO CREDIT AGREEMENT.

A. Definitions. Section 1 of the Credit Agreement is hereby amended as follows:

1. The following definition contained in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"'Commitment': the Lender’s commitment to make Loans in an aggregate principal amount not to exceed $1,392,422.22, which is the aggregate principal outstanding balance of the Loans as of December 31, 2005."

2. The following new definitions are hereby inserted into the Credit Agreement in proper alphabetical order:

"'Additional New Equity': new equity of the Guarantor, consisting of either common or preferred stock, or additional capital contributions, in either case resulting in the receipt by the Guarantor of unrestricted Gross Cash Proceeds of at least $5,000,000 and Net Cash Proceeds of at least $4,500,000, which Net Cash Proceeds shall initially be deposited into an account held with the Lender."

 
"'Additional New Equity Date': the date on which the Lender has verified that Borrower has received the Net Cash Proceeds of the Additional New Equity required by Section 6.1(a)."
 
"'Blocked Account': as defined in Section 6.1(b)."
 
"'Consolidated Discretionary Capital Expenditures': for any period, Consolidated Capital Expenditures which do not constitute Consolidated Maintenance Capital Expenditures, and which shall include for the purposes of Section 6.1(e) hereof, (i) investments by any Covered Party for the purposes of building, purchasing, maintaining or investing in new Units which have been funded by such Covered Party as well as those investments which any Covered Party has committed to make, but has not yet made, and (ii) capital expenditures which have been funded by any Covered Party as well as those capital expenditures for which any Covered Party has committed to make payment, but has not yet made payment thereon."
 
"'Gross Cash Proceeds': Net Cash Proceeds before attorneys’ fees, accountants’ fees, commissions and other customary fees and expenses incurred in connection with the incurrence of Indebtedness or issuance of any new equity or additional capital contributions."
 
"'Permitted Accounts': any passbook, savings, demand, time, money market, operating or depository bank accounts with the Lender, and/or certificates of deposit issued by the Lender."

"'Permitted Blocked Accounts': subject to the Lender's prior approval thereof, any passbook savings or savings statement account with the Lender, and/or certificates of deposit issued by the Lender; in each case on which the Lender has placed a hold causing access to such account or certificate of deposit to be restricted."

B. Additional Term Loans.

1. Section 2.2 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"2.2 Additional Term Loans. The Borrower acknowledges and agrees that after the Closing Date, the Lender made additional term loans (the "Additional Term Loans") to the Borrower and that as of December 31, 2005, the aggregate outstanding principal amount of the Initial Term Loan and the Additional Term Loans (collectively, the "Loans") is $1,392,422.22. The Borrower and the Lender agree that as of December 31, 2005, no further advances of Additional Term Loans shall be made by the Lender to the Borrower."

2. Sections 2.3, 2.4(b) and 2.4(c) of the Credit Agreement are hereby deleted in their entireties and in each case the phrase "Intentionally Omitted" is substituted therefor.

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C. Repayment of Loans. Section 2.5 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"2.5 Repayment of Loans. Unless an Event of Default shall occur and be continuing, prior to the Additional New Equity Date, the Loans shall not amortize. Commencing on the Additional New Equity Date, the Loans shall amortize and principal shall be payable in consecutive monthly installments, each in the principal amount of $29,167.00, commencing on January 1, 2007 and on the first Business Day of each calendar month thereafter. The remaining outstanding principal amount of the Loan shall be payable in full on the Maturity Date. Amounts paid or prepaid with respect to the Loans may not be reborrowed. The amount of any principal prepayment of the Loans shall be applied to reduce the then remaining installments of the Loans in inverse order of maturity."

D. Prepayment. Section 2.6 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"2.6 Prepayment Penalty. The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty except for any prepayment fee that may be due under the following sentence. Any such prepayment shall be made together with all other amounts due and owing under the Loan Documents at the time of prepayment (including, without limitation, any amounts owing pursuant to Section 2.12) and, if the date of such prepayment is on or before the second anniversary of the date hereof (unless such prepayment is made in connection with the occurrence of an Event of Default or at the written request of the Lender), a prepayment fee in the amount of $10,000. Prepayments shall be made upon irrevocable notice by the Borrower delivered to the Lender no later than 11:00 A.M., Boston time, one Business Day prior thereto, which notice shall specify the date and amount of prepayment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued and unpaid interest to such date on the amount prepaid. Partial prepayments of any Loan shall be in an aggregate principal amount of $100,000 or a whole multiple of $50,000 in excess thereof."
 
E. Mandatory Prepayments. Section 2.7(e) of the Credit Agreement is hereby deleted in its entirety and the phrase "Intentionally Omitted" is substituted therefor.

F. Interest Rate. Section 2.8(a) of the Credit Agreement is hereby amended and restated in its entirety as follows:

"(a) The Loans shall bear interest at a rate per annum equal to the Prime Rate."
 
