UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One) 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to_________

 

Commission File Number: 000-54070

 

THE GRILLED CHEESE TRUCK, INC.

(Exact name of registrant as specified in its charter)

 

NEVADA		27-3120288
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

151 North Nob Hill Road, Suite 321

Fort Lauderdale, FL 33324

(Address of principal executive offices) (Zip Code)

 

(949) 478-2571

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes   x  No   ¨  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer             ¨				Accelerated Filer                               ¨
Non-Accelerated Filer               ¨		(Do not check if a smaller reporting company)		Smaller Reporting Company            x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨  No   x

 

As of November 17, 2014, there were 18,037,158 outstanding shares of common stock, par value $0.001 per share, of the issuer.

 

  

Form 10-Q Quarterly Report

INDEX

 

PART I FINANCIAL INFORMATION
Item 1		Financial Statements	F-1
		Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	F-1
		Consolidated Statement of Operations for the Three and Nine Months ended September 30, 2014 and 2013 (unaudited)	F-2
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	F-3
		Notes to Consolidated Financial Statements (unaudited)	F-4
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3		Quantitative and Qualitative Disclosures About Market Risk	12
Item 4		Controls and Procedures	12
PART II OTHER INFORMATION
Item 1		Legal Proceedings	13
Item 1A		Risk Factors	13
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds Risk Factors	13
Item 3		Defaults Upon Senior Securities	13
Item 4		Mine Safety Disclosures	13
Item 5		Other Information	13
Item 6		Exhibits	13
Signatures			14

 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

THE GRILLED CHEESE TRUCK, INC.

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2014				2013
		(Unaudited)
ASSETS
Current Assets:
Cash and equivalents		$	81,247			$	42,359
Accounts receivable, net of allowance for doubtful accounts of $nil as of September 30, 2014 and December 31, 2013			49,246				15,256
Notes receivable			287,607				226,828
Prepaid expenses and other current assets			36,810				25,764
Vehicle held for sale			-				77,390
Total Current Assets			454,910				387,597
Property and equipment, net of accumulated depreciation			256,376				405,218
Deferred finance costs, net			8,857				236,070
Due from licensee			250,000				250,000
Other assets			76,863				78,795
Total Assets		$	1,047,006			$	1,357,680
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses		$	765,454			$	963,104
Accounts payable - related parties			314,206				552,416
Accrued compensation			693,429				134,387
Accrued interest			43,347				330,509
Accrued interest - related parties			-				1,502
Promissory notes			-				81,500
Promissory notes - related party			-				12,500
Notes payable			-				53,390
Advances from stockholders			311				311
Deferred sale			450,000				450,000
Convertible note payable, net of debt discount			80,308				-
Deferred revenue			250,000				250,000
Total Current Liabilities			2,597,055				2,829,619
Long-term convertible notes payable, net of debt discount			335,874				3,404,492
Total Liabilities			2,932,929				6,234,111
Stockholders' Deficit
Preferred stock, $0.001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2014 and December 31, 2013			-				-
Common stock, $0.001 par value, 100,000,000 shares authorized; 18,037,158 and 11,801,257 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively			18,037				11,802
Additional paid in capital			10,421,451				3,028,545
Accumulated deficit			(12,325,411	)			(7,916,778	)
Total Stockholders' Deficit			(1,885,923	)			(4,876,431	)
Total Liabilities and Stockholders' Deficit		$	1,047,006			$	1,357,680

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

THE GRILLED CHEESE TRUCK, INC.

UANUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three-month Periods Ended September 30,								For the Nine-month Periods Ended September 30,
		2014				2013				2014				2013
Revenue:
Food truck sales		$	585,211			$	303,922			$	1,848,204			$	998,179
Catering and special events			194,390				76,965				490,503				231,181
Licensing			215,994				39,693				235,885				118,810
Total revenue			995,595				420,580				2,574,592				1,348,170
Cost of Sales:
Food and beverage			255,297				144,496				729,196				422,800
Food truck expenses			540,481				210,694				1,500,907				559,832
Commissary and kitchen expenses			124,766				108,459				376,796				327,212
Total cost of sales			920,544				463,649				2,606,899				1,309,844
Gross (Loss) Profit:			75,051				(43,069	)			(32,307	)			38,326
Operating Expenses:
General and administrative			769,785				766,956				3,266,050				1,920,460
Selling costs			55,004				54,110				152,900				218,340
Consulting expense - related parties			116,525				325,035				247,775				1,310,712
Depreciation			17,777				22,619				57,313				26,876
Total operating expenses			959,091				1,168,720				3,724,038				3,476,388
Loss From Operations:			(884,040	)			(1,211,789	)			(3,756,345	)			(3,438,062	)
Other Income (Expenses):
Interest expense			(49,349	)			(131,010	)			(602,258	)			(509,506	)
Interest expense - related party			-				(427	)			(17,248	)			(1,138	)
Loss on disposition of equipment			(5,800	)			-				(43,800	)			-
Interest income			-				-				11,018				-
Net loss		$	(939,189	)		$	(1,343,226	)		$	(4,408,633	)		$	(3,948,706	)
Loss per share - basic and diluted		$	(0.05	)		$	(0.12	)		$	(0.30	)		$	(0.41	)
Weighted average shares outstanding - basic and diluted			18,036,520				10,922,662				14,530,870				9,730,308

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

  

 

THE GRILLED CHEESE TRUCK, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Nine-Month Period Ended September 30,
		2014				2013
Cash Flow From Operating Activities:
Net loss		$	(4,408,633	)		$	(3,948,706	)
Reconciliation of net loss to net cash used in operating activities:
Depreciation			57,313				26,876
Amortization of debt discount			99,190				207,178
Amortization of deferred financing costs			227,213				61,338
Amortization of intangible assets			-				4,035
Fair value of shares of common stock and warrants exceeding liability satisified			70,234				-
Fair value of options and warrants issued for services			456,613				450,156
Fair value of shares of common stock issued for services			277,188				768,500
Loss on disposition of equipment			43,800				-
Changes in operating assets and liabilities:
Accounts receivable			(33,990	)			(658	)
Notes receivable			-				(104,290	)
Prepaid expenses and other current assets			(18,893	)			(34,752	)
Deferred financing costs			-				(177,100	)
Other assets			-				(63,695	)
Accounts payable and accrued compensation			579,689				362,621
Accounts payable, related party			127,923				136,828
Accrued interest			188,887				235,830
Accrued interest, related party			-				661
Deferred revenues			-				(3,341	)
Net cash used in operating activities			(2,333,466	)			(2,078,519	)
Cash Flows From Investing Activities:
Proceeds from disposition of equipment			25,000				-
Proceeds from deferred sale of intangible assets			-				250,000
Purchases of fixed assets			(4,271	)			(41,277	)
Net cash provided by investing activities			20,729				208,723
Cash Flows From Financing Activities:
Proceeds from convertible notes			125,000				1,870,000
Proceeds from promissory note			55,000				-
Repayment of note payable			(99,000	)			(12,506	)
Payment of financing costs			(10,000	)			-
Advance from shareholders			-				26,200
Repayment of advances from shareholder			-				(28,626	)
Proceeds from issuance of shares of common stock			2,280,625				-
Net cash provided by financing activities			2,351,625				1,855,068
Net increase (decrease) in cash			38,888				(14,728	)
Cash at beginning of period			42,359				78,034
Cash at end of period		$	81,247			$	63,306
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	6,000			$	5,436
Income taxes		$	-			$	-
Non-cash investing and financing activities:
Common stock issued to satisfy promissory note and accrued interest related party		$	14,002			$	-
Common stock issued to satisfy promissory note and accrued interest		$	42,852			$	52,545
Common stock issued pursuant to conversion of convertible notes and accrued interest		$	3,620,697			$	512,500
Common stock issued to satisfy accounts payable, accrued compensation and accounts payable-related party		$	711,519			$	56,571
Common stock issued in connection with asset purchase agreement		$	-			$	500,000
Warrants issued in connection with asset purchase agreement		$	-			$	128,993
Assets purchased in connection with asset purchase agreement		$	-			$	682,383
Liablities assumed in connection with asset purchase		$	-			$	53,390
Beneficial conversion feature		$	62,500			$	89,743
Vehicle sold and assignment of note payable		$	53,390			$	-
Vehicle sold and issuance of receivable		$	51,000			$	-

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

  

 

THE GRILLED CHEESE TRUCK, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

  

1.

