NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 1 – ORGANIZATION, RECENT EVENTS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS
Organization and Recent Events
Bourbon Brothers Holding Corporation (“BBHC” or the “Company”) is a Colorado corporation. The Company, on January 22, 2014, with approval of a majority of the Company’s shareholders, changed its name from Smokin Concepts Development Corporation to Bourbon Brothers Holding Corporation.
The Company’s subsidiary, Southern Hospitality Franchisee Holding Corporation (“SH”) entered into a franchise agreement and area development agreement with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor”) in November 2011. In May 2012, SH formed Southern Hospitality Denver Holdings, LLC (“SHDH”), a wholly-owned subsidiary, and Southern Hospitality Denver, LLC (“SHD”). SHD was formed for the purpose of owning and operating the Company’s first franchised restaurant in Denver, Colorado. As of March 31, 2014, and December 31, 2013, SHD is 51% owned by SHDH and 49% owned by non-controlling interest holders, of which a director of the Company is a 22% non-controlling interest holder.
On September 30, 2013, the Company entered into an Acquisition Agreement with Bourbon Brothers Holding Company, LLC (“BBHCLLC”) to acquire all of the equity interests in BBHCLLC and its subsidiaries (the “BB Transaction”). BBHCLLC is a Colorado limited liability company (“LLC”) formed in May 2013, for the purpose of developing and managing all aspects of operating units related to a recently developed “Bourbon Brothers” brand. The principles of BBHCLLC were also, at various times, on the board of directors of the Company, and therefore BBHCLLC is considered to be a related party. As of December 31, 2013, BBHCLLC was a development stage company. BBHCLLC’s subsidiaries (all LLCs formed in April 2013) include Bourbon Brothers Restaurant Group, LLC (“BBRG”), Bourbon Brothers Franchise, LLC (“BBF”) and Bourbon Brothers Brand, LLC (“BBB”). BBRG owns the stores to encompass several Bourbon Brothers brands, and owns Bourbon Brothers Southern Kitchen Colorado Springs, LLC (“BBSK”), which opened its first restaurant in January 2014, and for which BBSK is 51% owned by BBRG as of the date of the BB Transaction.. BBRG also owns Bourbon Brothers Seafood and Chophouse Colorado Springs, LLC (“BBSF”). BBB manages all aspects of the Bourbon Brothers brand and anticipates establishing licensing and royalty agreements with producers of bourbon, spices, cigars and other products that fit the Company’s core brand.
On January 22, 2014, the Company and BBHCLLC closed on the BB Transaction. On that date, the Company issued 20,274,193 shares of common stock to BBHCLLC Class B Non-Voting members and 18,242,687 shares of Series A Convertible Preferred Stock to BBHCLLC Class A Voting members. All outstanding options and warrants to acquire BBHCLLC units were assumed by the Company, applying a 1.82427 conversion ratio. The acquisition of BBHCLLC was accounted for using the purchase method of accounting. The purchase price was allocated among the assets acquired and liabilities assumed at their estimated fair values, which management believes approximates the net book value of the assets and liabilities.
The purchase price allocation is preliminary and subject to change, as a final analysis and review of all underlying assumptions and calculations used in the determination of the purchase price and the allocation, especially in consideration of the related party nature of the underlying transaction, has not yet been completed.
The following table summarizes the estimated fair values of BBHCLLC’s assets and liabilities acquired at the acquisition date (January 22, 2014):
Cash
|
|
$
|
869,907
|
|
Property and equipment
|
|
|
957,705
|
|
Other assets
|
|
|
270,955
|
|
Accounts payable and accrued expenses
|
|
|
(135,260
|
)
|
Purchase price (estimated fair value of
common and preferred shares issued)
|
|
$
|
1,963,307
|
|
The pro forma effects on the Company’s consolidated results of operations for the quarter ended March 31, 2014, as if the acquisition had occurred on January 1, 2014, are not material. As BBHCLLC was not formed until May 2013, there are no pro forma effects of the acquisition related to the quarter ended March 31, 2013.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 1 – ORGANIZATION, RECENT EVENTS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)
Basis of Presentation
Since inception through February 20, 2013, the Company devoted substantially all of its efforts to establishing its business. The Company’s planned principal operations commenced on February 21, 2013, with the opening of the Southern Hospitality Denver restaurant. As a result, the Company was no longer considered to be a development stage enterprise as of February 21, 2013.
