NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 1 – ORGANIZATION, RECENT EVENTS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS
Organization and Recent Events
Southern Concepts Restaurant Group, Inc. (“SCRG” or the “Company”) is a Colorado corporation that was formed on January 29, 2008.
The Company, on March 9, 2015, with approval of a majority of the Company’s shareholders, changed its name from Bourbon Brothers Holding Corporation to Southern Concepts Restaurant Group, Inc.
The Company operates and manages restaurants through its wholly-owned and majority-owned subsidiaries, including:
SH Franchisee & Licensing Corp. (“SH”)
Southern Hospitality Denver Holdings, LLC (“SHDH”)
Southern Hospitality Denver, LLC (“SHD”)
Southern Hospitality Lone Tree, LLC (“SHLT”)
Carve Restaurant Group, LLC (“CRG”)
Carve BBQ Glendale, LLC (“CARVEG”)
Southern Hospitality Southern Kitchen Colorado Springs, LLC (“SHSK”)
Bourbon Brothers Holding Company, LLC (“BBHCLLC”)
Bourbon Brothers Restaurant Group, LLC (“BBRG”)
The Company began revenue generating activities in late February 2013, with the opening of its first Denver-based restaurant. In January 2014, the Company opened its second restaurant in Colorado Springs, Colorado, and in April 2015, the Company opened its third restaurant in Lone Tree, Colorado. The Company’s fourth restaurant opened November 5, 2015.
The Company has developed a fast casual concept, in which the Company opened its first fast casual restaurant in November 2015. This restaurant, located in Glendale, Colorado, is called Carve Barbecue, and it’s operated through a majority owned subsidiary, CARVEG.
The Company is a party to a franchise agreement (the “FA” or the “Franchise Agreement”) with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor” or “SHFL”). In February 2015, the Company executed a sixth amendment to the Franchise Agreement which specifically granted SCRG the right to develop two new full service Southern Hospitality restaurants during 2015, the locations of which were named in the amendment to be Lone Tree, Colorado and downtown Colorado Springs, Colorado. The Company opened a Southern Hospitality restaurant in Lone Tree, Colorado in April 2015. At this time, the Company has no plans to open a location in downtown Colorado Springs, Colorado. Additionally, the sixth amendment granted the Company the right to rebrand its Bourbon Brothers Southern Kitchen restaurant in northern Colorado Springs into a Southern Hospitality-branded full service franchised restaurant operating under the trade name Southern Hospitality Southern Kitchen, a differentiated and slightly more upscale concept to that of the original concept.
In February 2015, the Company entered into a Master License Agreement (“MLA”) with SHFL which grants the Company the right to license up to five Southern Hospitality-branded fast casual restaurants (SHQ) in the Denver and Colorado Springs markets through August 2016. SHFL and SCRG have agreed to a royalty of 2.5% of gross sales on each of the new SHQ locations. The agreement pertains exclusively to the Company’s right to develop the SHQ locations and does not restrict the Company from developing a similar, competitive brand in the future. Finally, in developing the SHQ concept, SCRG will retain joint ownership of this concept, which pertains to the functionality of the restaurant. The Company does not anticipate opening a SHQ in the near future.
During 2016, the Company is exploring options for growth for the Company’s two brands, Southern Hospitality and Carve Barbecue. Specifically, the Company is looking at building the Southern Hospitality growth model on the footprint and profitability similar to its Southern Hospitality Lone Tree location, with real estate between 4,000 to 5,000 square feet. In regards to the Carve model, the Company is identifying real estate partners and locations for its 2,500 square feet footprint.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Amounts as of December 31, 2015, are derived from those audited consolidated financial statements. These interim unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which has previously been filed with the SEC.
In the opinion of management, the accompanying interim unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2016, and the results of operations and cash flows for the periods presented. All such adjustments include those that are of a normal recurring nature. The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.
Management’s Plans
The accompanying interim unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported a net loss of approximately $0.9 million for the three month periods ended March 31, 2016 and 2015, respectively, and has an accumulated deficit of approximately $12.9 million at March 31, 2016. The interim unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has devoted substantially all of its efforts to developing its business plan, raising capital, and opening and operating its four restaurants in Denver, Colorado Springs, Lone Tree and Glendale.