Nature of Business

 

TRIG Acquisition 1, Inc. (the “Company”) was incorporated in the State of Nevada on December 31, 2009 as GSP-1, Inc. The Company was formed as a vehicle to pursue a business combination. On July 6, 2011, the Company filed a Certificate of Amendment to its Articles of Incorporation to change its name from “GSP-1, Inc.” to “TRIG Acquisition 1, Inc.”

 

On October 18, 2012, the Company entered into a share exchange agreement (the “Exchange Agreement”) by and among (i) the Company, (ii) Grilled Cheese, Inc., a California corporation, (“Grilled Cheese”), (iii) GCT, Inc., a Nevada corporation and wholly-owned subsidiary of the Company (“GCT Sub”); (iv) David Danhi, the majority shareholder of Grilled Cheese (“Majority Shareholder”) and (v) Michelle Grant, the minority shareholder of Grilled Cheese (“Minority Shareholder”, together with the Majority Shareholder, the “Grilled Cheese Shareholders”). Pursuant to the terms of the Exchange Agreement: (1) the Majority Shareholder transferred to GCT Sub all of the shares of Grilled Cheese held by such shareholder in exchange for the issuance of 4,275,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”); and (2) the Minority Shareholder transferred all of the shares of Grilled Cheese held by the Minority Shareholder in exchange for $500,000 and 845,000 shares of Common Stock (the “Share Exchange Transaction”).

 

The Share Exchange Transaction has been accounted for as a reverse acquisition of the Company, by Grilled Cheese but in substance as a capital transaction, rather than a business combination since the Company had nominal operations and assets prior to and as of the closing of the Share Exchange Transaction. The former stockholders of Grilled Cheese represent a significant constituency of the Company’s voting power immediately following the Share Exchange Transaction and Grilled Cheese’s management assumed operational, financial and governance control. The transaction is deemed a reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition. For accounting purposes, Grilled Cheese is treated as the surviving entity and accounting acquirer in accordance with ASC 805, Business Combinations although the Company was the legal acquirer. Accordingly, the Company’s historical financial statements are those of Grilled Cheese. The accumulated losses of Grilled Cheese were carried forward after the completion of the Share Exchange Transaction.

 

All reference to Common Stock and per share amounts have been restated to effect the Share Exchange Transaction which occurred on October 18, 2012.

 

On February 19, 2013, following the Share Exchange Transaction, the Company changed its corporate name from “TRIG Acquisition 1, Inc.” to “The Grilled Cheese Truck, Inc.”

 

The Company is a food truck operation that sells various types of gourmet grilled cheese and other comfort foods in the Southern California and Phoenix, Arizona areas. The Company’s food trucks currently make multiple stops per week at prearranged locations. The food preparation occurs at a kitchen which supports streamlined operations within the truck by limiting assembly and grilling, allowing the truck to achieve maximum revenues per hour by delivering our food items including melts, tots, soups and sides efficiently to customers. The Company’s business model includes the use of social media and location booking to attract customers to the truck’s various locations.

 

2.

Going Concern and Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer term business plan. The Company has cash and working capital deficiency of approximately $81,000 and $2.1 million, respectively, at September 30, 2014. The Company has historically relied on proceeds from the issuance of debt and shares of its Common Stock to finance its operations. The Company’s net loss for the nine-month period ended September 30, 2014 was approximately $4.4 million and the deficit accumulated by the Company amounts to approximately $12.3 million as of September 30, 2014. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

  

In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources.  Management’s plan to continue as a going concern includes raising capital through increased sales and conducting additional financings through debt and equity transactions. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon the management’s ability to successfully implement the plans described above, including securing additional sources of financing and attain profitable operations.   Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis. The Company is actively targeting sources of additional financing through debt and equity transactions and other transactions. There can be no assurance that we will be able to continue to raise funds in which case the Company may be unable to meet its obligations. 