The unaudited 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, 2013. Amounts as of December 31, 2013, are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2014, and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2014, 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 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 $1.1 million for each of the three-month periods ended March 31, 2014 and 2013, and has an accumulated deficit of approximately $6.3 million at March 31, 2014. The 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 Denver and Colorado Springs restaurants. The Company has also been focused on completing the BB Transaction with BBHCLLC, which occurred in January 2014.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)
Management’s Plans (Continued)
The Company began revenue generating activities in late February 2013, and in January 2014, BBHCLLC’s restaurant, located in Colorado Springs, Colorado, opened and began generating revenues. The Company does not have a revolving loan agreement with any financial institution, nor can the Company provide any assurance it will be able to enter into any such agreement in the future, or be able to raise funds through a future issuance of debt or equity. 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 the 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.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions and profits are eliminated in consolidated.
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 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, 2014. 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 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.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 generally accepted accounting principles, 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.
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, 2014.
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 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, and are reported in equity. From inception through March 31, 2014, in exchange for their interest in SHD, the non-controlling members contributed $897,465 in cash, of which nil and $225,980 was contributed during the periods ended March 31, 2014 and December 31, 2013, respectively.
Pre-opening Costs
Pre-opening costs, such as travel and 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.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
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 and equipment, 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 undiscounted cash flows of the asset and whether or not that difference is recoverable. Such assessment is to be performed on a restaurant-by-restaurant basis and is to include other 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.
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 intends to lease substantially all of its restaurant properties, and in April 2012, the Company entered into a ten-year lease for the restaurant in Denver, Colorado; the Company is also a party to a ten-year lease for its restaurant in Colorado Springs, Colorado, which commenced in January 2014. 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 the Denver and Colorado Springs leases in the amount of $55,912 are recorded as of March 31, 2014. Deferred rent also includes a tenant improvement allowance the Company received 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 began revenue-generating activities through the Denver restaurant on February 21, 2013. The Company began accounting for such 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 $90,500 and $2,100, for the three months ended March 31, 2014 and 2013, respectively.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
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 in each of the jurisdictions in which it operates. The income tax expense includes an estimate of the current income tax expense, 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.
Many of the Company’s subsidiaries are limited liability companies (“LLC’s”) and 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 the notes payable 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 6,235,226 and 1,869,711 for the periods ended March 31, 2014 and 2013, respectively, have been excluded from the calculation of diluted net loss per common share.
Recently Issued Accounting Standards
The Company reviews new accounting standards as issued. Management has not identified any recently issued accounting standards that it believes will have a significant impact on the Company’s consolidated financial statements.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 3 – INTANGIBLE ASSETS
In 2011, the Company paid $300,000 for the non-exclusive rights and license to use the Southern Hospitality system and Southern Hospitality licensed marks in connection with the operation of ten restaurants to be owned and operated by the Company under franchise and related area development agreements. These costs were allocable to each planned restaurant.
In September 2013, the Company terminated the Area Developer Agreement (“ADA”) with the Franchisor. As a result of the termination of the ADA, the Company determined this event impaired the intangible asset, and a resulting impairment expense was recorded in the year ended December 31, 2013, of $250,000. The intangible asset at March 31, 2014, represents franchise license costs for the Denver restaurant (net of accumulated amortization of $5,625).
Amortization began in February 2013 with the opening of the Company’s Denver-based restaurant, with amortization expense of $1,250 recorded for the three months ended March 31, 2014. Amortization expense for the next five years is estimated to be as follows:
2014 (remaining nine months)
|
|
$
|
3,750
|
|
2015
|
|
|
5,000
|
|
2016
|
|
|
5,000
|
|
2017
|
|
|
5,000
|
|
2018
|
|
|
5,000
|
|
Thereafter
|
|
|
20,625
|
|
|
|
$
|
44,375
|
|
The Company licenses the rights to the trademark “Bourbon Brothers” and certain intellectual property, as defined, from a related party, Bourbon Brothers LLC (“BBLLC), for the use in the Company’s business operations. BBLLC 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 considerations.