G. Financial Reporting.

1. Section 5.1(a) of the Credit Agreement is hereby amended by deleting the word "and" at the end of subsection (vii) thereof, substituting a semi-colon for the period at the end of subsection (viii) thereof; and adding the following new subsections (ix) and (x) immediately following subsection (vii) thereof as follows:

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"(ix) as soon as available, but in any event not later than 15 days after the end of each calendar month, the unaudited consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as at the end of such month and the related unaudited consolidated and consolidating statements of income and of cash flows for such month and the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year and the corresponding figures from the Borrower’s budget for such period, in each case certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); and
 
(x) as soon as available, but in any event not later than 15 days after the end of each calendar month, the unaudited consolidated and consolidating balance sheet of the Guarantor and its Subsidiaries as at the end of such month and the related unaudited consolidated and consolidating statements of income and of cash flows for such month and the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year and the corresponding figures from the Guarantor’s budget for such period together with a report on franchisee royalties received with respect to such month and a statement as to the number of franchise agreements in effect and whether any of such franchise agreements are then in default, in each case certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments);"
 
2. Section 5.1(b) of the Credit Agreement is hereby amended by adding the following sentence at the end thereof:
 
"The Covered Parties will permit the Lender to monitor at all times the account balances in Borrower's and/or Guarantor's accounts held with the Lender."
 
H. Certificates; Other Information. Section 5.2(b) of the Credit Agreement is hereby amended by adding the phrase "and Section 5.1(a)(ix) and (x)" immediately after the phrase "pursuant to Section 5.1(a)(iii) and (iv)"; and by inserting at the end thereof the following:

"Any compliance certificates furnished in connection with the calculations required by Sections 6.1(c), (d) and (e) hereof shall include with respect to the applicable period, a listing of all Consolidated Discretionary Capital Expenditures made during such period, the amount of same that has been funded during such period, and the amount of commitments to make Discretionary Capital Expenditures which are outstanding and/or were committed to during such period, but have not yet been paid."

I. Notices regarding Additional New Equity. Section 5.7 of the Credit Agreement is hereby amended by deleting the word "or" at the end of subsection (g) thereof, deleting the period at the end of subsection (h) thereof and substituting therefor "; or"; and adding the following new subsection (i) immediately following subsection (h) thereof as follows:

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"(i) any Additional New Equity raised by the Guarantor and the details thereof, including without limitation, the type, amount, source, date raised, the Gross Proceeds and Net Cash Proceeds thereof."

J. Bank Accounts. Section 5.10 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"5.10 Depository Accounts; Additional Accounts; Blocked Account.
 
(a) At all times prior to the Additional New Equity Date, maintain all operating, depository and disbursement bank accounts with the Lender, except as otherwise permitted by Section 3.23 hereof and Section 4(j) of the Security Agreement. After the Additional New Equity Date, provided the Borrower and Guarantor maintain their respective operating accounts with the Lender and no Event of Default shall have occurred and be continuing (including without limitation a Default or Event of Default under Section 6.1(c)(ii) hereof), the Loan Parties may maintain accounts at banks and financial institutions other than the Lender.
 
(b) Establish and maintain at all times prior to the Additional New Equity Date, the Blocked Account as required by Section 6.1(b) hereof. The Covered Parties each represent and warrant that there are no perfected liens or encumbrances with respect to the Blocked Account, other than in favor of the Lender, and each agrees that it shall not enter into any acknowledgment or agreement that gives any other person or entity except Lender control over, or any other security interest, lien or title in, the Blocked Account. The Blocked Account shall be under the sole dominion and control of the Lender. Neither any Covered Party, nor any other person or entity, acting through or under any Covered Party, shall have any control over the use of, or any right to withdraw any amount from, the Blocked Account, provided however, that as long as no Default or Event of Default exists immediately before and after giving effect thereto, the Lender will distribute to the Guarantor cash interest earned on the funds in the Blocked Account. No Covered Party will close the Blocked Account prior to the Additional New Equity Date. All funds in the Blocked Account shall be subject to the provisions of Section 8.7 hereof."

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K. Financial Covenants. Section 6.1 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"6.1 Financial Condition Covenants.

(a) Minimum Additional New Equity. Fail to cause the Guarantor to raise the Additional New Equity by June 1, 2006.
 
(b) Blocked Account. Fail to cause the Guarantor to maintain at all times prior to the Additional New Equity Date, cash (in U.S. Dollars) in an aggregate amount of at least $1,400,000 in a Permitted Blocked Account held with Lender (the "Blocked Account").

(c) Minimum Account Balances. Fail to maintain, on a combined basis with the Guarantor, in Permitted Accounts held with the Lender: (i) at all times prior to the Additional New Equity Date, cash (in U.S. Dollars) in an aggregate amount of at least $1,500,000 (which amount may include, without limitation, amounts held in the Blocked Account); and (ii) at all times on and after the Additional New Equity Date, cash (in U.S. Dollars) in an aggregate amount of at least $1,700,000.
 
(d) Consolidated Maintenance Capital Expenditures. After the Additional New Equity Date, the Borrower will not make Consolidated Maintenance Capital Expenditures unless both before and after giving effect to such capital expenditure, no Default or Event of Default shall have occurred and be continuing, including without limitation, under Section 6.1(c) hereof.