 

3.

Summary of Significant Accounting Policies

 

a.

Basis of Consolidation

 

The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant inter-company transactions are eliminated.

 

b.

Basis of Accounting

 

The balance sheet presented as of December 31, 2013 has been derived from our audited consolidated financial statements. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The unaudited consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014 as amended by the Form 10-K/A filed with SEC on May 13, 2014.  In the opinion of management, all adjustments, consisting of normal, recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results of operations for the three-month and nine-month periods ended September 30, 2014 are not necessarily indicative of the results for the year ending December 31, 2014.

 

c.

Cash and Cash Equivalents

 

Cash primarily consists of cash on hand and bank deposits. The Company currently has no cash equivalents which would consist of money market accounts and other highly liquid investments with an original maturity of three months or less when purchased.

 

d.

Use of Estimates in Preparation of Financial Statements

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts and notes receivable, useful life of fixed assets, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

  

e.

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed on the straight-line method. The depreciation and amortization methods are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows:

 

  

Computers	4 Years
Vehicles	4 Years
Office Equipment	7 Years
Food Service Equipment	7 Years
Furniture and Fixtures	7 Years
Leasehold Improvements	7 Years

 

Amortization of leasehold improvements is computed using the straight-line method over the shorter of the life of the lease or the estimated useful life of the assets. Maintenance and repairs are charged to expense as incurred. Improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in income.

 

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment, there was an impairment at December 31, 2013 of $142,309.

 

f.

Accounts Receivable

 

Accounts receivable are generally unsecured. The majority of the Company's sales are in cash from truck stop sales. Receivables relate to catering and special event sales. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management's evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts.

 

g.

Revenue Recognition

 

The Company's revenue is derived from three sources. The primary source is from truck stop sales and lesser portions are from catering and event services and licensed truck sales. Truck stop sales are primarily received in cash and revenue for these sales, net of sales tax, is reported at that time.

 

For catering and special event services, customers must sign and deliver the Company's standard catering agreement with a minimum payment of 50% of the agreed upon price of the event. The remaining balance is due by credit card payment within 2 days of the event or cash on the day of the event. The initial 50% deposit is fully refundable until 14 days prior to the event, between 4 and 13 days prior to the event, the deposit is non-refundable and if the customer cancels within 3 days of the event, 100% of the agreed-upon price of the event is due. Revenue is recognized, net of sales tax, at the time good and services are provided.

 

For recurring licensing revenue, which is based on 6% of gross revenue from truck stop sales collected by the licensee, revenue is recognized at the end of each month when the licensee is invoiced and the revenue is booked as a receivable.

 

For area licensing revenue, which is generally a fixed amount, the revenue is recognized when the Company has no remaining obligations or intent, either by agreement, trade practice, or law, to the extent it is collectible.

 

Any amount receivable or received pursuant to licensing revenues, but unrecognized for revenue recognition purpose is recorded as deferred revenues.

 

h.

Advertising Costs

 

Advertising costs, which are included in general and administrative expenses in the accompanying Statements of Operations, are expensed when incurred. These costs consist primarily of printing for signs, menus, and promotional items. Also included are costs of web based advertising. Total advertising expenses for the nine-month period ended September 30, 2014 and 2013 amounted to $23,471 and $17,373, respectively.

  

  

i.

Earnings (loss) per common share

 

The Company utilizes the guidance per FASB Codification “ASC 260 "Earnings per Share". Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the conversion of convertible notes and the exercise of stock options and warrants (calculated using the modified-treasury stock method). Such securities, shown below, presented on a common share equivalent basis and outstanding as of September 30, 2014 and 2013 have been excluded from the per share computations:

 

		As of
		September 30,
		2014				2013
Convertible notes			536,667				3,520,000
Options issued to employee			1,000,000				1,000,000
Warrants			7,811,951				2,862,000
			9,348,618				7,382,000

 

j.

Income Taxes

  

The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Penalties and interest on underpayment of income taxes are reflected in the Company’s effective tax rate.