NOTE 4 – PROPERTY AND EQUIPMENT
As of March 31, 2014 and December 31, 2013, property and equipment consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
Useful lives
|
Leasehold improvements
|
|
$
|
2,153,326
|
|
|
$
|
2,146,322
|
|
3-10 years
|
Website development
|
|
|
21,500
|
|
|
|
13,500
|
|
3 years
|
Equipment
|
|
|
1,223,954
|
|
|
|
478,194
|
|
3-7 years
|
Computers and hardware
|
|
|
114,389
|
|
|
|
52,742
|
|
5 years
|
|
|
|
3,513,169
|
|
|
|
2,690,758
|
|
|
Less accumulated depreciation
|
|
|
(349,211
|
)
|
|
|
(247,183
|
)
|
|
|
|
$
|
3,163,958
|
|
|
$
|
2,443,575
|
|
|
The Company’s first Denver-based restaurant opened in late February 2013, for which the Company began depreciating such assets. The Company’s Colorado Springs-based restaurant opened in late January 2014, for which the Company began depreciating such assets. Depreciation expense for the three months ended March 31, 2014 and 2013 was approximately $99,300 and $28,500, respectively.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 5 – NOTES PAYABLE
Convertible Notes:
Beginning in October 2011, the Company began selling 5% promissory notes (the “Notes”) along with shares of the Company’s common stock. Investors received one share of common stock for each one dollar of principal amount loaned to the Company. The Notes bear interest at 5% per annum, they are unsecured, and their maturity dates are seven years from their issue date. 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 restaurant. The first minimum quarterly payment of $7,297 was paid in May 2013 (45 days after the first calendar quarter in which the Denver restaurant opened which occurred on February 21, 2013).
By their original terms, the Notes and accrued interest became convertible, at the option of the holder, upon the Company’s common stock becoming publicly traded on November 13, 2012. 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 related to the intrinsic value of the conversion feature before the Company’s stock became public. At March 31, 2014, the discount was approximately $283,500. The Company recorded the beneficial conversion feature as a discount to the note and is amortizing the amount to interest over the term of the notes. Approximately $12,000 has been amortized for the three months ended March 31, 2014. There were no notes or accrued interest converted into common shares during the three months ended March 31, 2014.
Promissory Note:
The Company issued a promissory note with an aggregate face amount of $200,000, along with a warrant to purchase 50,000 shares of the Company’s common stock in 2013. This note bears interest at 5% per annum, is unsecured, and has a maturity date which is concurrent with the date that the current common stock offering closes. The holder of the note received additional consideration in the form of a fully vested stock warrant for the purchase of 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 has been recorded as a discount to the note payable and was amortized over approximately three months.
Related Party Promissory Note:
On August 1, 2013, the Company entered into an unsecured promissory note with BBHCLLC. The note was for $249,301 (a balance of $204,877 at December 31, 2013) with a maturity date of February 1, 2014. The note included a 5% annual interest rate and terms in case of default in which the loan could have been converted into common stock of the Company by the note holder at no less than $0.10 a share. The note and unpaid interest were extinguished on the date the Company and BBHCLLC successfully closed the BB Transaction.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
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, the Company is to pay royalty fees based on a percentage of gross revenues (generally between 3% and 5% of gross sales, as defined), plus additional fees and costs for marketing, training, inventory and other franchisor costs. Two officers of the Company have personally guaranteed royalty payments to the Franchisor.
In September 2013, the Company amended the Franchise Agreement with the Franchisor. The amendment resulted in a reduction in the royalty fees for the Company’s Denver restaurant to be paid to the Franchisor beginning January 1, 2014. The reduced rate is 2.5% of gross sales, subject to a monthly floor of $5,000.
For the three months ended March 31, 2014 and 2013, the Company incurred franchise royalty expense of $14,300 and $12,200, 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 $50,000 and $48,000 for the three months ended March 31, 2014 and 2013, respectively.
The Company has a 10-year lease with Bourbon Brothers, LLC (“BBLLC”), 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, on January 11, 2014. Rent is approximately $32,000 per month for the first 60 months, and thereafter subject to adjustment every 60 months. Any increase on a yearly basis will equal 11% of the construction costs in excess of $2,000,000. A long-term deposit on the lease in the amount of $32,083 is recorded as of March 31, 2014. Related party lease expense was $85,295 for the three months ended March 31, 2014. Subsequent to March 31, 2014, the Company issued 400,000 shares of common stock for $200,000.