The Company’s continued implementation of its business plan is dependent on its future profitability and engaging in strategic transactions, or on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all. As a consequence, if the Company is unable to achieve and maintain profitability through current restaurant operations, enter into strategic transactions, or obtain additional financing in the near term, the Company may be required to delay its business plan implementation, which would have a material adverse impact on the Company.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The interim unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions and profits are eliminated in consolidation.
Accounting guidance provides a framework for determining whether an entity should be considered a variable interest entity (VIE), and if so, whether the Company’s involvement with the entity results in a variable interest in the entity. If the Company determines that it does have a variable interest in the entity, it must perform an analysis to determine whether it represents the primary beneficiary of the VIE. If the Company determines it is the primary beneficiary of the VIE, it is required to consolidate the assets, liabilities and results of operations and cash flows of the VIE into the interim unaudited condensed consolidated financial statements of the Company.
A company is the primary beneficiary of a VIE if it has a controlling financial interest in the VIE. A company is deemed to have a controlling financial interest in a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company has concluded that there are no VIE’s subject to consolidation at March 31, 2016 and December 31, 2015. While the Company believes its evaluation is appropriate, future changes in estimates, judgments and assumptions in the case of an evaluation triggered by a reconsideration event as defined in the accounting standard may affect the determination of primary beneficiary status and the resulting consolidation, or deconsolidation, of the assets, liabilities and results of operations of a VIE on the Company’s consolidated financial statements.
Use of Estimates
The process of preparing the interim unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates. Changes in estimates are recorded in the period of change.
Fair Value Measurements
The Company accounts for financial instruments pursuant to accounting guidance which defines fair value, establishes a framework for measuring fair value in U.S GAAP, and expands disclosures about fair measurements. To increase consistency and comparability in fair value measurements, the accounting guidance established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 – quoted prices (unadjusted) in active markets of identical assets or liabilities;
Level 2 – observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 – assets and liabilities whose significant value drivers are unobservable.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurements (continued):
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgments or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
There were no financial assets or liabilities measured at fair value, with the exception of cash and cash equivalents as of March 31, 2016 and December 31, 2015.
The carrying amounts of accounts payable and notes payable approximate their fair values due to their interest rates and/or short-term maturities. The carrying amounts of related party receivables and payables are not practicable to estimate based on the related party nature of the underlying transaction.
Non-controlling Interest
The non-controlling interest represents capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities (SHD, SHSK, SHLT and CARVEG), and are reported in equity. From inception through March 31, 2016, in exchange for their interest in SHD, the non-controlling members contributed $897,465 in cash (no contributions in 2016 or 2015). The non-controlling members of SHSK contributed $109,022 for the year ended December 31, 2015 (none in 2016). The non-controlling members of SHLT contributed $500,000 in cash for the year ended December 31, 2015 (none in 2016). In April 2015, related party notes and accrued interest were converted into non-controlling CARVEG equity of $100,000 (Note 5), and $75,000 was contributed by the non-controlling interest holders of CARVEG in cash in the three months ended March 31, 2016 (March 31, 2015 – none). The Company will pay the non-controlling interest holders a monthly priority distribution which is calculated as the capital contribution of $75,000 multiplied by 1.25%. During the three months ended March 31, 2016, the Company distributed cash of $36,563 to the non-controlling members of SHLT and CARVEG.
Pre-opening Costs
Pre-opening costs, such as employee payroll and related training costs are expensed as incurred and include direct and incremental costs incurred in connection with the opening of each restaurant. Pre-opening costs also may include non-cash rental costs under operating leases incurred during a construction period.
Cash and Cash Equivalents
Cash equivalents include short-term highly liquid investments with an original a maturity of three months or less when purchased. In addition, the majority of payments due from financial institutions for the settlement of debit card and credit card transactions process within two business days, and therefore these payments due are classified as cash and cash equivalents.
Inventory
Inventory consists of food and beverages and is stated at the lower of cost (first-in, first-out) or market.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired. The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired. Management bases this assessment upon the carrying value versus the fair value of the asset and whether or not that difference is recoverable. Such assessment is performed on a restaurant-by-restaurant basis and includes relevant facts and circumstances including the physical condition of the asset.