 

k.

Sales Taxes

 

The Company's revenues in the statements of operations are net of sales taxes.

 

l.

Fair Value of Financial Instruments

 

Effective January 1, 2008, the Company adopted FASB ASC 820-Fair Value Measurements and Disclosures, or ASC 820, for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

  

  

Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data

 

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The Company did not have any Level 2 or Level 3 assets or liabilities as of September 30, 2014 and December 31, 2013, with the exception of its convertible notes payable. The carrying amounts of these liabilities at September 30, 2014 and December 31, 2013 approximate their respective fair value based on the Company’s incremental borrowing rate.

 

Additional Disclosures Regarding Fair Value Measurements

 

The carrying value of cash and cash equivalents, accounts receivable, notes receivable, other receivable, accounts payable and accrued expenses, notes payable, promissory notes and due from licensee- including related parties liabilities- approximate their fair value due to the short term maturity of these items.

  

In addition, FASB ASC 825-10-25 Fair Value Option, or ASC 825-10-25, was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.

 

m.

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities.”

 

Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.  Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of “Conventional Convertible Debt Instrument.”

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

  

  

ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

 

n.

Deferred Financing Costs

 

Costs incurred with obtaining and executing debt arrangements are capitalized and amortized over the term of the related debt using the effective interest method.

 

o.

Impairment of Long-Lived Assets

  

In accordance with ASC 360 “Property, Plant, and Equipment”, we periodically review our long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.  We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.  The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset. An impairment was necessary as of December 31, 2013. The Company fully impaired certain intellectual property comprised of trademarks, patents, domain names, technology rights, inventions etc. valued at $134,909 which was purchased on August 8, 2013 related to an asset purchase agreement. The impairment was recorded as impairment of intangible assets in the Company’s accompanying consolidated statement of operations for the year ended December 31, 2013. Since purchasing the intangible assets, the Company has not realized any benefit and management could not ascertain that the fair value of the intangibles would exceed their carrying value at December 31, 2013 and whether the intangible assets would generate positive cash flows for the foreseeable future. The Level of the fair value hierarchy used by management was Level 3. The intangible assets were re-measured on a non-recurring basis at December 31, 2013. The Company’s executive management undertook to perform the analysis of the valuation of the intangible assets. The highest and best use of the intangible assets does not differ from their current or intended use.

  

In addition, the Company purchased vehicles related to the asset purchase agreement dated August 8, 2013. The Company hired an appraiser to assess the value of the vehicles. The appraiser determined the value of the vehicles and the Company recorded an impairment of $142,309 at December 31, 2013.

  

p.

Intangible Asset

 

In connection with the asset purchase agreement dated August 8, 2013 (see Note 15), the Company identified and recognized an intangible asset of $134,909 representing intellectual property comprised of trademarks, patents, domain names, technology rights, inventions etc. The Company fully impaired the intangible asset at December 31, 2013 (see Note 3 o. - Impairment of Long-Lived Assets).

 

q.

Stock-Based Compensation

 

The Company adopted the provisions of ASC 718. We estimate the fair value of stock options using a binomial model, consistent with the provisions of ASC 718 and SEC Staff Accounting Bulletin No. 107, Share-Based Payment. Option-pricing models require the input of highly subjective assumptions, including the price volatility of the underlying stock. We determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. The expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting binomial calculation provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase plan, we decided to continue to use the Black-Scholes model to calculate the estimated fair value.

  

  

r.

Reclassifications

 

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

 

s.

Recently Issued Accounting Standards

 

The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company has not yet determined the effect of the adoption of this standard and it is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

 

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company has not yet determined the effect of the adoption of this standard and it is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

 

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company expects to adopt this new standard for the fiscal year ending December 31, 2014 and the Company will continue to assess the impact on its consolidated financial statements.

 

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operations, financial position or cash flows.

  

4.

Notes Receivable

 

The Company had promissory notes from licensees aggregating $276,817 and $226,828 outstanding at September 30, 2014 and December 31, 2013, respectively. The notes receivable bear interest ranging between 0% and 3.25%. The principal amount on the notes receivable are generally due within 12 months from issuance or payable upon demand. The Company recognized $0 and $3,685 of interest income in connection with such notes during the three and nine-month period ended September 30, 2014, respectively.