(e) Consolidated Discretionary Capital Expenditures. After the Additional New Equity Date, the Borrower will not make Consolidated Discretionary Capital Expenditures unless: (i) at the time of any such funding of such Consolidated Discretionary Capital Expenditures or commitment to make any such Consolidated Discretionary Capital Expenditures there is not (and after giving effect to such funding, and/or giving effect to such commitment as though such commitment has been funded on the date of such commitment, there will not be) any Default or Event of Default (with compliance with Section 6.1(c) being determined for this purpose as at the date immediately preceding the date of such funding and/or commitment, giving effect to such funding and/or commitment on a pro forma basis), and (ii) prior to the funding of any Consolidated Discretionary Capital Expenditure or commitment to make any Consolidated Discretionary Capital Expenditure, the Borrower shall have delivered to the Lender a pro forma Compliance Certificate containing all information and calculations necessary for evidencing compliance by each Covered Party with the provisions of Section 6.1(c) hereof."

L. Indebtedness to Borrower. Section 6.2(b) of the Credit Agreement is hereby deleted in its entirety and the phrase "Intentionally Omitted" is substituted therefor.

M. Loans to Guarantor. Section 6.8(d) of the Credit Agreement is hereby deleted in its entirety and the phrase "Intentionally Omitted" is substituted therefor.
 
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N. Full Funding. Section 6.17 of the Credit Agreement is hereby deleted in its entirety and the phrase "Intentionally Omitted" is substituted therefor.

O. Title to Accounts. Section 8.7 of the Credit Agreement is hereby amended by adding the following at the end thereof:

"In addition to the foregoing, upon any Event of Default, all right, title and interest in each account of each Covered Party held with the Lender shall immediately and automatically, without demand or notice of any kind, be transferred to the Lender, the Lender shall be the owner thereof, and as such, the Lender may apply the funds held in such accounts to the Obligations in such manner and order as the Lender may elect in its sole discretion."
 
II. NO FURTHER AMENDMENTS.

Except as specifically amended herein, all terms and conditions of the Credit Agreement shall remain in full force and effect as originally constituted and is hereby ratified and affirmed in all respects and the indebtedness of the Borrower to the Lender evidenced hereby and by the Note is hereby reaffirmed in all respects. This Amendment constitutes an amendment to and modification of the Credit Agreement. On and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this Amendment, and each reference in any Loan Document between the Borrower and the Lender or, the Guarantor and the Lender, to the Credit Agreement, "thereunder", "thereof" or words of like import referring the Credit Agreement shall mean a reference to the Credit Agreement as amended by this Amendment.

III. REPRESENTATIONS, WARRANTIES AND COVENANTS.

The Borrower represents, warrants and covenants as follows as of the date hereof:

A. Each of the representations and warranties contained in the Credit Agreement, as amended by this Amendment, and the other Loan Documents are true and correct as of the date hereof. No material adverse change has occurred in the assets, liabilities, financial condition, business or prospects of the Borrower or the Guarantor from that disclosed in the management-prepared financial statements most recently distributed to the Lender. No Default or Event of Default has occurred or is continuing.

B. The Credit Agreement, as amended by this Amendment, constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action at law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right thereunder.

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C. The execution and delivery of this Amendment and the other documents, if any, by the Borrower and the transactions contemplated hereby are within the corporate power and authority of the Borrower and have been authorized by all necessary corporate proceedings, and do not and will not (i) contravene any provision of the charter documents or by-laws of the Borrower or any law, rule or regulation applicable to the Borrower; (ii) contravene any provision of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given (or both) would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Borrower; or (iii) result in or require the imposition of any encumbrance or lien on any of the properties, assets or rights of the Borrower (other than pursuant to any Security Document executed in connection with the Credit Agreement).

D. The Borrower and the Lender acknowledge and agree that but for this Amendment, the Borrower would have been in default under the terms and conditions of the Credit Agreement, and that the terms and conditions set forth herein and the avoidance of such a default constitute fair and adequate consideration mutually exchanged by the Borrower and the Lender in their execution and delivery of this Amendment. 

IV. CONDITIONS.

A. This Amendment shall become effective on the first date on which the Borrower shall have executed and delivered to the Lender (or shall have caused to be executed and delivered to the Lender by the appropriate persons) the following:

1. This Amendment;

2. Evidence that Borrower shall have caused the Guarantor to deposit cash (in U.S. Dollars) in an aggregate amount of at least $1,400,000 in a Permitted Blocked Account held with the Lender;

3. A fully-executed copy of the agreement with the investor group evidencing a commitment for Additional New Equity in a minimum amount of $5,000,000; and

4. Such other supporting documents and certificates as the Lender or its counsel may reasonably request.

B. All legal matters incident to the transactions contemplated hereby shall be satisfactory to counsel for the Lender.

V. CONFIRMATION OF SECURITY.

The Obligations of the Borrower to the Lender, including, without limitation, the liabilities and obligations of the Borrower under the Credit Agreement, as amended hereby, and the Notes, are secured by, and entitled to all benefits of, the Security Agreement, the Guarantee and Security Agreement, any Mortgage, any Leasehold Security Document, and any other collateral granted by the Borrower or Guarantor to the Lender. The Covered Parties confirm and reaffirm that each has granted to Lender a security interest in, among other property, its deposit accounts, including without limitation the Blocked Account, and all credits or proceeds thereto and all monies, checks and other instruments held or deposited therein.