If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value. Management determined that no impairment existed at March 31, 2016 and December 31, 2015.
Leasehold improvements are stated at cost. Property and equipment costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.
Capitalized Interest
Interest on funds used to finance the acquisition and construction of a restaurant to the date the asset is placed in service is capitalized.
Leases and Deferred Rent
The Company leases and intends to lease substantially all of its restaurant properties. For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period. Long-term deposits on leases in the amount of $120,555 are recorded as of March 31, 2016 and December 31, 2015. Deferred rent also includes a tenant improvement allowance the Company received in 2012 for $150,000, which is amortized as a reduction of rent expense, also on a straight-line basis over the initial term of the lease.
Revenue Recognition
The Company recognizes revenues pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition
, and applicable related guidance. Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is reported on the Company's consolidated statements of income (loss) net of sales taxes collected. The amount of sales tax collected is included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses were approximately $71,000 and $22,000 for the three months ended March 31, 2016 and 2015, respectively.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company accounts for stock-based compensation under Accounting Standards Codification (“ASC”) 718,
Share-Based Payment
. ASC 718 requires the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718 also requires the stock-based compensation expense to be recognized over the period of service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using an option pricing model, typically the Black-Scholes model.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.
The Company determines its income tax expense (benefit) in each of the jurisdictions in which it operates. Income tax includes an estimate of the current income tax expense (benefit), as well as deferred income tax expense, which results from the determination of temporary differences arising from the different treatment of items for book and tax purposes. The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions.
Certain of the Company’s subsidiaries are limited liability companies (“LLC’s”), which are treated for tax purposes as pass-through entities. As a result, any taxes are the responsibility of the respective members.
The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying consolidated financial statements. The Company recognizes tax related interest and penalties, if any, as a component of income tax expense
.
Net loss per share
Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if dilutive securities were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, unless the effect of such inclusion would reduce a loss or increase earnings per share. For each of the periods presented in the accompanying consolidated financial statements, the effect of the inclusion of dilutive shares would have resulted in a decrease in loss per share. Common stock options, warrants and shares underlying convertible debt aggregating 30,949,755 and 27,014,595 for the periods ended March 31, 2016 and 2015, respectively, have been excluded from the calculation of diluted net loss per common share.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards:
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies many aspects of accounting for share-based payment transactions under ASC Topic 718, Compensation - Stock Compensation, including income tax consequences, classification of awards as either equity or liability, forfeiture rate calculations and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"),
Leases (Topic 842)
, which supersedes existing guidance on accounting for leases in
"Leases (Topic 840)"
and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. The Company is currently evaluating the effect that this ASU will have on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330) Simplifying the Measurement of Inventory
, which changes the measurement from lower of cost or market to lower of cost and net realizable value. The guidance requires prospective application for reporting periods beginning after December 15, 2016 and permits adoption in an earlier period. The Company intends to adopt this ASU in the first quarter of 2016; the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts from Customers
, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
Management has not identified any other recently issued accounting standards that it believes may have a significant impact on the consolidated financial statements.
NOTE 3 – INTANGIBLE ASSETS
Intangible assets at March 31, 2016, represents franchise license costs for the Denver restaurant (net of accumulated amortization of $15,625 and $14,375 as of December 31, 2015).
Amortization expenses of $1,250 have been recorded for each of the three month periods ended March 31, 2016 and 2015. Amortization expense for the next five years and thereafter is estimated to be as follows:
2016
|
|
$
|
3,750
|
|
2017
|
|
|
5,000
|
|
2018
|
|
|
5,000
|
|
2019
|
|
|
5,000
|
|
2020
|
|
|
5,000
|
|
Thereafter
|
|
|
10,625
|
|
|
|
$
|
34,375
|
|
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 3 – INTANGIBLE ASSETS (CONTINUED)
The Company licenses the rights to the trademark “Bourbon Brothers” and certain intellectual property, as defined, from a related party, Hospitality Income & Asset, LLC (“HIA” previously Bourbon Brothers LLC), for use in the Company’s business operations. HIA has granted an exclusive license to use and to sublicense the tradename and intellectual property for an initial ten-year term. The agreement shall automatically renew for additional terms of ten-years each without any action required by either party. This license agreement does not require the payment of royalties or any other consideration. The Company is not currently using this trademark in its operations, nor is it contemplated for use in the foreseeable future.
