DATED APRIL 15, 2008

PROSPECTUS

 

 

Spicy Pickle Franchising, Inc.

12,968,750 Shares of Common Stock

This prospectus relates to 12,968,750 shares of our common stock, par value $0.001 per share, that may be sold from time to time by the selling shareholders listed under the caption “Selling Shareholders.” We will receive no proceeds from the sales of shares made by selling shareholders. The selling shareholders may sell those shares from time to time in the public securities market. The selling shareholders may determine the prices at which they will sell the common stock, which prices may be the market prices prevailing at the time of such sale or some other price. See "Plan of Distribution."

Our common stock is traded on the OTC Bulletin Board (the “OTCBB”) under the symbol “SPKL.” On March 25, 2008, the last reported sale price of our common stock was $0.80 per share.

AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 3.

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. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. NO ONE IS ALLOWED TO DISTRIBUTE THE COMMON STOCK OFFERED BY THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT THAT WE HAVE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL OUR COMMON STOCK - AND DOES NOT SOLICIT OFFERS TO BUY - IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

Summary of the Offering
The Company		We formed in 2003 as Spicy Pickle Franchising, LLC. On September 8, 2006, we converted from a Colorado limited liability company to a Colorado corporation and changed our name to Spicy Pickle Franchising, Inc. to reflect our legal structure.
		Our executive offices are located at 90 Madison Street, Suite 700, Denver, Colorado 80206, and our telephone number is (303) 297-1902. Our Internet site is www.spicypickle.com.
Capital Structure		We are authorized to issue 200,000,000 shares of common stock, with a par value of $0.001 per share, and 20,000,000 shares of preferred stock, with a par value of $0.001 per share. As of March 25, 2008, we had 47,936,553 shares of common stock outstanding and 680 shares of Series A Preferred Stock outstanding. At their initial conversion price, the outstanding shares of Series A Preferred Stock convert, at the option of the holders, to a maximum of 6,800,000 shares of our common stock. In connection with the issuance of the Series A Preferred Stock, we issued warrants to purchase up to a maximum of 5,287,500 shares of our common stock. We also have reserved 7,662,500 shares of our common stock that may be issued at our option for the payment of dividends on the Series A Preferred Stock in lieu of cash. We also have issued 5,215,000 stock options to officers, employees and directors for the purchase of our common stock.
The Offering		The selling shareholders are offering: (a) 6,800,000 shares of common stock issuable upon conversion of currently outstanding Series A Preferred Stock, (b) 5,287,500 shares of common stock issuable upon exercise of currently outstanding common stock purchase warrants, and (c) 881,250 shares of common stock issuable upon payment of dividends on the Series A Preferred Stock in shares in lieu of cash through December 14, 2010.
Trading Market		OTCBB under the symbol “SPKL”
Offering Period		We are registering the selling shareholders’ shares under a shelf registration to allow the selling shareholders the opportunity to sell their shares. The shares of common stock being registered include such indeterminate number of shares of common stock as may be issuable with respect to the shares of common stock being registered hereunder as a result of stock splits, stock dividends or similar transactions. The shares of common stock being registered do not include additional shares of common stock issuable as a result of changes in market price of the common stock, issuance by us of shares of equity securities below a certain price or other anti-dilutive adjustments or variables not covered by Rule 416 (“Rule 416”) under the Securities Act of 1933, as amended (“Securities Act”).
Risk Factors		The shares being offered are speculative and involve very high risks, including those listed in "Risk Factors."
Net Proceeds		We will not receive any proceeds from the sale of any shares by selling shareholders. However, we may receive up to an aggregate of $8,460,000 from the exercise by selling shareholders of warrants to purchase the common stock we are registering under this registration statement.
Use of Proceeds		We expect to use any cash proceeds we receive from the exercise of warrants by selling shareholders for general working capital purposes.

Statement of Operations Data		Year Ended  December 31,
		2007			2006
Revenues		$	1,273,993		$	892,009
Operating expenses		$	4,909,092		$	2,305,536
Net income (loss)		$	(3,601,884	)	$	(1,382,985	)
Weighted average shares outstanding			44,315,486			36,514,512
Net income (loss) per common share basic and fully diluted		$	(0.08	)	$	(0.04	)
Cash flow used in operations		$	(2,425,198	)	$	(590,640	)
Cash and cash equivalents (end of period)		$	5,405,069		$	1,198,982
Balance Sheet Data
Total current assets		$	5,701,439		$	1,323,719
Total assets		$	6,440,059		$	1,481,808
Total current liabilities		$	1,303,223		$	889,963
Total stock holders equity		$	5,136,836		$	591,845

RISK FACTORS

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

RISKS RELATING TO OUR BUSINESS

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

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

 

We also expect that our operating expenses will continue to increase as a result of having become a public company in 2007. We cannot assure you that we will be profitable or generate sufficient profits from operations in the future. If our revenue growth does not continue, we may experience a loss in one or more future periods. We may not be able to reduce or maintain our expenses in response to any decrease in our revenue, which may impact our ability to implement our business strategy and adversely affect our financial condition. This would also have a negative impact on our share price.

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

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

 

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

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

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

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

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

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

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

We are a high-risk early stage company.

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

	·	continue to expand the number of franchise and corporate locations;
	·	attract and maintain customer loyalty;
	·	continue to establish and increase brand awareness;
	·	provide products to customers at attractive prices;
	·	establish and maintain relationships with strategic partners and affiliates;
	·	rapidly respond to competitive developments;

 

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	·	build an operations and customer service structure to support our business; and
	·	attract, retain and motivate qualified personnel.

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

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

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

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

	·	the nature, timing and sufficiency of disclosures to franchisees upon the initiation of the franchisor-potential franchisee relationship;
	·	our conduct during the franchisor-franchisee relationship; and
	·	renewals and terminations of franchises.

 

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

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

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

RISKS RELATING TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK

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

The market price of our common stock has fluctuated significantly in the past. Our common stock started trading on the OTCBB under the symbol “SPKL” on August 20, 2007. Since it started trading, the high and low prices of a share of our common stock have been $2.02 and $0.48, respectively. On March 25, 2008, the last reported sale price of a share of our common stock was $0.80. The market price of our common stock may continue to fluctuate in response to the following factors, in addition to others, many of which are beyond our control:

 

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	·	conversion of our Series A Preferred Stock and exercise of our warrants and the sale of their underlying common stock;
	·	changes in market valuations of similar companies and stock market price and volume fluctuations generally;
	·	economic conditions specific to the industries within which we operate;
	·	announcements by us or our competitors of new franchises, food products or marketing partnerships;
	·	actual or anticipated fluctuations in our operating results;
	·	changes in the number of our franchises; and
	·	loss of key employees.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition" and "Description of Business," contains forward-looking statements.

Forward-looking statements include, but are not limited to, statements about:

 

	·	the risk of failing to sell sufficient Spicy Pickle franchises;
	·	the risk of failing to locate appropriate store locations for franchisees; and
	·	the risk of lack of customer and market acceptance of Spicy Pickle restaurant offerings.