-8-
 
VI. MISCELLANEOUS.

A. The Borrower represents, warrants, and agrees that, to its knowledge, the Borrower has no claims, defenses, counterclaims or offsets against the Lender in connection with the Credit Agreement or the Obligations, and, to the extent that any claim, defense, counterclaim, or offset may exist, the Borrower hereby affirmatively WAIVES AND RELEASES the Lender from the same.

B. The Borrower agrees to reimburse the Lender upon demand for all reasonable out-of-pocket costs, charges, liabilities, taxes and expenses of the Lender in connection with (i) the preparation, negotiation, interpretation, execution and delivery of this Amendment and any other agreements, instruments or documents executed pursuant or relating hereto, and (ii) any enforcement hereof. The legal fees for the preparation, negotiation, interpretation, execution and delivery of this Amendment and any other agreements, instruments or documents executed pursuant or relating hereto shall be limited to $2000.

C. This Amendment shall take effect as a sealed instrument under the laws of The Commonwealth of Massachusetts.

D. This Amendment may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, all of which counterparts shall together constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment.

[The next page is the signature page.]

-9-


IN WITNESS WHEREOF, the Lender and the Borrower have caused this Amendment to be duly executed as a sealed instrument by their duly authorized representatives, all as of the day and year first above written.

KFLG WATERTOWN, INC.
 
By:
  
 
Name:
 
Title:
   
TD BANKNORTH, N.A.
 
By:
  
 
Name:
 
Title:


AGREEMENT, CONSENT AND CONFIRMATION OF GUARANTOR


The undersigned Guarantor does hereby acknowledge and consent to the execution, delivery and performance of the within foregoing Amendment, confirms the continuing effect of that certain Guarantee and Security Agreement dated as of May 27, 2005, as amended, made by such Guarantor in favor of the Lender, after giving effect to the foregoing Amendment, and agrees to the provisions of the within and foregoing Amendment which apply to it by their terms, including without limitation, the obligation of the Guarantor to (i) raise the Additional New Equity by June 1, 2006 as required by Section 6.1(a) of the Credit Agreement, (ii) maintain at all times prior to the Additional New Equity Date at least $1,400,000 cash in the Blocked Account as required by Section 6.1(b) of the Credit Agreement, and (iii) comply with the provisions of Section 5.10(b) hereof.

Accepted and agreed to as of December 31, 2005:

KNOWFAT FRANCHISE COMPANY, INC.
   
By:
  
 
Name:
 
Title:
 

Exhibit 10.30

SECOND AMENDMENT TO CREDIT AGREEMENT

This Second Amendment (this “Second Amendment”) is made as of May 31, 2006 by and between KFLG WATERTOWN, INC., a Massachusetts corporation, with an address at 20 Guest Street, Suite 450, Brighton Landing East, Brighton, MA 02135 (the “Borrower”), and TD BANKNORTH, N.A., a national banking association with an office at 370 Main Street, Worcester, Massachusetts 01608 (the “Lender”).

RECITALS

A. The Lender and the Borrower are parties to that certain Credit Agreement, dated as of May 27, 2005, as amended by that certain First Amendment to Credit Agreement, dated as of December 31, 2005 (the “First Amendment”), (as the same is and may hereafter be amended from time to time, the “Credit Agreement”). Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement.

B. The Borrower has requested that the Lender make certain modifications to the terms and conditions of the Credit Agreement as described herein.

C. Subject to certain terms and conditions, the Lender is willing to agree to the same, as hereinafter set forth.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

I. AMENDMENTS TO CREDIT AGREEMENT.

A. Definitions. Section 1 of the Credit Agreement is hereby amended as follows:

1. The following definitions contained in Section 1.1 of the Credit Agreement are hereby amended and restated in its entirety as follows:

“Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Lender that are required to be paid by the Borrower pursuant hereto) or otherwise, and also including all present and future liabilities, obligations and Indebtedness of the Borrower to the Lender with respect to any agreement governing the provision of treasury and/or cash management services, including, without limitation, deposit accounts, funds transfer, automatic clearinghouse, zero balance accounts, controlled disbursements, lockboxes, and payroll services.

 
 
 
 
“Security Documents”: the Security Agreement, the Guarantee and Security Agreement, any Mortgage, any Leasehold Security Document, the Personal Guaranty, the Pledge Agreement, the Account Control Agreement and all other security documents hereafter delivered to the Lender granting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document, collectively.

2. The following new definitions are hereby inserted into the Credit Agreement in proper alphabetical order:

“Account Control Agreement”: The Account Control Agreement among the Lender, the Personal Guarantor and Wachovia Bank, National Association.