NOTE 4 – PROPERTY AND EQUIPMENT
As of March 31, 2016 and December 31, 2015, property and equipment consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
Useful lives
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
3,263,780
|
|
|
$
|
3,237,345
|
|
10 years
|
Website development
|
|
|
57,000
|
|
|
|
45,750
|
|
3 years
|
Equipment
|
|
|
2,051,568
|
|
|
|
2,077,889
|
|
3-7 years
|
Computers and hardware
|
|
|
170,822
|
|
|
|
170,822
|
|
5 years
|
|
|
|
5,543,170
|
|
|
|
5,531,806
|
|
|
Less accumulated depreciation
|
|
|
(1,442,780
|
)
|
|
|
(1,252,710
|
)
|
|
|
|
$
|
4,100,390
|
|
|
$
|
4,279,096
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s Lone Tree restaurant opened in late April 2015, and the Company’s Glendale restaurant opened in November 2015, for which the Company began depreciating such assets at the date of each respective opening. Depreciation expense was approximately $187,500 and $114,800 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 5 – NOTES PAYABLE
Convertible Notes:
The Company has outstanding 5% promissory notes (the “Notes”) that bear interest at 5% per annum, they are unsecured, and their maturity dates are seven years from their issue date (October 2018 through November 2019). Quarterly payments are applied against accrued interest first, then principal. The minimum aggregate quarterly payment to Note holders is 2.5% of the Company’s portion of gross quarterly revenues from each Southern Hospitality BBQ restaurant. At March 31, 2016, the Company has not made all required payments of interest on the Notes. At March 31, 2016 and December 31, 2015, quarterly payments in arrears total $118,500 and $108,000. Accrued interest at March 31, 2016 and December 31, 2015 is $129,950 and $119,490, respectively. The Company may cure this deferral in quarterly payments within a defined period of time, as provided for in the note agreements, thus preventing the Notes from becoming callable.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 5 – NOTES PAYABLE (CONTINUED)
Convertible Notes (continued):
The Notes and accrued interest are convertible, at the option of the holder. The conversion price is 80% of the 20-day average closing sales price on the date conversion is elected, but not less than $0.50 per share. The Company determined that there was a beneficial conversion feature associated with the Notes in the amount of $283,500 related to the intrinsic value of the conversion feature before the Company’s stock became public. The Company recorded the beneficial conversion feature as a discount to the Notes and is amortizing the amount to interest over the term of the Notes. Approximately $13,100 and $53,900 was amortized for the periods ended March 31, 2016 and December 31, 2015, respectively. No Notes were converted in 2016 or in 2015. At March 31, 2016 and December 31, 2015, the balance of the Notes and accrued interest, net of discount, was approximately $787,600 and $764,100, respectively.
Beginning in August 2014, the Company began selling 6.5% promissory notes (the “2014 Notes”) along with warrants to purchase the Company’s common stock. Investors received a warrant to purchase four shares of common stock for each one dollar of principal amount loaned to the Company. The 2014 Notes bear interest at 6.5% per annum, they are unsecured, and their maturity dates are five years from their issue date. The Company sold $460,000 of 2014 Notes from August through December 2014 and $280,000 of 2014 Notes in 2015. By their original terms, the 2014 Notes and accrued interest become convertible, at the option of the holder, after two years from the issue date. The conversion price is the lower of 80% of the 20-day average closing sales price on the date conversion is elected or $0.25 per share.
The 2014 Notes were recorded at $322,200 after discounting the convertible notes based on the relative fair value of the warrants issued with the debt, of approximately $274,700. The warrants were issued with the convertible debt and their relative fair value was determined using the Black-Scholes option pricing model. Additionally, the convertible notes were further discounted, as the Company determined that the convertible debt contained a beneficial conversion feature and recorded an additional debt discount of approximately $143,100. The net carrying value of the 2014 Notes and accrued interest at March 31, 2016 and December 31, 2015 was $496,000 and $467,700, respectively.