 

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

You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with information that is different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. The information presented on, or that can be accessed through, our website is not a part of this prospectus. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume the information appearing in this prospectus is accurate only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

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USE OF PROCEEDS

We will not receive any of the proceeds from the sale of the shares of common stock offered under this prospectus by the selling shareholders. Rather, the selling shareholders will receive those proceeds directly.

Upon exercise of the warrants issued to the purchasers of the Series A Preferred Stock, the underlying shares of common stock of which are offered for sale hereunder, we expect to receive aggregate proceeds of approximately $8,460,000. We expect to use any cash proceeds from the exercise of warrants for general working capital purposes.

SELLING SHAREHOLDERS

We are registering 12,968,750 shares of common stock that the selling shareholders may acquire upon conversion of the Series A Preferred Stock, exercise of warrants or payment of dividends on the Series A Preferred Stock in shares of common stock. The shares of common stock being registered include such indeterminate number of shares of common stock as may be issuable with respect to the shares of common stock being registered hereunder only as a result of stock splits, stock dividends or similar transactions. The shares of common stock being registered do not include additional shares of common stock issuable as a result of changes in market price of the common stock, issuance by us of equity securities below a certain price or other anti-dilutive adjustments or variables not covered by Rule 416. All shares that may be issued will be restricted securities as that term is defined in Rule 144 under the Securities Act, and will remain restricted unless and until such shares are sold pursuant to this prospectus, or otherwise are sold in compliance with Rule 144.

 

No shareholder may offer or sell shares of our common stock under this prospectus unless such shareholder has notified us of such shareholder’s intention to sell shares of our common stock and the registration statement of which this prospectus is a part has been declared effective by the SEC and remains effective at the time such selling shareholder offers or sells such shares. We are required to amend the registration statement of which this prospectus is a part to reflect material developments in our business and current financial information. Each time we file a post-effective amendment to our registration statement with the SEC, it must first become effective prior to the offer or sale of shares of our common stock by the selling shareholders.

The table below lists the selling shareholders and other information regarding the beneficial ownership of shares of common stock by the selling shareholders. The second column lists the number of shares of common stock beneficially owned by each selling shareholder as of March 25, 2008, which includes the shares of common stock issuable upon conversion of all shares of the Series A Preferred Stock and exercise of all warrants held on that date, without regard to any limitations on conversion or exercise, and shares of common stock that the Company could issue as dividends on the Series A Preferred Stock in lieu of cash through December 14, 2010.  The third column lists the number of shares of common stock being offered by this prospectus by the selling shareholders. The fourth column lists the number of shares of common stock that will be beneficially owned by the selling shareholders after this offering assuming that all of the shares offered pursuant to this prospectus are sold and that other shares of common stock beneficially owned by them as of March 25, 2008 but not offered under this prospectus are not sold.

For purposes of illustration only, the following table assumes that all of the selling shareholders will sell all of the shares they are offering under this prospectus. Alternatively, these shareholders may choose not to sell any shares currently held by them, or they may sell some lesser portion of their holdings. In these three possible circumstances, respectively, the selling shareholders would then own no shares, all of the shares they currently hold, or some number of shares less than the number of shares they currently hold.

The common stock covered by this prospectus is to be offered for the account of the following selling shareholders listed below. All positions, offices and material relationships that any selling shareholder has had with us or any of our predecessors or affiliates in the past three years are disclosed in footnotes to the table.

 

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Name of Selling Shareholder		Number of Shares Owned Before Offering			Number of Shares Being Offered (1)			Number of Shares Owned After Offering (2)			Percent of Shares Owned After Offering (3)
Enable Growth Partners LP (4)			6,393,750			6,393,750			-			-
Enable Opportunity Partners LP (4)			1,106,250			1,106,250			-			-
Pierce Diversified Strategy Master Fund LLC, ena (4)			225,000			225,000			-			-
Presley Reed and Patricia Stacey Reed (5)			5,015,986			2,250,000			2,765,986			4.54	%
Steven and Judith Combs (6)			605,707			225,000			380,707			*
MarketByte LLC Defined Benefit Plan Trust (7)			415,000			225,000			190,000			*
Marilyn D. Herter Trust (8)			425,000			225,000			200,000			*
Desert Lake Advisors Inc. Defined Benefit Plan (9)			325,000			225,000			100,000			*
David Andrew Piper and Deborah Cooke-Smith (10)			243,000			225,000			18,000			*
Raymond J. BonAnno and Joan E. BonAnno (11)			2,660,445			225,000			2,435,445			3.99	%
Keith and Angela Oxenreider (12)			225,000			225,000			-			-
R. James BonAnno, Jr. (13)			225,000			225,000			-			-
Mark Abdou (14)			385,606			318,750			66,856			*
Bristol Investment Fund, Ltd. (15)			875,000			875,000			-			-
			19,185,744			12,968,750			6,156,994

 

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* Less than one percent

	(1)	Except as otherwise indicated, 53.33% of such shares represent shares issuable upon conversion of the selling shareholder’s Series A Preferred Stock at the initial conversion price of $0.85 per share, 40.00% of such shares represent shares issuable upon exercise of such shareholder’s warrants, and 6.67% of such shares represent shares issuable as dividends on such shareholder’s Series A Preferred Stock in lieu of cash through December 14, 2010.
	(2)	Assumes that all of the shares offered under this prospectus by the selling shareholders are sold and that shares owned by such shareholder before this offering but not offered by this prospectus are not sold.
	(3)	All percentages of shares outstanding after the offering are based on 47,936,553 shares of common stock outstanding as of March 25, 2008, plus 12,968,750 additional shares of common stock outstanding assuming conversion of all shares of the Series A Preferred Stock, exercise of all warrants held by the selling shareholders, and the payment of future dividends on the Series A Preferred Stock in shares of common stock in lieu of cash through December 14, 2010, and all other shares of common stock subject to options, warrants and convertible securities within 60 days of March 25, 2008 are deemed to be outstanding for computing the percentage of the person holding such options, warrants or convertible securities but are not deemed to be outstanding for computing the percentage of any other person.
	(4)	Mitch Levine has voting and investment power over the shares registered in the name of Enable Growth Partners LP, Enable Opportunity Partners LP and Pierce Diversified Strategy Master Fund LLC, ena. These selling shareholders have contractually agreed to restrict their ability to convert their Series A Preferred Stock or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates in the aggregate after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock as determined in accordance with Section 13(d) of the Exchange Act. In light of that restriction, the number of shares of common stock set forth in the table for these selling shareholders exceeds the number of shares of common stock that they could own beneficially at any one time through their ownership of the Series A Preferred Stock and the warrants.
	(5)	Presley Reed is a director of the Company. Includes 1,544,578 shares owned jointly by Presley and Patricia Reed, 1,146,408 shares owned by the Presley Reed 1999 Family Trust, of which Patricia Reed is the beneficiary, 1,200,000 shares based on conversion of Series A Preferred Stock owned jointly by Mr. Reed and his wife, 900,000 shares based on exercise of warrants jointly owned by Mr. Reed and his wife, 150,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock owned jointly by Mr. Reed and his wife, and 75,000 shares based on options exercisable within 60 days of March 25, 2008 owned by Mr. Reed.
	(6)	Includes 380,707 shares owned jointly by Steven and Judith Combs, 120,000 shares based on conversion of Series A Preferred Stock jointly owned by Steven and Judith Combs, 90,000 shares based on exercise of warrants jointly owned by Steven and Judith Combs, and 15,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock jointly owned by Steven and Judith Combs.