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 6. A long-term deposit in the amount of $5,794 is recorded as of March 31, 2014.
The Company also paid rent and rent-related expenses to Accredited Members Acquisition Corporation (“AMAC”), a related party (Note 8), on a month-to-month basis for office space at the AMAC corporate headquarters in Colorado Springs, Colorado. This arrangement began in October 2011 and terminated July 31, 2013, as the Management Service Agreement terminated. Base rental payments were approximately $3,500 per month. Related party rent expense was approximately $0 and $14,300 for the three months ended March 31, 2014 and 2013, respectively.
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.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 7 – EQUITY
Preferred stock:
The Company authorized the issuance of up to 18,242,700 shares of Series A convertible preferred stock in January 2014, of which 18,242,687 shares were issued on January 22, 2014. On March 1, 2014, the holders of 13,357,828 Series A preferred shares elected to convert their Series A preferred stock into shares of the Company’s common stock at a ratio of one to one. These Series A preferred shares were then subsequently cancelled. As of March 31, 2014, 4,884,859 Series A convertible preferred shares remain issued and outstanding.
Each share of Series A convertible preferred is entitled to 25 votes and is convertible into shares of common stock on a one-for-one basis. Other rights of the Series A convertible preferred are identical to the common stock rights.
Common stock:
In connection with the Company’s 2014 private placement offering to raise $3,000,000 for 6,000,000 shares at $0.50 per share that began in March 2014, 550,000 shares have been issued for proceeds of $275,000 through March 31, 2014. Subseqent to March 31, 2014, the Company issued 400,000 shares of common stock for $200,000.
In connection with services provided to the Company, the Company issued 30,000 common shares valued at $15,000 ($0.50 per share) during the three months ended March 31, 2014.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
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 3 million shares of common stock may be issued under the Plan (as amended on January 22, 2014).
In 2012, the Company granted stock options to the Company’s CEO to purchase an aggregate of 660,368 shares of common stock. The Company’s CEO was granted a five-year term option to acquire 660,368 shares of Company common stock at approximately $0.015 per share with 66,035 options vesting immediately and the remaining shares vesting upon the achievement of the performance objectives determined by management, as defined. During the three months ended March 31, 2013, the CEO exercised the vested options for $995. In March 2013, the board of directors modified the stock option agreement, revising the vesting conditions of the agreement from performance objectives to a service condition. Under the revised agreement, 264,149 shares vest in March 2014, and the remaining 330,184 shares vest in March 2015. The Company valued the modified options at the modification date. Based on the Black Scholes option pricing model, the fair value of the modified share option is $1.44 per share. In June 2013, the Company’s CEO resigned his position. In connection with his resignation, the Company agreed to accelerate the vesting of a portion of his options for 264,149 shares from March 2014 to June 2013. The Company valued the modified options at the modification date which resulted in approximately $198,000 of stock option expense recorded during the year ended December 31, 2013. The CEO exercised these options in a cashless exercise, and the stock certificate was held by the Company per a lock-up provision until March 2014 at which time the certificate was released by the Company.
In March 2013, the Company granted certain members of the Denver-based restaurant management team stock options to purchase an aggregate of 90,000 shares of common stock. These options were granted with a five-year term exercisable at approximately $1.50 per share with 45,000 options vesting immediately and the remaining shares to vest one year later in March 2014. With the departure of two of these four employees in 2013, 40,000 stock options were forfeited and 50,000 stock options remained outstanding and vested as of March 31, 2014. None of these options were exercised by March 31, 2014.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
Stock options (continued):
In March 2014, Company granted the COO options to purchase up to 300,000 shares of common stock of the Company, vesting in equal shares annually over four years, with the first tranche to be vested fully by March 1, 2015, with an exercise price of $0.50 per share with a five-year term. In addition, this person holds options for 18,243 common shares to vest evenly over two years with the first tranche vested fully by September 30, 2014, with an exercise price of $0.14 with a five-year term. In addition, this person holds options to purchase up to 30,000 shares of common stock vesting in equal parts annually over three years with the first tranche vested fully by February 5, 2015, with an exercise price of $0.45 with a five-year term.
In January 2014, the Company granted the Chairman of the Board options to purchase up to 729,707 shares of common stock of the Company vesting evenly over four years with the first tranche to be vested fully by January 9, 2015, with an exercise price of $0.0685 per share with a five-year term.
