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. At December 30, 2007, the carrying amount of goodwill was $977,135 and was comprised of $841,135 of goodwill attributable to our store operations segment and $136,000 of goodwill attributable to our franchise operations segment. Goodwill attributable to our franchise operations segment is evaluated by comparing the Company's fair market value, determined based upon quoted market prices of the Company's equity securities, to the carrying amount of goodwill. Goodwill attributable to our store operations segment is evaluated on a restaurant -by-restaurant basis by comparing the restaurant's estimated fair value to the carrying value of the restaurant's underlying net assets inclusive of goodwill. Fair value is determined based upon the restaurant's estimated future cash flows. Future cash flows are estimated based upon a restaurant's historical operating performance and management's estimates of future revenues and expenses over the period of time that the Company expects to operate the restaurant, which generally coincides with the initial term of the restaurant's lease but which may take into account the restaurant's first lease renewal period up to 5 years. The estimate of a restaurant's future cash flows may also include an estimate of the restaurant's terminal value, determined by applying a capitalization rate to the restaurant's estimated cash flows during the last year of the forecast period. The capitalization rate used by the Company was determined based upon the restaurant's location, cash flows and growth prospects.
In August 2008, the Company completed the conversion of three of its Company-owned stores from KnowFat! locations to UFood Grill outlets, including two stores that have goodwill associated with them. Following the store conversions, the Company tested the carrying value of the store's goodwill for impairment as of the first day of the fourth quarter and determined that there was no impairment. For purposes of estimating each store's future cash flows, the Company assumed that comparable store sales would increase by approximately 4% per year; store operating expenses as a percentage of the store's revenues would decrease by a total of 1-1/2% of sales due to labor and purchasing efficiencies; and the terminal value of each store was calculated using a 20% capitalization rate applied to the final year's estimated cash flow. The present value of each restaurant's estimated future cash flows was calculated using a discount rate of 8%.
Following the impairment test performed as of the first day of the fourth quarter, economic conditions in the United States have worsened. The U.S. Government and Federal Reserve have provided an unprecedented level of financial support to U.S. financial institutions, unemployment has risen, home foreclosures have increased, mortgage delinquency rates have increased, credit markets have tightened, volatility in the equity markets has continued and the National Bureau of Economic Research announced that the United States economy has been in recession for almost a year. These factors have all contributed to economic uncertainty and a decrease in consumer spending which in turn has contributed to a decline in sales at Company-owned stores. According to The Conference Board, Inc., the decline in real consumer spending experienced in the third and fourth quarters of 2008 are expected to last through the first half of 2009. As a result of these factors and the uncertainty surrounding the level of economic activity in 2009 and beyond, the Company tested the carrying value of the stores' goodwill in December 2008 and determined that the carrying amount of the goodwill attributable to our store operations exceeded its implied fair value and recognized a non-cash impairment charge of $765,772. For purposes of its mid-December 2008 impairment test, the Company assumed that comparable store sales will decline by 6% in 2009 and increase by 2.5% per year thereafter and store operating expenses will continue at their current level as a percentage of store revenues. As a result of the economic uncertainty that currently exists, the Company's estimate of future cash flows did not include an estimate of the restaurant's terminal value since the Company cannot be certain that a buyer could be found for the restaurant at the end of the lease term. The present value of the estimated future cash flows was calculated using a 7% discount rate reflecting the recent decrease in long-term interest rates. Following the non-cash impairment charge, the carrying value of goodwill attributable to our store operations segment is $75,363 carrying amount of goodwill may be impaired in the future if our actual operating results and cash flows fall short of our expectations.

Executive Summary of Results
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 29,        March 30,
                                                        2009            2008
     Revenues:
     Store sales                                           85.9 %           94.4 %
     Franchise royalties and fees                          14.1              5.6
     Other revenue                                            -                -

                                                          100.0 %          100.0 %


     Costs and expenses:
     Store operating expenses (1):
     Cost of food and paper products (2)                   32.9 %           34.4 %
     Cost of goods sold                                     8.3             12.2
     Labor                                                 33.3             31.7
     Occupancy                                             14.2             11.7
     Other store operating expenses                        17.3             20.4
     General and administrative expenses                   68.2            112.0
     Advertising, marketing and promotion expenses          3.5             13.9
     Depreciation and amortization                          8.2              9.4
     Loss on disposal of assets                             0.4              0.2

     Total costs and expenses                             167.9            233.7


     Operating loss                                       (67.9 )         (133.7 )


     Other income (expense):
     Other income                                           6.7                -
     Interest income                                        0.3              1.2
     Interest expense                                      (1.2 )           (2.0 )

     Other income (expense), net                            5.8             (0.8 )


     Loss before income taxes                             (62.1 )         (134.5 )
     Income taxes                                             -                -


     Net loss                                             (62.1 )%        (134.5 )%

(1) As a percentage of store sales.
(2) As a percentage of only restaurant sales.