 

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(7)

Lawrence D. Isen has voting and investment power over the shares registered in the name of the MarketByte LLC Defined Benefit Plan Trust. Includes 190,000 owned by the MarketByte LLC Defined Benefit Plan Trust,   120,000 shares based on conversion of Series A Preferred Stock owned by the MarketByte LLC Defined Benefit Plan Trust, 90,000 shares based on exercise of warrants owned by the MarketByte LLC Defined Benefit Plan Trust, and 15,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock owned by the MarketByte LLC Defined Benefit Plan Trust.

	(8)	Marilyn D. Veigel has voting and investment power over the shares registered in the name of the Marilyn D. Herter Trust. Includes 200,000 shares owned by the Marilyn D. Herter Trust, 120,000 shares based on conversion of Series A Preferred Stock owned by the Marilyn D. Herter Trust, 90,000 shares based on exercise of warrants owned by the Marilyn D. Herter Trust, and 15,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock owned by the Marilyn D. Herter Trust.
	(9)	Thomas P. Dobron has voting and investment power over the shares registered in the name of the Desert Lake Advisors Inc. Defined Benefit Plan. Includes 100,000 owned by the Desert Lake Advisors Inc. Defined Benefit Plan, 120,000 shares based on conversion of Series A Preferred Stock owned by the Desert Lake Advisors Inc. Defined Benefit Plan, 90,000 shares based on exercise of warrants owned by the Desert Lake Advisors Inc. Defined Benefit Plan, and 15,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 owned by the Desert Lake Advisors Inc. Defined Benefit Plan.

	(10)		Includes 18,000 shares owned by Deborah Cooke-Smith, 120,000 shares based on conversion of Series A Preferred Stock jointly owned by David Andrew Piper and Deborah Cooke-Smith, 90,000 shares based on exercise of warrants jointly owned by David Andrew Piper and Deborah Cooke-Smith, and 15,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock jointly owned by David Andrew Piper and Deborah Cooke-Smith.
	(11)		Raymond BonAnno is a director of the Company. Includes 2,360,445 shares owned of record by the BonAnno Family Partnership, over which Raymond BonAnno has voting and dispositive power, 120,000 shares based on conversion of Series A Preferred Stock jointly owned by Raymond J. and Joan E. BonAnno, 90,000 shares based on exercise of warrants jointly owned by Raymond J. and Joan E. BonAnno, 15,000 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock jointly owned by Raymond J. and Joan E. BonAnno, and 75,000 shares based on options exercisable within 60 days of March 25, 2008 owned by Mr. BonAnno.
	(12)		Keith and Angela Oxenreider are the son-in-law and daughter, respectively, of Raymond BonAnno.
	(13)		R. James BonAnno, Jr. is the son of Raymond BonAnno.
	(14)		Mark Abdou is a partner of the law firm Richardson & Patel LLP, our legal counsel. Includes 8,705 shares owned by Mr. Abdou, 58,151 shares owned by Richardson and Patel LLP, 170,000 shares based on conversion of Series A Preferred Stock owned by Mr. Abdou, 127,500 shares based on exercise of warrants owned by Mr. Abdou, and 21,250 shares based on payment of dividends in shares in lieu of cash through December 14, 2010 on Series A Preferred Stock owned by Mr. Abdou.
	(15)		Of the shares being offered, 40.00% of such shares represent shares issuable upon conversion of the selling shareholder’s Series A Preferred Stock at the initial conversion price of $0.85 per share, 51.43% of such shares represent shares issuable upon exercise of such shareholder’s warrants, and 8.57% of such shares represent shares issuable as dividends on such shareholder’s Series A Preferred Stock in lieu of cash through December 14, 2010. Paul Kessler has voting and investment power over the shares registered in the name of Bristol Investment Fund, Ltd.

PLAN OF DISTRIBUTION

Each selling shareholder of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTCBB or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling shareholder may use any one or more of the following methods when selling shares:

 

	·	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;
	·	an exchange distribution in accordance with the rules of the applicable exchange;
	·	privately negotiated transactions;
	·	settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
	·	broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share;
	·	through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
	·	a combination of any such methods of sale; or

 

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any other method permitted pursuant to applicable law.

The selling shareholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

Broker-dealers engaged by the selling shareholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

In connection with the sale of the common stock or interests therein, the selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling shareholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The selling shareholders 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 received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling shareholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the selling shareholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

Because selling shareholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling shareholders.

We have agreed to keep this prospectus effective until the earlier of the date on which (i) the shares may be resold by the selling shareholders without registration and without regard to any volume limitations by reason of Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling shareholders or any other person. We will make copies of this prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS

Our executive officers and directors are as follows:

 

Name		Age		Position
Marc N. Geman		62		Chairman and Chief Executive Officer
Anthony S. Walker		36		Director and Chief Operating Officer
Kevin Morrison		43		Chief Culinary Officer
Arnold Tinter		62		Chief Financial Officer
Raymond BonAnno		67		Director
Presley Reed		61		Director
L. Kelly Jones		54		Director

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial ownership of our capital stock as of March 25, 2008 by (i) each person known by us to be the beneficial owner of more than five percent of the outstanding common stock, (ii) each director, (iii) each named executive officer, and (iv) all directors and executive officers as a group.

The number of shares beneficially owned is determined under the rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power and any shares that the person has the right to acquire within 60 days of March 25, 2008, through the exercise or conversion of any stock option, convertible security, warrant or other right. Including those shares in the table does not, however, constitute an admission by the named shareholder that the shareholder is a direct or indirect beneficial owner of those shares.

Unless otherwise indicated, each person named in the table has sole voting power and investment power (or shares that power with that person's spouse) with respect to all shares of capital stock listed as owned by that person. Unless otherwise indicated, the address of each of the following persons is 90 Madison Street, Suite 700, Denver, Colorado 80206. All percentages of common stock beneficially owned by the listed persons are based upon 47,936,553 shares of common stock outstanding at March 25, 2008, and shares of common stock subject to options, warrants and convertible securities within 60 days of March 25, 2008 are deemed to be outstanding for computing the percentage of the person holding such options, warrants or convertible securities but are not deemed to be outstanding for computing the percentage of any other person.