“Personal Guarantor”: George A. Naddaff.

“Personal Guaranty”: The Limited Personal Guaranty of the Personal Guarantor, dated as of the date hereof, in favor of the Lender.

“Pledge Agreement”: The Pledge Agreement of the Personal Guarantor, dated as of May 31, 2006, in favor of the Lender.

3. The following definitions are hereby deleted from the Credit Agreement:

“Blocked Account”, “Permitted Accounts” and “Permitted Blocked Accounts”

B. Bank Accounts. Section 5.10 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“5.10 Depository Accounts; Additional Accounts. At all times prior to the Additional New Equity Date, maintain all operating, depository and disbursement bank accounts with the Lender, except as otherwise permitted by Section 3.23 hereof and Section 4(j) of the Security Agreement. After the Additional New Equity Date, provided the Borrower and Guarantor maintain their respective operating accounts with the Lender and no Event of Default shall have occurred and be continuing, the Loan Parties may maintain accounts at banks and financial institutions other than the Lender.

C. Financial Covenants. Section 6.1 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“6.1 Financial Condition Covenants.

(a) Minimum Additional New Equity. Fail to cause the Guarantor to raise the Additional New Equity by July 31, 2006.

 
- 2 -
 
 
(b) Pledge Agreement and Account Control Agreement. Fail to cause the Personal Guarantor to maintain at all times marketable securities in an investment account, pledged to the Lender pursuant to the Pledge Agreement and subject to the Account Control Agreement, with a minimum market value at all times of at least $1,750,000.

(c) Consolidated Maintenance Capital Expenditures. After the Additional New Equity Date, the Borrower will not make Consolidated Maintenance Capital Expenditures unless both before and after giving effect to such capital expenditure, no Default or Event of Default shall have occurred and be continuing.

(d) Consolidated Discretionary Capital Expenditures. After the Additional New Equity Date, the Borrower will not make Consolidated Discretionary Capital Expenditures unless: (i) at the time of any such funding of such Consolidated Discretionary Capital Expenditures or commitment to make any such Consolidated Discretionary Capital Expenditures there is not (and after giving effect to such funding, and/or giving effect to such commitment as though such commitment has been funded on the date of such commitment, there will not be) any Default or Event of Default; and (ii) prior to the funding of any Consolidated Discretionary Capital Expenditure or commitment to make any Consolidated Discretionary Capital Expenditure, the Borrower shall have delivered to the Lender a certificate certifying to such fact.

D. Section 8.7 of the Credit Agreement is hereby amended to read in its entirety as follows:

“8.7 Adjustments; Set-off. In addition to any rights and remedies of the Lender provided by law, the Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Lender, any of its affiliates or any branch or agency of either thereof to or for the credit or the account of any Covered Party, whether or not the Lender is otherwise fully secured. The Lender agrees promptly to notify the Borrower after any such setoff and application made by the Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application.”

II. NO FURTHER AMENDMENTS.

Except as specifically amended herein, all terms and conditions of the Credit Agreement shall remain in full force and effect as originally constituted and is hereby ratified and affirmed in all respects and the indebtedness of the Borrower to the Lender evidenced hereby and by the Note is hereby reaffirmed in all respects. This Second Amendment constitutes an amendment to and modification of the Credit Agreement. On and after the date hereof, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this Second Amendment, and each reference in any Loan Document between the Borrower and the Lender or, the Guarantor and the Lender, to the Credit Agreement, “thereunder”, “thereof” or words of like import referring the Credit Agreement shall mean a reference to the Credit Agreement as amended by this Second Amendment.

 
- 3 -
 
 
III. REPRESENTATIONS, WARRANTIES AND COVENANTS.

The Borrower represents, warrants and covenants as follows as of the date hereof:

A. Each of the representations and warranties contained in the Credit Agreement, as amended by this Second Amendment, and the other Loan Documents are true and correct as of the date hereof. No material adverse change has occurred in the assets, liabilities, financial condition, business or prospects of the Borrower or the Guarantor from that disclosed in the management-prepared financial statements most recently distributed to the Lender. No Default or Event of Default has occurred or is continuing.

B. The Credit Agreement, as amended by this Second Amendment, constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action at law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right thereunder.

C. The execution and delivery of this Second Amendment and the other documents, if any, by the Borrower and the transactions contemplated hereby are within the corporate power and authority of the Borrower and have been authorized by all necessary corporate proceedings, and do not and will not (i) contravene any provision of the charter documents or by-laws of the Borrower or any law, rule or regulation applicable to the Borrower; (ii) contravene any provision of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given (or both) would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Borrower; or (iii) result in or require the imposition of any encumbrance or lien on any of the properties, assets or rights of the Borrower (other than pursuant to any Security Document executed in connection with the Credit Agreement).

D. The Borrower and the Lender acknowledge and agree that but for this Second Amendment, the Borrower would have been in default under the terms and conditions of the Credit Agreement, and that the terms and conditions set forth herein and the avoidance of such a default constitute fair and adequate consideration mutually exchanged by the Borrower and the Lender in their execution and delivery of this Second Amendment.