In February and March 2014, the Company granted certain members of the Denver-based restaurant management team, Colorado Springs-based restaurant management team and the corporate staff stock options to purchase an aggregate of 210,000 shares of common stock. These options were granted with a five-year term exercisable at ranges approximately $0.45 to $0.55 per share with options vesting evenly in tranches over three to four years with the first tranche vesting fully in February 2015. None of these options were exercised by March 31, 2014.
In March 2014, the Company appointed certain officers and directors of the Company. At the same time, the CEO announced his resignation to be effective June 1, 2014. In connection with these changes, options were granted to two directors for 100,000 common shares each with a one year vesting term and an exercise price of $0.51 per share. The CEO’s options have also been amended to have 304,854 shares of common stock to vest evenly over a three year vesting period with the first tranche to vest in August 2014 at an exercise price of approximately $0.000274 per share.
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 $54,500 and $94,000 for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, there was approximately $432,190 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.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The weighted-average fair value of options granted during the three months ended March 31, 2014 and 2013 was $0.20 and $0.51 per share. The assumptions utilized to determine the fair value of options granted during the three months ended March 31, 2014 and 2013, are as follows:
|
|
2014
|
|
|
2013
|
|
Risk free interest rate
|
|
|
0.79
|
%
|
|
|
0.79
|
%
|
Expected volatility
|
|
|
105
|
%
|
|
|
105
|
%
|
Expected term
|
|
5 years
|
|
|
2-5 years
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
The expected term of stock options represents the period of time that the stock options granted are expected to be outstanding. The expected volatility is based on the historical price volatility of the common stock of similar companies. The risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend yield represents the anticipated cash dividend over the expected term of the stock options.
On January 22, 2014, in connection with the BB Transaction, all BBHCLLC options were assumed applying a conversion rate of 1.82427, resulting in a total of 879,164 options granted.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
The following tables set forth the activity in the Company's Plan for the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average
|
|
|
|
|
|
|
Shares
|
|
|
average
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
under
|
|
|
exercise
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
option
|
|
|
price
|
|
|
life
|
|
|
value
|
|
Outstanding at January 1, 2014
|
|
|
50,000
|
|
|
$
|
1.50
|
|
|
|
|
|
$
|
-
|
|
Granted
|
|
|
2,348,871
|
|
|
|
0.18
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2014
|
|
|
2,398,871
|
|
|
|
0.22
|
|
|
|
4.62
|
|
|
|
-
|
|
Exercisable at March 31, 2014
|
|
|
50,000
|
|
|
$
|
1.50
|
|
|
|
3.99
|
|
|
$
|
-
|
|
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s common stock on March 31, 2014, 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, 2014.
The following table summarizes the activity and value of non-vested options as of and for the three months ended March 31, 2014:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
Number of
|
|
|
grant date
|
|
|
|
options
|
|
|
fair value
|
|
Non-vested options outstanding at January 1, 2014
|
|
|
25,000
|
|
|
$
|
0.96
|
|
Granted
|
|
|
2,348,871
|
|
|
|
0.20
|
|
Vested
|
|
|
(25,000
|
)
|
|
|
0.96
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
Non-vested options outstanding at March 31, 2014
|
|
|
2,348,871
|
|
|
$
|
0.20
|
|
Warrants:
In December 2012, the Company entered into an indemnification agreement with JW Roth and Gary Tedder, both directors of the Company, for their personal risk regarding personal guarantees in favor of the Franchisor, which were the subject of an Area Development Agreement between the Franchisor and SH. The personal guarantees are still in effect for the royalty payments due to the Franchisor. In addition to the indemnification agreements, the Company compensated Messrs. Roth and Tedder for their personal guarantees in the form of a warrant to purchase up to 200,000 shares, per director, exercisable for ten years at $1.00 per share with the warrant vested immediately with a cashless exercise feature. The Company used the contractual term of the warrant, a risk free interest rate of 0.62% and a volatility of 105%. There are no unrecognized expenses related to the warrants.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
Warrants (continued):
As of December 31, 2013, the Company had a promissory note with an aggregate face amount of $200,000 outstanding. By the original terms, the holder of the note received additional consideration in the form of an immediately vested stock warrant of 50,000 common shares at an exercise price of $0.50 per share exercisable for the three years from the date of execution of the note. The Company used the Black Scholes pricing model to determine the fair value of the warrants. The Company used the contractual term of the warrant, a risk free interest rate of 0.39% and a volatility of 105%. A relative fair value of approximately $44,000 was calculated based on the fair value of the warrant and note payable.