Title of Class		Name and Address of Beneficial Owner			Amount and Nature of Beneficial Ownership			Percent of Class
Common Stock		Marc Geman (1)				7,088,934			14.49	%
Common Stock		Anthony Walker (2)				6,485,712			13.45	%
Common Stock		Kevin Morrison (3)				5,921,038			12.28	%
Common Stock		L. Kelly Jones (4)				644,500			1.34	%
Common Stock		Raymond BonAnno (5)				2,645,445			5.49	%
Common Stock		Presley Reed (6)				4,865,986			9.71	%
Common Stock		Arnold Tinter (7)				1,025,000			2.09	%
Common Stock		EWM Investments (8)				4,122,300			8.60	%
Common Stock		All Directors and Executive Officers as a Group (7 persons)				28,676,615			54.01	%
Preferred Stock		Raymond BonAnno				12			1.76	%
Preferred Stock		Presley Reed				120			17.65	%

 

 

* Less than one percent 

(1)	Includes 1,000,000 shares based on options exercisable within 60 days of March 25, 2008.
(2)	Includes 300,000 shares based on options exercisable within 60 days of March 25, 2008.
(3)	Includes 300,000 shares based on options exercisable within 60 days of March 25, 2008.
(4)	Includes 50,000 shares owned by Jones and Cannon, a law firm in which Mr. Jones is a partner, and 75,000 shares based on options exercisable within 60 days of March 25, 2008.
(5)	Includes 2,360,445 shares owned of record by the BonAnno Family Partnership; Raymond BonAnno has voting and dispositive power over such shares, 120,000 shares based on conversion of Series A Preferred Stock owned jointly by Mr. BonAnno and his wife, 90,000 shares based on exercise of warrants jointly owned by Mr. BonAnno and his wife, and 75,000 shares based on options exercisable within 60 days of March 25, 2008.

(6)	Includes 1,544,578 shares owned jointly by Presley and Patricia Reed, 1,146,408 shares owned by the Presley Reed 1999 Family Trust, of which Patricia Reed, Mr. Reed’s wife, is the beneficiary, 1,200,000 shares based on conversion of Series A Preferred Stock owned jointly by Mr. Reed and his wife, 900,000 shares based on exercise of warrants jointly owned by Mr. Reed and his wife, and 75,000 shares based on options exercisable within 60 days of March 25, 2008.
(7)	Includes 1,025,000 shares based on options exercisable within 60 days of March 25, 2008.
(8)	Ernest Moody has sole voting and dispositive power over the shares owned of record by EWM Investments.

In connection with the sale of the Series A Preferred Stock, the Company adopted a Certificate of Designation of Preferences, Rights and Limitations of Series A Variable Rate Convertible Preferred Stock (the “Certificate of Designation”) on December 14, 2007. The Certificate of Designation designates up to 705 shares of Series A Preferred Stock, and each share of Series A Preferred Stock has a stated value equal to $8,500 (the “Stated Value”). 

The Certificate of Designation provides that the Series A Preferred Stock is further subject to the following rights and preferences:

The Company shall pay each holder of Series A Preferred Stock cumulative dividends at a rate per share of 5% per annum until the second anniversary of the original issue date, 7.5% per annum from the second anniversary of the original issue date until the third anniversary of the original issue date, and 14% per annum thereafter, payable semi-annually on January 1 and July 1, beginning on July 1, 2008, and upon conversion or redemption of the Series A Preferred Stock. Such dividends are payable in cash or, at the Company’s option, in shares of common stock or a combination thereof.

Except as otherwise provided in the Certificate of Designation or as required by law, the Series A Preferred Stock have no voting rights. Without the affirmative vote of 65% or more of the then-outstanding shares of Series A Preferred Stock, the Company may not authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation of the Company senior to or otherwise pari passu with the Series A Preferred Stock, adversely affect any rights of the holders of Series A Preferred Stock, or increase the number of authorized shares of Series A Preferred Stock.

Each share of Series A Preferred Stock is convertible, at any time after the original issue date, at the option of the holder of such share, into that number of shares of common stock determined by dividing the Stated Value by the conversion price for the Series A Preferred Stock. The conversion price for the Series A Preferred Stock is $0.85, subject to adjustment as provided in the Certificate of Designation.

Subject to certain restrictions as provided in the Certificate of Designation, the Company may redeem some or all of the then-outstanding Series A Preferred Stock for cash in an amount provided in the Certificate of Designation. The Company may redeem the Series A Preferred Stock at any time after the date on which a registration statement registering for resale the shares of common stock into which the shares of Series A Preferred Stock are convertible is declared effective by the SEC.

 

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR

SECURITIES ACT LIABILITIES

Our Articles of Incorporation and Bylaws provide that we shall indemnify our directors and officers to the fullest extent permitted under Colorado law. Our Board of Directors is obtaining quotations on the cost of an insurance policy covering officers and directors for claims made that such officers and directors may otherwise be required to pay for or for which we would be required to indemnify them, subject to certain exclusions.

Insofar as indemnification for liability arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to our Articles and Bylaws, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

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DESCRIPTION OF BUSINESS

 

Our sole business is the franchise and operation of Spicy Pickle restaurants. Spicy Pickle is a fast casual restaurant where made-to-order panini, submarine-style sandwiches, pizzetti (Neapolitan thin crust pizza), and salads created by our founders are served using fresh-baked breads and high-quality ingredients.

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

Our franchisees must qualify on the basis of considerable experience in other management and food service ventures and should have liquid assets of at least $150,000. Franchise fees are $35,000 for the first restaurant and $20,000 for additional locations. Fees for additional locations are lower because the training and grand opening are handled by the experienced franchisee, although these services are still available for purchase from us if desired. Area development agreements are available to selected franchisees that wish to secure a territory for future development ($10,000 per store is pre-paid and the balance of $10,000 is paid when the area developer is ready to begin build-out for each new site).

 

Franchisees pay Spicy Pickle a 5% royalty on weekly gross sales and an additional 2% to support national and regional marketing efforts that produce brand development, agency support, point of purchase materials and print and broadcast advertising. In addition, we require franchisees to dedicate at least 1% of sales to local advertising. The estimated initial cost of a Spicy Pickle franchise is approximately $440,000 and varies based on location. Each location has an end-cap/in-line of approximately 2,000 square feet and seating for 30-50 guests inside with additional outdoor seating as available.

 

Spicy Pickle has been recognized nationally and in its local markets as a purveyor of fast casual food to watch. The December 2006 and 2007 issues of Fast Casual Magazine feature Spicy Pickle as numbers 54 and 25, respectively, in its list of “2006 Top 100 Movers and Shakers” and “2007 Top 100 Movers and Shakers,” respectively. National Restaurant News selected Spicy Pickle as one of its 2006 Hot Concepts!

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

Industry Background

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

Growth Strategy

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

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

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

As part of our growth strategy, in addition to our franchised restaurants, we will operate company-owned restaurants. In February 2008, we purchased a partial interest in a Spicy Pickle restaurant from a franchisee. In March 2008, we purchased three restaurants from another franchisee. Also in March 2008, we purchased a restaurant located in Chicago from another franchisee. Currently, we also have two restaurants under construction in Colorado. We intend to continue to either build or acquire new restaurants in the future. There are no other acquisition agreements in place at this time.