 
- 4 -
 
 
IV. CONDITIONS.

A. This Second Amendment shall become effective on the first date on which the Borrower shall have executed and/or delivered to the Lender (or shall have caused to be executed and delivered to the Lender by the appropriate persons) the following:

1. This Second Amendment;

2. The Personal Guaranty;

3. The Pledge Agreement;

4. The Account Control Agreement;

5. The amendment fee of $2,000 to Lender with respect to the Second Amendment; and

6. Such other supporting documents and certificates as the Lender or its counsel may reasonably request.

B. All legal matters incident to the transactions contemplated hereby shall be satisfactory to counsel for the Lender.

V. CONFIRMATION OF SECURITY.

The Obligations of the Borrower to the Lender, including, without limitation, the liabilities and obligations of the Borrower under the Credit Agreement, as amended hereby, and the Notes, are secured by, and entitled to all benefits of, the Security Agreement, the Guarantee and Security Agreement, any Mortgage, any Leasehold Security Document, and any other collateral granted by the Borrower or Guarantor to the Lender. The Covered Parties confirm and reaffirm that each has granted to Lender a security interest in, among other property, its deposit accounts and all credits or proceeds thereto and all monies, checks and other instruments held or deposited therein.

VI. MISCELLANEOUS.

A. The Borrower represents, warrants, and agrees that, to its knowledge, the Borrower has no claims, defenses, counterclaims or offsets against the Lender in connection with the Credit Agreement or the Obligations, and, to the extent that any claim, defense, counterclaim, or offset may exist, the Borrower hereby affirmatively WAIVES AND RELEASES the Lender from the same.

B. The Borrower agrees to reimburse the Lender upon demand for all reasonable out-of-pocket costs, charges, liabilities, taxes and expenses of the Lender in connection with (i) the preparation, negotiation, interpretation, execution and delivery by Lender’s counsel of the First Amendment and this Second Amendment and any other agreements, instruments or documents executed pursuant or relating hereto, and unpaid expenses of Lender’s counsel relating to the initial closing, all as set forth on Exhibit B hereto, and (ii) any enforcement hereof.

 
- 5 -
 
 
C. This Second Amendment shall take effect as a sealed instrument under the laws of The Commonwealth of Massachusetts.

D. This Second Amendment may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, all of which counterparts shall together constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Second Amendment by facsimile shall be effective as delivery of a manually executed counterpart of this Second Amendment.


[Signature page follows.]

 
- 6 -
 


[Signature Page to Second Amendment to Credit Agreement]

IN WITNESS WHEREOF, the Lender and the Borrower have caused this Second Amendment to be duly executed as a sealed instrument by their duly authorized representatives, all as of the day and year first above written.


KFLG WATERTOWN, INC.
   
By:
  
 
Name:
 
Title:
   
TD BANKNORTH, N.A.
   
By:
  
 
Name:
 
Title:

 
 
 


[Signature Page to Second Amendment to Credit Agreement]

AGREEMENT, CONSENT AND CONFIRMATION OF GUARANTOR

The undersigned Guarantor does hereby acknowledge and consent to the execution, delivery and performance of the within foregoing Second Amendment, confirms the continuing effect of that certain Guarantee and Security Agreement dated as of May 27, 2005, as amended, made by such Guarantor in favor of the Lender, after giving effect to the foregoing Second Amendment, and agrees to the provisions of the within and foregoing Second Amendment which apply to it by their terms, including without limitation, the obligation of the Guarantor to raise the Additional New Equity by July 31, 2006 as required by Section 6.1(a) of the Credit Agreement.

Accepted and agreed to as of May 31, 2006:
 
KNOWFAT FRANCHISE COMPANY, INC.
   
By:
  
 
Name:
 
Title:
 
 
 
 
 

Exhibit 10.32


FOURTH AMENDMENT TO CREDIT AGREEMENT
 
This Fourth Amendment (this “Fourth Amendment” is made as of October 2, 2006 by and between KFLG WATERTOWN, INC., a Massachusetts corporation, with an address at 255 Washington Street, Suite 290, Newton, MA 02458 (the “Borrower”), and TD BANKNORTH, N.A., a national banking association with an office at 370 Main Street, Worcester, Massachusetts 01608 (the “Lender”).

RECITALS

A. The Lender and the Borrower are parties to that certain Credit Agreement, dated as of May 27, 2005, as amended by that certain First Amendment to Credit Agreement, dated as of December 31, 2005, as further amended by that certain Second Amendment to Credit Agreement dated as of May 31, 2006, and as further amended by that certain Third Amendment to Credit Agreement dated as of July 31, 2006 (as the same is and may hereafter be amended from time to time, the “Credit Agreement”) Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement.
 
B. The Borrower has requested that the Lender make certain modifications to the terms and conditions of the Credit Agreement as described herein.
 