Promissory Note:
During the year ended December 31, 2013, the Company issued a promissory note with an aggregate face value of $200,000, along with a warrant to purchase 50,000 shares of the Company’s common stock. This note bears interest at 5% per annum, it is unsecured and due on demand. The holder of the note received additional consideration in the form of a fully vested warrant to purchase 50,000 common shares at an exercise price of $0.50 per share exercisable for three years from the date of execution of the note. The Company determined the relative fair value of the warrant to be approximately $44,000, which was recorded as a discount to the note payable, which was amortized over approximately three months. In February 2016, the Company paid $50,000 in principal and issued a new promissory note for $150,000 which bears interest at 5% per annum, is unsecured and is due on February 3, 2017.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 5 – NOTES PAYABLE (CONTINUED)
Bank Financing:
In November 2014, SHLT entered into a bank financing agreement to purchase kitchen equipment for the Lone Tree restaurant location. A board member of the Company is also a board member of the bank. The agreement provides for financing up to $300,000, of which the Company had drawn $270,000 and $282,900 by March 31, 2016 and December 31, 2015. This loan bears interest at 6%. Monthly interest-only payments began in December 2014 and continued through August 2015. Beginning in September 2015, monthly principal and interest payments of approximately $5,800 are due through maturity in August 2020. This agreement is collateralized by the kitchen equipment at the SHLT and SHD restaurants.
Related Party Note Payable:
On December 31, 2014, the Company entered into a Loan Agreement and associated Promissory Note (the “Loan Agreement”) with Bourbon Brothers #14, LLC (“BB14”) which provides for an unsecured term loan in the aggregate original principal amount of $1,250,000 (the “Loan”). The Company received net proceeds of $1,197,714 after loan closing fees. BB14 is a related party entity, controlled by certain shareholders of the Company. The Company is to pay interest on the Loan at the greater of 9.5% or 6.25% per annum plus the prime rate announced by the Wall Street Journal. In addition, the Company is to pay a monthly loan servicing fee in the amount of 1% of the principal balance of the Loan. The entire principal balance of the Loan, plus any accrued and unpaid interest, is due on December 29, 2016. The related party interest expense on this loan for the three months ended March 31, 2016 was $33,340 and for year ended December 31, 2015 was $130,300. The Company paid $100,000 towards prepayment of this Loan to BB14 at December 31, 2015. Subsequently, the Company prepaid an additional $400,000 towards this Loan to BB14 in January 2016.
In connection with the Loan, the Company issued a warrant to BB14 for the purchase of 7,500,000 shares of common stock exercisable for a period of five years at $0.10 per share with the warrant vesting in one year. BB14 funded the Loan with financing BB14 received from a third-party lender. JW Roth, a director of the Company, personally guaranteed the BB14 Loan to obtain financing to facilitate the Loan. To compensate JW Roth, the Company issued a warrant to Mr. Roth for the purchase of 7,500,000 shares of common stock exercisable for a period of five years at $0.10 per share with the warrant vesting in one year.
The Company determined the relative fair value of the 15,000,000 warrants to be approximately $731,800, which has been recorded as a discount to the Loan principal balance, and which is being amortized over the term of the Loan. The balance of the discount at March 31, 2016 and December 31, 2015 was $274,500 and $365,940, respectively.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Commitments:
Franchise agreement
The Company operates its Denver restaurant property under a franchise agreement with the Franchisor under an initial ten-year term, renewable for two additional five-year terms. Pursuant to the franchise agreement, as amended, the Company is to pay royalty fees based on a percentage of gross revenues (2.5%, subject to a monthly floor of $5,000) , plus additional fees and costs for marketing, training, inventory and other franchisor costs. Two shareholders of the Company have personally guaranteed royalty payments to the Franchisor.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 6 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
On December 30, 2014, SHD entered into a Fifth Amendment to its FA with the Franchisor in connection with the opening of a new Southern Hospitality restaurant in Lone Tree, Colorado. Under the FA, SHD partially assigned its rights to SHLT to use the Franchisor’s marks, business methods, proprietary products, confidential information and intellectual property to operate a Southern Hospitality restaurant. In addition, pursuant to the FA, the Franchisor waived certain initial fees in connection with SHLT opening a restaurant in Lone Tree, Colorado.