 

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Results of Operations

Operating Statistics

The following analysis shows operating statistics for the years ended December 31, 2007 and 2006:

		2007						2006
Revenues:		Amount			As a Percentage of Total Revenue			Amount			As a Percentage of Total Revenue
Restaurant and bakery sales		$	30,730			2.41	%	$	409,018			45.85	%
Franchise fees and royalties			1,243,263			97.59	%		482,991			54.15	%
Total revenue		$	1,273,993			100.00	%	$	892,009			100.00	%
Operating costs and expenses:
Restaurant:					As a Percentage of Restaurant Sales						As a Percentage of Restaurant Sales
Cost of sales		$	30,383			98.87	%	$	160,728			39.30	%
Labor			33,137			107.83	%		154,619			37.80	%
Occupancy			44,423			144.56	%		67,951			16.61	%
Other operating cost			42,551			138.47	%		50,582			12.37	%
Total restaurant operating expenses		$	150,494			489.73	%	$	433,880			106.08	%
Franchise and general:					As a Percentage of Franchise Fees and Royalties						As a Percentage of Franchise Fees and Royalties
Cost of sales		$	-			-		$	18,510			3.83	%
General and administrative			4,735,854			380.92	%		1,834,571			379.84	%
Depreciation			22,744			1.83	%		18,575			3.85	%
Total franchise and general expenses		$	4,758,598			382.75	%	$	1,871,656			387.52	%
					As a Percentage of Total Revenue						As a Percentage of Total Revenue
Total operating costs and expenses		$	4,909,092			385.33	%	$	2,305,536			258.47	%
(Loss) from operations			(3,635,099	)		(285.33	)%		(1,413,527	)		(158.47	)%
Other income and (expense):
Interest income			51,252			4.02	%		29,556			3.31	%
Other income (expense)			(18,037	)		(1.42	)%		986			0.11	%
Total other income and (expense)			33,215			2.60	%		30,542			3.42	%
Net (loss)		$	(3,601,884	)		(282.72	)%	$	(1,382,985	)		(155.04	)%

DESCRIPTION OF PROPERTY

We do not own any real property. We lease all of the real properties we use in our business. The table below sets forth information regarding each of those properties as of March 25, 2008. We believe that each of our leased facilities is suitable for the operations we conduct in it.

 

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Use		Location			Current Monthly Rent			Square Footage			Remaining Term (in years) Including Expected Renewal Period			Comments
Corporate headquarters			90 Madison St. Denver, CO		$	7,964			10,159			4.58			Rent increases in 2008 and 2009.
Restaurant and bakery			1298 S. Broadway Denver, CO		$	4,081			3,481			9.17			Rent increases in 2012.
Restaurant			10320 Federal Heights Blvd. #200 Federal Heights, CO		$	3,958			1,453			11.67			Rent increases each year. Includes 2 five-year renewals.
Restaurant			8923 E. Union Ave. Greenwood Village, CO		$	1,909			1,516			12.75			Rent increases each year. Includes 2 five-year renewals.
Restaurant			2043 S. University Blvd. Denver, CO		$	3,740			2,200			8.42			Rent increases each year. Includes 2 five-year renewals.
Restaurant			123 N. College Ave. Ft. Collins, CO		$	3,635			1,848			18.83			Includes 3 five-year options.
Restaurant			2312 N. Lincoln Ave. Chicago, IL		$	4,096			1,200			4.08			Rent increases each year.
Restaurant (under construction)			2120 E. Harmony Rd. #101 Ft. Collins, CO		$	4,650			1,800			10.83			Includes 1 five-year option.
Restaurant (under construction)			2300 Parker Rd. Aurora, CO		$	5,250			1,800			10.00			Rent increases each year.

Name and Principle Position		Year			Salary ($)			Bonus ($)			Stock Awards ($)			Option Award ($)			Non equity Incentive Plan compensation ($)			Nonqualified Deferred Compensation earnings ($)			All other Compensation ($)			Total  ($)
(a)		(b)			(c)			(d)			(e)			(f)			(g)			(h)			(i)			(j)
Marc Geman Chief Executive Officer			2007 2006			150,000 79,500			73,000 90,000			- -			95,561 -			- -			- -			- -			318,561 169,500
Arnold Tinter Chief Financial Officer			2007 2006			135,000 15,000			25,000 -			25,000			101,837 -			- -			- -			- -			261,837 40,000
Anthony Walker Chief Operating Officer			2007 2006			100,000 63,433			10,000 -			- -			48,843 -			- -			- -			- -			158,843 63,433

(1)	In August 2006, Mr. Geman received an increase in his salary to $150,000 per annum. Under Mr. Geman’s employment agreement, an increase to $360,000 per annum has been implemented. Bonuses awarded in 2006 and 2007 were granted by the compensation committee of the Board of Directors. Mr. Geman receives no compensation for his services as a director.
(2)	From September 2006 to July 2007, Mr. Tinter was compensated as an independent contractor at the rate of $5,000 per month. Subsequent to July 1, 2007, Mr. Tinter became a full-time employee of our Company and under a verbal agreement received $12,500 per month as compensation. The bonus awarded in 2007 was granted by the compensation committee of the Board of Directors.
(3)	In September 2006, Mr. Walker’s salary increased to $109,000 per annum. Under Mr. Walker’s employment agreement, an increase to $150,000 per annum has been implemented. Mr. Walker receives no compensation for his services as a director.

Name		Number of securities underlying unexercised options (#) exercisable			Number of securities underlying unexercised options (#) unexercisable			Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)			Option exercise price ($)			Option expiration date
(a)		(b)			(c)			(d)			(e)			(f)
Marc Geman			500,000	1		-			-		$	0.6325			9/20/12
			-			500,000	2				$	1.2600			12/14/12
Arnold Tinter			50,000	3		150,000	4		-		$	0.2500			1/25/12
			400,000	1		-			-		$	0.5750			9/20/12
			-			500,000	2		-		$	1.1500			12/14/12
Anthony Walker			300,000	1		-			-		$	0.6325			9/20/12

 

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(1)

Options vested September 29, 2007.

	(2)	100% of the options vest June 14, 2008.
	(3)	Options vested January 25, 2007.
	(4)	75,000 options vest January 25, 2008 and 75,000 options vest January 25, 2009.

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

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

Name		Fees earned or paid in cash ($)			Stock awards ($)			Option awards ($)			Non-equity incentive plan compensation ($)			Nonqualified deferred compensation earnings ($)			All other compensation ($)			Total ($)
(a)		(b)			(c)			(d)			(e)			(f)			(g)			(h)
L. Kelly Jones 1			-			-			5,928			-			-			64,000			69,928
Raymond BonAnno 2			-			-			5,928			-			-			-			5,928
Presley Reed 3			-			-			5,928			-			-			-			5,928

 

(1)	During the year ended December 31, 2007, Mr. Jones was awarded options to purchase 100,000 shares of common stock, all of which were outstanding at December 31, 2007. The exercise price of the options is $.25 per share. At December 31, 2007, 50,000 options have vested, 25,000 will vest January 25, 2008 and 25,000 will vest January 25, 2009. The options expire January 25, 2012. Other compensation represents fees paid to Jones and Cannon PC for legal services rendered in connection with real estate leases. Mr. Jones is a partner in the law firm.
(2)	During the year ended December 31, 2007, Mr. BonAnno was awarded options to purchase 100,000 shares of common stock, all of which were outstanding at December 31, 2007. The exercise price of the options is $.25 per share. At December 31, 2007, 50,000 options have vested, 25,000 will vest January 25, 2008 and 20,000 will vest January 25, 2009. The options expire January 25, 2012.
(3)	During the year ended December 31, 2007, Mr. Reed was awarded options to purchase 100,000 shares of common stock, all of which were outstanding at December 31, 2007. The exercise price of the options is $.25 per share. At December 31, 2007, 50,000 options have vested, 25,000 will vest January 25, 2008 and 25,000 will vest January 25, 2009. The options expire January 25, 2012.