C. Subject to certain terms and conditions, the Lender is willing to agree to the same, as hereinafter set forth.
 
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

I. AMENDMENTS TO CREDIT AGREEMENT.
 
A. Section 5.9 of the Credit Agreement entitled “Additional Collateral; Subsidiaries; New Units” is hereby further amended by deleting subsection (d) in its entirety and by substituting the following therefor:

“(d) Insure that all Units opened after the date hereof are owned by the Borrower; provided, however, that: (i) KnowFat of Downtown Crossing, Inc. may own the Unit located at 530 Washington Street, Boston, Massachusetts (the “Downtown Crossing Restaurant”); and (ii) KnowFat of Landmark Center, Inc. may own the Unit located at Landmark Center, 2001 Brookline Avenue, Boston, Massachusetts (the “Landmark Center Restaurant”). Except for the Downtown Crossing Restaurant and the Landmark Center Restaurant, any interest in any restaurant or Unit now or hereafter acquired by the Guarantor shall be an asset owned directly by the Borrower.”

B. Section 6.2 of the Credit Agreement entitled “Indebtedness” is hereby amended by substituting a semi-colon for the period at the end of subsection (h) thereof, and adding the following new subsections (i), (j) and (k) immediately following subsection (f) thereof as follows:
 
 
 
 
 
“(i) Indebtedness and obligations of KnowFat of Downtown Crossing, Inc. (“KnowFat Downtown”) to Fit Food, LLC, a Massachusetts limited liability company (“Fit Food”) pursuant to that certain Asset Purchase Agreement between Fit Food and KnowFat Downtown dated as of the date hereof;
 
(j) Indebtedness and obligations of KnowFat Downtown to Sovereign Bank under the Sovereign Bank Documents (as defined below) in an amount not to exceed the current principal amount outstanding under the Sovereign Bank Documents, plus interest due thereon and costs and expenses related thereto. For purposes hereof, “Sovereign Bank Documents” means: (a) that certain U.S. Small Business Administration Note from Fit Food payable to Sovereign Bank dated April 26, 2005 in the original principal amount of $400,000; (b) that certain Business Loan Agreement between Fit Food and Sovereign Bank dated April 26, 2005; and (c) the Commercial Security Agreement between Fit Food and Sovereign Bank dated April 26, 2005 and the other collateral documents related thereto;
 
(k) Indebtedness and obligations of the Guarantor to Fit Food pursuant to that certain Guaranty of the Guarantor in favor of Fit Food dated as of the date hereof.”
 
C. Section 6.3 of the Credit Agreement entitled “Liens” is hereby amended by substituting a semi-colon for the period at the end of subsection (h) thereof; adding the word “and” immediately after said semi-colon; and adding the following new subsections (i) and (j) immediately following subsection (h) thereof as follows:
 
“(i) Liens granted by KnowFat Downtown in favor of Fit Food pursuant to a certain Security Agreement from KnowFat Downtown in favor of Fit Food dated as of the date hereof securing the Indebtedness and obligations described in Section 6.2(g) hereof;
 
(j) Liens granted pursuant to the Sovereign Bank Documents (as defined in Section 6.2(i) hereof) on the assets of KnowFat Downtown in favor of Sovereign Bank securing the Indebtedness and obligations described in Section 6.2(i) hereof.
 
II. OTHER AMENDMENTS TO LOAN DOCUMENTS
 
A. The Borrower agrees that it will not permit any amendment to any of the following agreements without the prior written consent of the Lender: (a) the Asset Purchase Agreement between Fit Food, LLC and KnowFat Downtown Crossing, Inc. dated as of the date hereof; (b) the Security Agreement between Fit Food, LLC and KnowFat Downtown Crossing, Inc. dated as of the date hereof; (c) the Sovereign Bank Documents (as defined in Section 6.2(i) of the Credit Agreement); and (d) the Guaranty of the Guarantor in favor of Fit Food, LLC dated as of the date hereof.”
 
 
- 2 -
 
 
B. Notwithstanding any representation, warranty or covenant contained in the Credit Agreement or any of the other Loan Documents to the contrary, the Lender agrees and acknowledges that the priority of the Permitted Liens in favor of Fit Food and Sovereign Bank shall be governed by a certain lien subordination Agreement among the Lender, Fit Food and Sovereign Bank dated as of the date hereof.
 
III. NO FURTHER AMENDMENTS.
 
Except as specifically amended herein, all terms and conditions of the Credit Agreement shall remain in fill force and effect as originally constituted and is hereby ratified and affirmed in all respects, and the indebtedness of the Borrower to the Lender evidenced hereby and by the Note is hereby reaffirmed in all respects. This Fourth Amendment constitutes an amendment to and modification of the Credit Agreement On and after the date hereof, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this Fourth Amendment, and each reference in any Loan Document between the Borrower and the Lender or, the Guarantor and the Lender, to the credit Agreement, “thereunder”, “thereof’ or words of like import referring the Credit Agreement shall mean a reference to the Credit Agreement as amended by this Fourth Amendment.

IV. REPRESENTATIONS, WARRANTIES AND COVENANTS.
 
The Borrower represents, warrants and covenants as follows as of the date hereof:

A. Each of the representations and warranties contained in the Credit Agreement, as amended by this Fourth Amendment, and the other Loan Documents are true and correct as of the date hereof. No material adverse change has occurred in the assets, liabilities, financial condition, business or prospects of the Borrower or the Guarantor from that disclosed in the management-prepared financial statements most recently distributed to the Lender. No Default or Event of Default has occurred or is continuing.
 