On September 1, 2013, BBHCLLC retained an individual to advertise and promote the Company. This individual was granted an aggregate of 600,000 Class B non-voting warrants that vested immediately. These units were granted with a three-year term exercisable at approximately $0.0005 per unit. None of these warrants were exercised by March 31, 2014. These units converted into warrants to purchase 1,094,562 common shares at the date of the BB Transaction. The Company used the contractual term of the warrant, a risk free interest rate of .79% and a volatility of 105%. Approximately $37,432 has been recognized as equity-based compensation for the three months ended March 31, 2014. The remaining amount of approximately $62,380 recorded at March 31, 2014, is to be expensed through the remaining five months of the vesting period in 2014.
NOTE 8 – RELATED PARTY TRANSACTIONS
Related Party Management Agreement with AMHC Managed Services
Effective September 1, 2011, the Company entered into a management agreement (the “Management Agreement”) with AMHC Managed Services, Inc. (“AMMS”), a subsidiary of AMAC. The Company’s Chairman of the Board of Directors and officers of the Company are also officers/board members of AMAC. The significant terms of the Management Agreement provide for monthly payments to AMMS in exchange for the ability of the Company to fully utilize the management expertise, financial and accounting expertise, support staff and location of AMMS, including the expertise of the position of AMMS’ Chief Financial Officer and necessary support for compliance under the securities laws with respect to any private or public reports or registration statements the Company may file. The Management Agreement term was 12 months, and required the Company to pay AMMS a monthly fee equal to $35,000 per month. Additionally, under the Management Agreement, the Company granted AMMS a warrant to purchase 330,184 shares of Company’s common stock exercisable at $0.0007 per share, exercisable for a three-year term. The value of the warrant was determined to be approximately $49,700. The amount was recorded as a prepaid asset and was amortized over the one-year term of the Management Agreement as services are performed. AMMS exercised the warrant in full in July 2012.
The Management Agreement was renewed in October 2012 for an additional one-year period with terms similar to those of the 2011 Management Agreement. In connection with the renewed Management Agreement, the Company issued an additional warrant in October 2012 to AMMS to purchase 330,184 shares of the Company’s common stock at $0.0007 per share for a three-year term. The value of the warrant was determined to be approximately $49,700. The amount was recorded as a prepaid asset and is being amortized over the one-year term of the Management Agreement as services are performed, of which approximately $39,400 and $10,300 was expensed in the years ended December 31, 2013 and 2012. AMMS exercised the warrant in full in October 2012. On May 17, 2013, the Company amended its terms with AMMS so that AMMS would no longer be the “Acting CFO” nor provide senior financial management services for the Company effective the same date. Further, on June 26, 2013, the Company notified AMMS that it would terminate the Management Agreement effective July 31, 2013. These functions were handled by the interim CEO and interim CFO for the remainder of 2013.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
NOTE 8 – RELATED PARTY TRANSACTIONS (CONTINUED)
Related Party Management Agreement with AMHC Managed Services (continued)
The Company also paid rent and rent-related expenses to Accredited Members Acquisition Corporation (“AMAC”), a related party, on a month-to-month basis for office space at the AMAC corporate headquarters in Colorado Springs, Colorado. This arrangement began in October 2011 and terminated July 31, 2013, as the Management Service Agreement terminated. Base rental payments were approximately $3,500 per month. Related party rent expense was approximately $0 and $12,440 for the three months ended March 31, 2014 and 2013.
In addition to the management fee and the rent discussed above, the Company paid AMMS for reimbursable expenses and payments made to third parties on behalf of the Company. During the three months ended March 31, 2014 and 2013, the Company paid reimbursable expenses of $0 and $14,300, respectively.
In July 2013, the Company repurchased 33,334 common shares owned by AMMS for $1.50 per share for a total price of $50,000. These shares were cancelled by the Company in July 2013. The difference between the $1.50 per share and the fair value of the shares at the transaction date of $0.75 per share ($25,000) is recorded as an expense to related party management fees.