Employment Agreements

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

We have an employment agreement with our Chief Operating Officer, Anthony Walker. His base salary is currently $150,000 per annum. The term is for two years and ends on August 13, 2008. If Mr. Walker is terminated without cause or resigns with good reason (as defined in his agreement, which good reason includes a change in control), then he receives a lump sum payment of his salary for a 12-month period as severance.

 

We have an employment agreement with our Chief Culinary Officer, Kevin Morrison. His base salary is currently $150,000 per annum. The term is for two years and ends on August 13, 2008. If Mr. Morrison is terminated without cause or resigns with good reason (as defined in his agreement, which good reason includes a change of control), then he receives a lump sum payment of his salary for a 12-month period as severance.

 

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with our accountants on accounting and financial disclosure during the last two fiscal years or the interim period from January 1, 2008, through the date of this prospectus.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

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

Quarter Ended		High Bid			Low Bid
December 31, 2007		$	2.02		$	0.92
September 30, 2007		$	1.24		$	0.48

Holders

 

We have approximately 92 record holders of our common stock as of March 25, 2008.

Dividends

 

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

Transfer Agent

Our transfer agent, Corporate Stock Transfer, Inc., is located at 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209 and its phone number is (303) 282-4200.

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock being offered in this offering. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules filed as part of the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. We will file annual reports on Form 10-KSB and quarterly reports on Form 10-QSB with the SEC as well as other required SEC filings. The reports and other information we file with the SEC can be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information regarding the operation of the Public Reference Room by calling 1 (800) SEC-0330. The SEC also maintains a website (http://www.sec.gov) you can access that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We will also make copies of our SEC filings available free of charge on our website www.spicypickle.com.

 

32

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INDEX TO FINANCIAL STATEMENTS

 

		Page
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of December 31, 2007 and 2006		F-2
Consolidated Statements of Operations for the Years Ended December 31, 2007 and 2006		F-3
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2007 and 2006		F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006		F-5
Notes to Consolidated Financial Statements		F-6

 

33

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Spicy Pickle Franchising, Inc.

Denver, Colorado

 

We have audited the accompanying consolidated balance sheets of Spicy Pickle Franchising, Inc as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years ended 2007 and 2006. Spicy Pickle Franchising Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the financial position of Spicy Pickle Franchising Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years ended 2007 and 2006 in conformity with accounting principles generally accepted in the United States of America.

 

Gordon, Hughes & Banks, LLP                                                    

Greenwood Village, Colorado

March 17, 2008

 

F-1

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Spicy Pickle Franchising, Inc.

Consolidated Balance Sheets

December 31, 2007 and 2006

 

		2007			2006
Assets
Current assets:
Cash and cash equivalents		$	5,405,069		$	1,198,982
Current portion of notes receivable			40,000			-
Accounts receivable, trade, net			60,489			63,597
Inventory			11,383			31,969
Prepaid expenses and other current assets			184,498			29,171
Total current assets			5,701,439			1,323,719
Property and equipment, net of accumulated depreciation			685,751			127,982
Other assets:
Notes receivable, less current portion			40,000			-
Deposits and other assets			12,869			30,107
Total other assets			52,869			30,107
Total assets		$	6,440,059		$	1,481,808
Liabilities and stockholders' equity
Current liabilities:
Current portion of notes payable to related parties		$	-		$	30,000
Accounts payable			441,096			55,440
Accrued expenses and compensation			89,827			63,298
Accounts payable related parties			-			53,925
Deferred franchise revenue			770,000			685,000
Other			2,300			2,300
Total current liabilities			1,303,223			889,963
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares
authorized, 705 shares of Series A Variable Rate
Convertible Preferred Stock, stated value $8,500
per share, issued and outstanding in 2007 and none
issued or outstanding in 2006			4,801,124			-
Common stock, $.001 par value, 200,000,000 shares
authorized, 47,634,053 and 40,996,455 shares issued
and outstanding in 2007 and 2006, respectively			47,634			40,996
Additional paid in capital			5,546,692			1,161,516
Fair value of common stock warrants			873,825			-
Accumulated (deficit)			(5,562,772	)		(610,667	)
Deferred compensation			(569,667	)		-
Total stockholders' equity			5,136,836			591,845
Total liabilities and stockholders’ equity		$	6,440,059		$	1,481,808

See the accompanying notes to the consolidated financial statements

 

F-2

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Spicy Pickle Franchising, Inc.

Consolidated Statements of Operations

Years Ended December 31, 2007 and 2006

 

		Year Ended
		2007			2006
Revenue:
Restaurant and bakery sales		$	30,730		$	409,018
Franchise fees and royalties			1,243,263			482,991
Total revenues			1,273,993			892,009
Operating costs and expenses:
Restaurant and bakery:
Cost of sales			30,383			160,728
Labor			33,137			154,619
Occupancy			44,423			67,951
Other operating costs			42,551			50,582
Total restaurant and bakery operating costs			150,494			433,880
Franchise and general:
General and administrative			4,735,854			1,853,081
Depreciation			22,744			18,575
Total franchise and general			4,758,598			1,871,656
Total operating costs and expenses			4,909,092			2,305,536
(Loss) from operations			(3,635,099	)		(1,413,527	)
Other income (expense):
Interest income			51,252			29,556
Other income (expense)			(18,037	)		986
Total other income (expense):			33,215			30,542
Net (loss)		$	(3,601,884	)	$	(1,382,985	)
Per share information - basic and fully diluted:
Weighted average shares outstanding			44,315,486			36,514,512
Net (loss) per share		$	(0.08	)	$	(0.04	)

See the accompanying notes to the consolidated financial statements

F-3

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Spicy Pickle Franchising, Inc.