B. The Credit Agreement, as amended by this Fourth Amendment, constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action at law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right thereunder.
 
C. The execution and delivery of this Fourth Amendment and the other documents, if any, by the Borrower and the transactions contemplated hereby are within the corporate power and authority of the Borrower and have been authorized by all necessary corporate proceedings, and do not and will not (i) contravene any provision of the charter documents or by-laws of the Borrower or any law, rule or regulation applicable to the Borrower; (ii) contravene any provision of, or constitute an event o f default or event that, but for the requirement that time elapse or notice be given (or both) would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Borrower; or (iii) result in or require the imposition of any encumbrance or lien on any of the properties, assets or rights of the Borrower (other than pursuant to any Security Document executed in connection with the Credit Agreement).
 
 
- 3 -
 
 
D. The Borrower and the Lender acknowledge and agree that but for this Fourth Amendment, the Borrower would have been in default under the terms and conditions o f the Credit Agreement; and that the terms and conditions set forth herein and the avoidance of such a default constitute fair and adequate consideration mutually exchanged by the Borrower and the Lender in their execution and delivery of this Fourth Amendment.
 
V. CONDITIONS.
 
A. This Fourth Amendment shall become effective on the first date on which the Borrower shall have executed and/or delivered to the Lender (or shall have caused to be executed and delivered to the Lender by the appropriate persons) the following:
 
1. This Fourth Amendment;
 
2. A Guarantee and Security Agreement from KnowFat of Downtown Crossing, Inc. in favor of the Lender; and
 
3. Such other supporting documents and certificates as the Lender or its counsel may reasonably request.
 
B. All legal matters incident to the transactions contemplated hereby shall be satisfactory to counsel for the Lender.
 
VI. CONFIRMATION OF SECURITY.
 
The Obligations of the Borrower to the Lender, including, without limitation, the liabilities and obligations of the Borrower under the Credit Agreement, as amended hereby, and the Notes, are secured by, and entitled to all benefits of, the Security Agreement, the Guarantee and Security Agreement, any Mortgage, any Leasehold Security Document, and any other collateral granted by the Borrower or Guarantor to the Lender. The Covered Parties confirm and reaffirm that each has granted to Lender a security interest in, among other property, its deposit accounts and all credits or proceeds thereto and all monies, checks and other instruments held or deposited therein.

VII. MISCELLANEOUS
 
A. The Borrower represents, warrants, and agrees that, to its know1edge, the Borrower has no claims, defenses, counterclaims or offsets against the Lender in connection with the Credit Agreement or the Obligations, and, to the extent that any claim, defense, counterclaim, or offset may exist, the Borrower thereby affirmatively WAIVES AND RELEASES the Lender from the same.
 
B. This Fourth Amendment shall take effect as a sealed instrument under the laws of The Commonwealth of Massachusetts.
 
 
- 4 -
 
 
C. This Fourth Amendment may be executed by the parties hereto in several counterparts hereof and by the different parties hereto on separate counterparts hereof, all of which counterparts shall together constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Fourth Amendment by facsimile shall be effective as delivery of a manually executed counterpart of this Fourth Amendment.
 
[SIGNATURE PAGE FOLLOWS]

 
- 5 -
 

IN WITNESS WHEREOF, the Lender and the Borrower have caused this Fourth Amendment to be duly executed as a sealed instrument by their duly authorized representatives, all as of the day and year first above written.

 
KFLG WATERTOWN, INC.
   
 
By:__________________________________________
 
Name:
 
Title:
   
 
TD BANKNORTH, N.A.
   
 
By:__________________________________________
 
Name:
 
Title:

By its signature below, KnowFat Franchise Company, Inc. hereby agrees and acknowledges that it shall not grant any liens or security interests on any of its assets in favor of Fit Food, LLC (“Fit Food”) to secure any of its obligations to Fit Food under its Guaranty in favor of Fit Food dated as of October 2, 2006.
 
 
KNOWFAT FRANCHISE COMPANY, INC.
   
 
By:__________________________________________
 
Name:
 
Title:
 
[Signature Page to Fourth Amendment to Credit Agreement]
 
 
 
 

Exhibit 10.33


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 

Exhibit 10.34


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 
 

Exhibit 10.35


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 
 

Exhibit 10.36


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 


 
 
 
 

Exhibit 10.37

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Exhibit 10.38

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EXHIBIT 23.2
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the inclusion in this Amendment No. 1 to Registration Statement on Form S-1 of our report dated April 14, 2008, relating to the financial statements of Ufood Resturant Group, Inc. as of December 30, 2007 and December 31, 2006 and for the fiscal years then ended and to the reference to us under the heading “experts” in the Prospectus, which is part of thiss Registration Statement.
 
 
 
/s/ Carlin, Charron & Rosen, LLP
Westborough, Massachusetts
July 7, 2008