On February 13, 2015, SHD entered into a Sixth Amendment to its FA with the Franchisor in connection with the potential for opening two Southern Hospitality restaurants in Colorado Springs, Colorado. Under the FA, SHD partially assigned its rights to SHSK, a 51% owned subsidiary of the Company, and Southern Hospitality Tejon, LLC, a wholly-owned subsidiary of the Company, to use the Franchisor's marks, business methods, proprietary products, confidential information and intellectual property to operate a Southern Hospitality restaurant.
For the three months ended March 31, 2016 and 2015, the Company incurred franchise royalty expense of $42,100, and $16,700, respectively.
Leases
:
In April 2012, the Company entered into a ten-year, non-cancellable lease for the restaurant in Denver, Colorado. This lease provides for two, five-year renewal options. Rent payments are approximately $16,000 per month plus certain common area maintenance charges, as defined, and are subject to escalation provisions. Lease expense was approximately $49,500 for each of the three months ended March 31, 2016 and 2015, respectively.
The Company has a ten-year lease with HIA, a related party, for the real property in connection with the restaurant location in Colorado Springs. The lease commenced upon taking possession of the premises in January 2014. Rent is approximately $33,340 per month for the first 60 months, and thereafter is subject to adjustment every 60 months. This lease provides for one, ten-year renewal option. Related party lease expense was approximately $100,300 for each of the three months ended March 31, 2016 and 2015, respectively.
The Company has a ten-year, non-cancellable lease for the restaurant in Lone Tree, Colorado. The lease provides for an initial lease term of ten years and for two, five-year renewal options. Rent payments are approximately $8,900 per month plus certain common area maintenance charges, and are subject to escalation provisions. In addition to base rent, this lease requires contingent rent payments equal to 5% of gross sales above predetermined thresholds, as defined. This location opened April 27, 2015, at which time the lease commenced. Lease expense was approximately $26,300 for the three months ended March 31, 2016.
In April 2015, CARVEG entered into
a non-cancellable lease for the Company’s first fast casual restaurant in Glendale, Colorado.
The initial term of this lease provides for expiration on July 31, 2020. This lease includes three, five-year extension options.
Rent payments are approximately $11,100 per month, which includes certain common area maintenance charges, and are subject to escalation provisions. This location opened November 5, 2015. Lease expense was approximately $34,500 for the three months ended March 31, 2016.
On January 1, 2014, the Company assumed a lease from a related party for the corporate office in Colorado Springs. The lease is for 78 months with an unaffiliated party. Monthly rent is $5,800 per month escalating up to $6,000 per month in year six. The initial term of the lease provides for expiration on December 31, 2016. Lease expense for the three months ended March 31, 2016 and 2015 was $17,400 and $14,100, respectively.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 6 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies:
From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management provides for them if upon the advice of counsel, losses are determined to be both probable and estimable.
NOTE 7 – EQUITY
Preferred stock:
On February 3, 2016, 4,428,791 shares of Series A Preferred Stock, converted to common shares, leaving 456,068 Series A Preferred Stock issued and outstanding.
Common stock:
The Company’s issued 1,163,783 common shares of stock for proceeds of $232,755 between January 1, 2016 and March 31, 2016. During the three-month period ended March 31, 2016, the authorized capital has been increased to 125,000,000 shares of common stock from 120,000,000.
Stock options:
Effective November 13, 2012, the Company adopted the 2012 Stock Option Plan (the “Plan”). Under the Plan, the Company may grant stock options, restricted and other equity awards to any employee, consultant, independent contractor, director or officer of the Company. A total of 4 million shares of common stock may be issued under the Plan (as amended on January 22, 2014).