Consolidated Statement of Stockholders' Equity

Years Ended December 31, 2007 and 2006

		Members' Equity																					Additional			Common
		Contributed Capital						Accumulated			Preferred Stock						Common Stock						Paid in			Stock			Deferred			Accumulated
		Units			Amount			Deficit			Shares			Amount			Shares			Amount			Capital			Warrants			Compensation			(Deficit)			Total
Balances at January 1, 2006			154,974		$	781,209		$	(988,525	)		-		$	-			-		$	-		$	-		$	-		$	-		$	-		$	(207,316	)
Membership units issued for cash			38,920			1,889,551						-			-																					1,889,551
Membership units issued for services			5,546			285,000						-			-			-			-			-			-			-			-			285,000
Net loss for the period
January 1, 2006 to September 8, 2006									(772,318	)		-			-			-			-			-			-			-			-			(772,318	)
Conversion of membership units
to common shares			(199,440	)		(2,955,760	)		1,760,843			-			-			40,996,455			40,996			1,153,921			-			-			-			-
Fair value of options granted												-			-			-			-			7,595			-			-			-			7,595
Net (loss) for the period September 9, 2006
to December 31, 2006			-			-			-			-			-			-			-			-			-			-			(610,667	)		(610,667	)
Balances at December 31, 2006			-		$	-		$	-			-			-			40,996,455			40,996			1,161,516			-			-			(610,667	)		591,845
Common shares issued for cash																		4,352,780			4,353			1,574,398			-			-			-			1,578,751
Common shares issued for services																		2,284,818			2,285			1,109,142			-			(871,292	)		-			240,135
Preferred shares issued for cash												705			5,622,996			-			-			-			-			-			-			5,622,996
Allocation of fair value common stock warrants												-			(821,872	)		-			-			-			821,872			-			-			-
Fair value of placement consultant warrants												-			-			-			-			(51,953	)		51,953			-			-			-
Beneficial conversion dividend on preferred shares												-			-			-			-			1,350,221			-			-			(1,350,221	)		-
Fair value of stock options granted												-			-			-			-			403,368			-			-			-			403,368
Amortization of deferred compensation												-			-			-			-			-			-			301,625			-			301,625
Net (loss) for the year												-			-			-			-			-			-			-			(3,601,884	)		(3,601,884	)
Balances at December 31, 2007												705		$	4,801,124			47,634,053		$	47,634		$	5,546,692		$	873,825		$	(569,667	)	$	(5,562,772	)	$	5,136,836

 

See the accompanying notes to the consolidated financial statements

 

F-4

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

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

F-8

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

The weighted average fair value of options granted during 2007 of $.222 was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 41.66%, expected term of 2.5 years, risk-free interest rate of 5.9%, and no expected dividend yield.

The weighted average fair value of options granted during 2006 of $.076 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 40.48%, expected term of 2.5 years, risk-free interest rate of 5.5%, and expected dividend yield of 0%.

Recent Pronouncements

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

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosure about fair value measurements. Management does not expect adoption of SFAS 157 to have a material impact on the Company's financial statements.

On February 15, 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” (“SFAS 159”). This standard permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to FASB No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS 159 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (i) makes that choice in the first 120 days of that year, (ii) has not yet issued financial statements for any interim period of such year, and (iii) elects to apply the provisions of FASB 157. Management is currently evaluating the impact of SFAS 159, if any, on the Company’s financial statements.

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

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

F-9

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

3. Property and Equipment

Major classes of property and equipment consist of the following:

		2007			2006
Computer software and equipment		$	86,643		$	66,995
Furniture and fixtures			47,753			22,379
Office equipment			26,344			23,022
Leasehold improvements			392,994			-
Kitchen equipment			147,548			3,796
Vehicles			17,340			-
Construction in progress			35,303			53,345
			753,926			169,537
Less: accumulated depreciation			(68,175	)		(41,555	)
		$	685,751		$	127,982

The Company recorded depreciation expense related to these assets of $26,620 and $24,622 in 2007 and 2006, respectively.

4. Commitments and Contingencies

 

The Company leases office space, as well as restaurant locations, under non-cancelable operating leases, which expire through 2016.

 

The aggregate minimum requirements under non-cancelable leases as of December 31, 2007 are as follows:

 

2008		$	239,594
2009			221,573
2010			159,549
2011			160,990
2012			166,990
Later years			463,775
		$	1,412,470

Rent expense for the years ended December 31, 2007 and 2006 was $146,039 and $106,826, respectively.

5. Shareholders’ and Members’ Equity

Pursuant to a private placement, the Company raised $2,000,000 less offering expenses of $110,449 for a net amount of $1,889,551 through the issuance of 38,920 member units during the year ended December 31, 2006. In addition, the Company issued 5,546 member units to non-employees for services rendered. The Company recorded expenses in the amount of $225,000 for consulting services and $60,000 of offering costs attributed to and included in the offering expenses mentioned above.

Effective September 8, 2006, the Company converted from a Colorado limited liability company to a Colorado corporation. At that date, there were 199,400 membership units issued and outstanding. The membership units converted to 40,996,455 shares of common stock. The total amount of members’ equity, including contributed capital and retained deficit, at that date was $1,194,917. As a result of the conversion, the Company recorded $40,996 in common stock and $1,153,921 in additional paid in capital.

The Company is authorized to issue two hundred million (200,000,000) shares of common stock, par value $0.001. At December 31, 2007, the Company has reserved 7,500,000 shares of common stock for issuance upon exercise of awards granted under the Company’s 2006 Stock Option Plan (Note 9).

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

F-10

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

The Company filed a registration statement with the United States Securities and Exchange Commission (“SEC”) that became effective during January 2007. The registration statement covered 8,240,000 common shares of the Company held by shareholders. The Company has not received and will not receive any proceeds from the sales of these shares by the selling shareholders. In addition, the Company registered 10,000,000 common shares to be sold by the Company, and the Company received the proceeds from such sales. As of December 31, 2007, the Company had sold 4,352,780 of such shares at a price of $.40 per share for gross proceeds of $1,741,112, less offering expenses of $118,434, for net proceeds of $1,622,678. The offering was terminated November 15, 2007.

The Company completed a private equity financing of $5,992,500 on December 14, 2007, with 14 accredited investors. Net proceeds from the offering were approximately $5,623,000. The Company issued 705 shares of its Series A Variable Rate Convertible Preferred Stock, par value $0.001 per share and stated value of $8,500 per share (the “Series A Preferred Stock”). Each share of the Series A Preferred Stock is immediately convertible into 10,000 shares of the Company’s $.001 par value common stock. This conversion rate implies a discount to the fair value of the common stock of $.26 per share ($1,833,000), which amount will be recorded by the Company $1,350,221 as a current dividend on the Series A Preferred Stock with an additional dividend of $482,779 recorded ratably over a forty-five-day period immediately subsequent to December 31, 2007. Additionally, the Company shall pay each holder of Series A Preferred Stock cumulative dividends at a rate per share of 5% per annum until the second anniversary of the original issue date, 7.5% per annum from the second anniversary of the original issue date until the third anniversary of the original issue date, and 14% per annum thereafter, payable semi-annually on January 1 and July 1, beginning on July 1, 2008, and upon conversion or redemption of the Series A Preferred Stock. Such dividends are payable in cash or, at the Company’s option, in shares of common stock or a combination thereof.

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

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

The warrants that each investor received as a result of the Series A Preferred Stock financing are exercisable immediately at an exercise price of $1.60 per share. The Company was obligated to register the common shares underlying the warrants within 180 days of the closing date in order to avoid cash penalties which could amount to an aggregate of $719,100. The Company completed the registration of the shares during February 2008.

The Company has determined the fair value of the warrants as of the issuance date. The Company used the Black-Scholes option-pricing model with the following assumptions: an expected life equal to ½ of the contractual term of the warrants, no dividends, a risk free rate of 5.5%, and volatility of 39%. Under the assumptions, the Black-Scholes option pricing model yielded an aggregate fair value of approximately $952,500. A portion of this amount ($821,872) has been allocated to Common Stock Warrants in the accompanying balance sheet based upon the percentage relationship of the warrant fair value to the total fair value of the offering multiplied by the gross proceeds of the offering.