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 29,           March 30,
                                                   2009               2008
       Company-owned locations:
       Locations at the beginning of the year            5                   4
       Locations opened                                  -                   -
       Locations closed (1)                              1                   -
       Locations sold                                    -                   -
       Locations transferred                             -                   1

       Locations at the end of the period                4                   5


       Franchise-owned locations:
       Locations at the beginning of the year            5                   4
       Locations opened                                  3                   -
       Locations closed                                  -                   -
       Locations sold                                    -                   -
       Locations transferred (1)                         -                  (1 )

       Locations at the end of the period                8                   3


       System-wide locations
       Locations at the beginning of the year           10                   8
       Locations opened                                  3                   -
       Locations closed                                  1                   -
       Locations sold                                    -                   -
       Locations transferred                             -                   -

       Locations at the end of the period               12                   8

(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. This store was closed on March 27, 2009.

Three Months Ended March 29, 2009 Compared to Three Months Ended March 30, 2008 General
For the three months ended March 29, 2009, our comparable store sales for Company owned stores decreased by 12.4%. System-wide comparable store sales for the quarter decreased by 15.4%. The decrease in comparable store sales was primarily attributable to the economic downturn the whole nation is experiencing; in particular the restaurant industry has been affected by the reduction of discretionary income due to the historical high employment rates. Comparable store sales are based on sales for stores that have been in operation for the entire period of comparison. Comparable store sales exclude closed locations.
Results of Operations
Revenues
Total revenues for the three months ended March 29, 2009 decreased by $37,456, or 2.8%, to $1,288,110 from $1,325,566 from the three months ended March 30, 2008. The decrease in total revenues for the three months ended March 29, 2009, as compared to the prior year was primarily due to the decrease in comparable store sales for Company-operated stores, partially off set by the increase in franchise fees revenue.
Sales at Company-operated stores for the three months ended March 29, 2009 decreased by $145,207, or 11.6%, to $1,106,675 from $1,251,882 for the three months ended March 30, 2008. As a percentage of total revenues, sales at Company-operated stores decreased to 85.9% of total revenues for the three months ended March 29, 2009 from 94.4% of total revenues for the three months ended March 30, 2008. The decrease in sales at Company-operated stores for the three months ended March 29, 2009 was primarily due to the decrease in comparable store sales.
During the three months ended March 29, 2009, franchise royalties and fees increased $107,751, or 146.2% to $181,435 from $73,684 for the three months ended March 30, 2008 due to an increase in franchise fees for the opening of three new franchisee-owned stores, partially off set by the decrease in royalties. During the three months ended March 30, 2008, the Company did not recognize any franchise fees.