During the year ended December 31, 2015, the Company granted options to purchase up to 120,000 common shares to two of its restaurant managers that vest evenly over three years, with the first tranche vesting on February 2, 2016 and each year thereafter with an exercise price of $0.25 per share. In addition, the Company granted options to another of its store managers to purchase up to 20,000 shares that vest evenly over two years beginning on March 16, 2015, with an exercise price of $0.27 per share. In June 2015, the Company granted options to purchase up to 600,000 common shares to six members of its board of directors that vest on March 9, 2016, with an exercise price of $0.30 per share. In 2015, the Company also issued options to purchase up to 43,500 shares of common stock to restaurant management which vest in full on November 9, 2016, exercisable at $0.20 per option.
The stock-based compensation cost related to options that have been included as a charge to general and administrative expense in the statements of operations was approximately $82,300 and $74,200 for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016 there was approximately $161,500 of unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized over a weighted-average period of less than five years.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 7 – EQUITY (CONTINUED)
Stock options (continued):
The following tables set forth the activity in the Company's Plan for the three months ended March 31, 2016:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
Shares
|
|
|
average
|
|
remaining
|
|
|
Aggregate
|
|
|
under
|
|
|
exercise
|
|
contractual
|
|
|
intrinsic
|
|
|
option
|
|
|
price
|
|
life
|
|
|
value
|
Outstanding at January 1, 2016
|
|
|
2,867,876
|
|
|
$
|
0.30
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(729,707
|
)
|
|
|
0.07
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
2,138,169
|
|
|
|
0.38
|
|
3.28
|
|
$
|
-
|
Exercisable at March 31, 2016
|
|
|
1,497,243
|
|
|
$
|
0.52
|
|
2.72
|
|
$
|
-
|
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the market price of the Company’s common stock on March 31, 2016, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they exercised their options on March 31, 2016.
The following table summarizes the activity and value of non-vested options as of and for the three months ended March 31, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
Number of
|
|
|
grant date
|
|
|
|
options
|
|
|
fair value
|
|
Non-vested options outstanding at January 1, 2016
|
|
|
1,365,926
|
|
|
$
|
0.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(725,000
|
)
|
|
|
0.48
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
Non-vested options outstanding at March 31, 2016
|
|
|
640,926
|
|
|
$
|
0.12
|
|
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
NOTE 7 – EQUITY (CONTINUED)
Warrants:
The Company uses the Black-Scholes pricing model to determine the weighted average fair value of warrants. The assumptions utilized to determine the fair value of warrants granted during the three months ended March 31, 2016, are as follows:
|
|
2016
|
|
Risk free interest rate
|
|
|
0.79
|
%
|
Expected volatility
|
|
|
168
|
%
|
Expected term
|
|
3 years
|
|
Expected dividend yield
|
|
|
0
|
|
The following table sets forth the activity regarding warrants for the three months ended March 31, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Shares
|
|
Average
|
|
Remaining
|
|
|
Aggregate
|
|
|
Underlying
|
|
Exercise
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Warrants
|
|
Price
|
|
Life
|
|
|
Value
|
|
Outstanding at January 1, 2016
|
|
27,717,614
|
|
$
|
0.25
|
|
|
2.96
|
|
|
|
|
|
Granted
|
|
1,163,782
|
|
|
0.40
|
|
|
|
|
|
|
|
|
Exercised
|
|
(5,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
23,631,396
|
|
|
0.29
|
|
|
2.39
|
|
|
$
|
-
|
|
Exercisable at March 31, 2016
|
|
23,458,396
|
|
$
|
0.29
|
|
|
2.39
|
|
|
$
|
-
|
|
The following table sets for the activity regarding non-vested warrants for the three months ended March 31, 2016:
|
|
Non-vested
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Fair Value
|
|
Non-vested at January 1, 2016
|
|
|
173,000
|
|
|
$
|
0.18
|
|
|
$
|
0.24
|
|
Granted
|
|
|
1,163,782
|
|
|
|
0.40
|
|
|
$
|
-
|
|
Vested
|
|
|
(1,163,782
|
)
|
|
|
0.40
|
|
|
|
0.00
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
0.50
|
|
|
$
|
0.50
|
|
Non-vested at March 31, 2016
|
|
|
173,000
|
|
|
$
|
0.29
|
|
|
$
|
0.24
|
|