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

The net proceeds from the financing are to be used for capital expenditures necessary to expand our Company-owned and franchising operations.

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

F-11

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

 

6. Earnings Per Share Data

 

Earnings per share is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for common stock equivalents, including stock options, restricted stock, and other stock-based compensation. Earnings per common share are computed in accordance with SFAS No. 128 "Earnings Per Share,'' which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive securities outstanding during the year. At December 31, 2007 and 2006, any equivalents would be anti-dilutive as the Company had losses for the years then ended.

7. Income Taxes

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

Income tax provision (benefit) for the year ended December 31, 2007 and 2006 is summarized below:

		2007			2006
Current:
Federal		$	-		$	-
State			-			-
Total current			-			-
Deferred:
Federal			(1,053,000	)		(198,000	)
State			(163,000	)		(28,300	)
Total deferred			(1,216,000	)		(226,300	)
Increase in valuation allowance			1,216,000			226,300
Total provision		$	-		$	-

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

		2007			2006
Income tax provision at the federal statutory rate			34.0	%		34.0	%
Amount of 2006 income attributed to members prior to conversion from a limited liability company to a corporation ($772,318)			0.0	%		(19.0	)%
State income taxes, net of federal benefit			(3.3	)%		(4.6	)%
Effect of net operating loss ($610,667 attributed to the corporation in 2006)			(30.7	)%		(10.4	)%
			0.0	%		0.0	%

Components of the net deferred income tax assets at December 31, 2007 and 2006 were as follows:

Deferred tax assets:		2007			2006
Net operating loss carryovers		$	1,313,000		$	226,300
Taxable deferred franchise fees			130,000			-
Valuation allowance			(1,443,000	)		(226,300	)
		$	-		$	-

F-12

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a $1,443,000 allowance at December 31, 2007 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current year is $1,216,000.

As of December 31, 2007, the Company has a net operating loss carry forward of approximately $3,482,000. This loss will be available to offset future taxable income. If not used, this carry forward will expire in 2027.

8. Related Party Transactions

Two of the Company’s members are also the founders and sole members of Spicy Pickle, LLC, a Colorado limited liability company formed on January 14, 1999. Spicy Pickle, LLC created the Spicy Pickle restaurant concept, and its primary business was the operation of the three original Spicy Pickle restaurants.

Prior to 2006, two of these three original restaurants were sold to unrelated parties, who then entered into franchise agreements with the Company. No initial franchise fees were charged to the new owners.

On January 1, 2005, the Company acquired the remaining Spicy Pickle restaurant from Spicy Pickle, LLC for $40,000. The purchase consideration consisted of a $40,000 promissory note that bore interest at 7%, was secured by substantially all of the restaurant assets, and was due in installments of $10,000 in January 2006 and $30,000 in January 2007. Due to the commonality of ownership of the Company and Spicy Pickle, LLC, the acquisition of the restaurant was recorded at the historical basis of the assets acquired of $12,667, with the excess purchase price of $27,333 reflected as a reduction of members’ equity.

The Company rents a suite at a local events center from a partnership in which an officer and member of the Company is a partner. The partnership passed through the rent at the same rate it paid to the event center owner. The booth is used primarily for marketing entertainment. The amounts charged to expense were $75,197 and $73,860 for the years ended December 31, 2007 and 2006, respectively.

The accounts payable due to related parties at December 31, 2006 relates to accrued expenses and compensation.

9. Stock-Based Compensation

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

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

								Weighted Average
					Weighted			Remaining
					Average			Contractual Term			Aggregate
		Options			Exercise Price			(in years)			Intrinsic Value
Outstanding January 1, 2006			-
Granted			100,000
Exercised			-
Cancelled			-
Outstanding December 31, 2006			100,000		$	0.25			4.80		$	7,595
Granted			3,960,000		$	0.78			4.68		$	879,049
Exercised			-
Cancelled			-
Outstanding December 31, 2007			4,060,000		$	0.76			4.66		$	886,644
Exercisable December 31, 2007			1,940,000		$	0.56			4.60		$	304,521

F-13

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

 

Of the options outstanding at December 31, 2007, 1,940,000 were vested and exercisable with a weighted average exercise price of $.56 per share.

The following table summarizes information concerning outstanding and exercisable options at December 31, 2007:

		Options Outstanding									Options Exercisable
Range of Exercise Price		Number Outstanding			Weighted Average Remaining Contractual Life			Weighted Average Exercise Price			Number Exercisable			Weighted Average Exercise Price
$.25 - $1.26			4,060,000			4.66		$	.76			1,940,000		$	.56

10. Business Segment information

The Company operates two business segments. The Company Restaurant Operations segment is comprised of the operating activities of the restaurant owned by the Company. The company-owned restaurant conducts business under the Spicy Pickle name. This restaurant specializes in fast casual food featuring fresh, made-to-order, premium submarine-style, deli and panini sandwiches, salads, soups and soft drinks.

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

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

		2007			2006
Number of restaurants:
Company-owned:
Beginning of period			-			1
Restaurants closed			-			1
Restaurants opened			1			-
End of period			1			-
Franchise-operated:
Beginning of period			16			10
Restaurants opened			19			6
End of period			35			16
System-wide:
Beginning of period			16			11
Restaurants opened			20			6
Restaurants closed			-			(1	)
End of period			36			16

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company had no inter-segment sales for the years ended December 31, 2007 and 2006. Management has determined that the Company’s reportable segments are strategic business units that offer different products and services.

F-14

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Spicy Pickle Franchising, Inc.

Notes to Consolidated Financial Statements

(Continued)

 

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

		2007			2006
Revenues:
Company restaurant and bakery operations		$	30,730		$	409,018
Franchise operations			1,243,263			482,991
Total Revenues		$	1,273,993		$	892,009
Segment profit (loss):
Company restaurant and bakery operations		$	(119,764	)	$	(33,174	)
Franchise operations			(3,515,335	)		(1,380,353	)
Total segment profit (loss)		$	(3,635,099	)	$	(1,413,527	)
Segment assets:
Company restaurant and bakery operations		$	625,874		$	-
Franchise operations			5,814,185			1,481,808
Total segment assets		$	6,440,059		$	1,481,808
Segment liabilities
Company restaurant and bakery operations		$	102,615		$	-
Franchise operations			1,200,608			889,963
Total segment liabilities		$	1,303,223		$	889,963
Depreciation and amortization (included in segment profit (loss):
Company restaurant and bakery operations		$	3,876		$	6,047
Franchise operations			22,744			18,575
Total depreciation and amortization		$	26,620		$	24,622
Capital expenditures:
Company restaurant and bakery operations		$	561,761		$	44,639
Corporate administration			22,628			77,272
Total capital expenditures		$	584,389		$	121,911

11. Subsequent Events

Subsequent to December 31, 2007, the Company purchased 100% of four restaurants from franchisees and a 60% interest in a fifth. The total investment was $1,121,257, of which $621,256 was paid in cash and $500,000 was paid in notes. The notes bear interest at a rate of 10% and are payable over 4 years. There was no prior obligation to purchase these restaurants from the franchisees.

Subsequent to December 31, 2007, the Company had two restaurants under construction.

F-15

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