Costs and Expenses
Cost of food and paper products for the three months ended March 29, 2009 decreased by $29,875, or 8.5%, to $320,281 from $350,156 for the three months ended March 30, 2008. As a percentage of store sales, food and paper products decreased to 32.9% of store sales for the three months ended March 29, 2009 from 34.4% of store sales for the three months ended March 30, 2008. The decrease in food and paper products was primarily attributable to improved cost controls and slightly lower meat prices.
Labor expense for the three months ended March 29, 2009 decreased by $28,613, or 7.2%, to $368,850 from $397,463 for the three months ended March 30, 2008. The decrease in labor expense was primarily attributable to a reduction on total man hours worked. As a percentage of store sales, labor expense increased to 33.3% of store sales for the three months ended March 29, 2009 from 31.7% of store sales for the three months ended March 30, 2008. The increase in labor expense as a percentage of store sales for the three months ended March 29, 2009 was primarily due to the decrease in comparable store sales.
Occupancy costs for the three months ended March 29, 2009 increased by $10,539, or 7.2%, to $156,630 from $146,091 for the three months ended March 30, 2008. The increase in occupancy costs was primarily attributable to a increase in common area charges from our landlords, and during the three months ended on March 29, 2009 we were operating a franchisee-owned location pursuant to a management service agreement for three months versus only two months in the prior period. As a percentage of store sales, occupancy costs increased to 14.2% of store sales for the three months ended March 29, 2009 from 11.7% of store sales for the three months ended March 30, 2008. This increase is attributable to the decrease in comparable store sales.
Other store operating expenses for the three months ended March 29, 2009 decreased by $64,410, or 25.2%, to $191,330 from $255,740 for the three months ended March 30, 2008. The decrease in other store operating expenses was primarily due to a slight reduction in electricity and gas rates compared to the same period the prior year .The primary reason for the reduction of operating expenses was due to better operational controls. As a percentage of store sales, other store operating expenses decreased to 17.3% of store sales for the three months ended March 29, 2009 from 20.5% of store sales during the three months ended March 30, 2008.
General and administrative expenses for the three months ended March 29, 2009 decreased by $606,102 or 40.8%, to $878,286 from $1,484,388 for the three months ended March 30, 2008. The decrease in general and administrative expenses for the three months ended March 29, 2009 compared to the same period in the prior year is primarily due to the reduction in investor relations expenses, payroll, and consulting expenses. Also, in the prior year we had other costs associated with the settlement of a dispute with a former franchisee. As a result of the foregoing, general and administrative expenses decreased to 68.2% of total revenues during the three months ended March 29, 2009 from 112.0% of total revenues for the three months ended March 30, 2008.
Advertising, marketing and promotion expenses for the three months ended March 29, 2009 decreased by $139,599, or 75.8%, to $44,657 from $184,256 for the three months ended March 30, 2008. The decrease in advertising, marketing and promotion expenses was primarily due to the decrease in expenses incurred in connection with the planned conversion of franchisee-owned and company-operated stores operating under the KnowFat! tradename to stores operating under the UFood Grill tradename compared to the prior year. As a percentage of total revenues, advertising, marketing and promotion expenses decreased to 3.5% of total revenues in the three months ended March 29, 2009 from 13.9% of total revenues in the three months ended March 30, 2008.
Depreciation and amortization expense for the three months ended March 29, 2009 decreased by $19,027, or 15.2%, to $105,880 from $124,907 for the three months ended March 30, 2008. Depreciation and amortization expense decreased primarily due to a reduction in assets resulting from a non-cash impairment of long-lived assets charge of $1,249,150 recorded during the fourth quarter of 2008. As a percentage of total revenues, depreciation and amortization expense decreased to 8.2% of total revenues for the three months ended March 29, 2009 from 9.4% of total revenues for the three months ended March 30, 2008.
Net other income for the three months ended March 29, 2009 increased by $85,018, to $74,291 income, from $10,727 expense for the three months ended March 30, 2008. As a percentage of total revenues, net other income increased to 5.8% of total revenues for the three months ended March 29, 2009 from 0.8% of total revenues for the three months ended March 30, 2008. The increase in net other income was primarily due to the change in the value of the warrant liability and the decrease of interest payments due to lower debt amount this year than the prior year for the same period.
Our net loss for the three months ended March 29, 2009 decreased by $982,608, or 55.1%, to $800,430, from $1,783,038 for the three months ended March 30, 2008. Our net loss decreased primarily due to the decrease in general and administrative expenses , advertising, marketing and promotion expenses As a percentage of total revenues, our net loss decreased to 62.1% of total revenues for the three months ended March 29, 2009 from 134.5% of total revenues for the three months ended March 30, 2008.

Liquidity and Capital Resources
Cash and cash equivalents and restricted cash at March 29, 2009 were $2,975,092 compared to $1,205,041 at December 28, 2008. 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. During the three months ended March 29, 2009, the Company sold $3,315,000 of Senior Secured Convertible Debentures (the Debentures) in a private offering to accredited investors. The Company received net cash proceeds of approximately $2,844,050. The debentures bear interest at a rate of 8% and are due three years from the date they are issued. The Debentures are convertible into shares of common stock at $0.13 per share. In addition, each investor will receive 5-year detachable Warrants to purchase a number of shares of Common Stock equal to 50% of the shares underlying the Investor's Debenture. Interest on the Debentures bear a rate of 8% per annum and is payable on a quarterly basis. Subject to certain conditions, the Company has the right to pay interest on the Debentures in either cash or shares of Common Stock, or in a combination of cash and Common Stock. At March 29, 2009, we had working capital of $1,023,043 compared to negative working capital of $1,085,995 at December 28, 2008. The increase in working capital was primarily due to an increase in cash and cash equivalents due to net cash proceeds received from the Senior Secured Convertible Debentures in the amount of $3,315,000. We used $1,434,076 of cash to fund our operating activities in the three months ended March 29, 2009 compared with $1,685,001 of cash used to fund our operating activities in three months ended March 30, 2008. The decrease in cash used to fund our operating activities was primarily due to reductions in operating losses, accounts receivable, and prepaids mostly off set by an increase in financing costs, and a reduction in franchisee deposits, and a reduction in accrued expenses and other liabilities. During the three months ended March 29, 2009, we spent $2,417 for the acquisition of equipment compared with $35,368 spent for the acquisition of equipment during the three months ended March 30, 2008. During the three months ended March 29, 2009, financing activities provided $3,546,363 of cash, primarily due to cash proceeds received from the sale of Senior Secure Convertible Debentures described above and the release and usage of restricted cash partially offset by payments on long-term debt. During the three months ended March 30, 2008, the financing activities provided $2,384,915 primarily due to the sale of 2,291,000 units of our securities. 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.
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 . . .