 

5.

Due from Licensee

  

On September 27, 2013, a licensee issued a promissory note to the Company relating to a one time license fee in the amount of $250,000. The note matures on September 28, 2016 and bears interest at 3% per annum. The Company has recorded interest income of $0 and $7,333 during the three and nine-month period ended September 30, 2014, respectively.

 

  

6.

Property and Equipment and Vehicles Held for Sale

 

Property and equipment consists of the following:

 

		September 30,				December 31,
		2014				2013
POS systems		$	21,358			$	21,358
Food service equipment			41,691				41,691
Truck equipment			5,346				5,346
Vehicles			252,542				567,384
Leasehold improvements			10,703				10,703
Computers			2,564				2,334
Furniture and fixtures			3,748				3,064
Total			337,952				651,880
Impairment of vehicles			-				(142,309	)
Accumulated depreciation			(81,576	)			(26,963	)
Total property and equipment and vehicles held for sale			256,376				482,608
Vehicles held for sale			-				(77,390	)
Total property and equipment		$	256,376			$	405,218

  

Depreciation expense for the nine-month period ended September 30, 2014 and 2013 amounted to $57,313 and $26,876, respectively and for the three month period ended September 30, 2014 and 2013 amounted to $17,776 and $22,618, respectively. 

 

On August 8, 2013, the Company entered into an Asset Purchase Agreement. As part of the Asset Purchase Agreement, the Company purchased $543,439 worth of equipment and vehicles (see Note 15). The Company had an appraisal performed on the vehicles and recorded an impairment of $142,309, which is recorded as impairment of vehicles in the Company’s accompanying consolidated statement of operations as of December 2013. (see Note 3 o. - Impairment of Long-Lived Assets).

 

As part of the audit process of its 2013 financial statements, and considering certain of the vehicles the Company had acquired pursuant to the Asset Purchase Agreement were either for sale or were idle, the Company tried to determine whether such vehicles’ fair value was lower than their carrying value. The Company used the services of a qualified appraiser to determine the fair value of such vehicles. The level of the fair value hierarchy used by the appraiser was categorized as Level 3. While the appraisal considered the market value of comparable vehicles sold within the markets within the area the vehicles were located (market approach), the fair value was adjusted for certain customizations (e.g., kitchen equipment) which either increased or decreased its fair value. Additionally, the appraiser made allowances for the additional options a given vehicle has or its conditions.

 

The vehicles were re-measured on a non-recurring basis at December 31, 2013. The Company’s executive management undertook to hire the appraiser who would ultimately perform the valuation of the vehicles. The highest and best use of the vehicles does not differ from their current or intended use.

 

During the nine-month period ended September 30, 2014, the Company sold four vehicles with an aggregate carrying value of $173,190, two of which were classified for sale with an aggregate carrying value of $77,390 at December 31, 2013. In consideration for the disposition, one of the buyers assumed the obligations under a note payable which had a carrying value of $53,390, another buyer owes the Company $24,000 at September 30, 2014, which is recorded as other asset, the third buyer paid $20,000 and issued a note receivable of $27,000, which is outstanding at September 30, 2014, and the fourth buyer paid $5,000, and resulted in loss on disposition of asset of $5,800 and $43,800 during the three and nine months ended September 30, 2014.

  

  

7.

Convertible Notes

 

The Company’s convertible promissory notes at September 30, 2014 and December 31, 2013 are as follows:

 

		September 30,				December 31,
		2014				2013
Convertible notes payable, bearing interest at 10%, maturing between October 2015 and March 2016, principal and accrued interest convertible at the holder’s option following the effectiveness of the Company’s registration statement or mandatory conversion at their maturity date, at a price of $1.00 per share		$	370,000			$	3,520,000
Convertible note payable, bearing interest at 10%, maturing May 2015, principal and accrued interest convertible at the holder’s option at a price of $0.75 per share			125,000				-
Unamortized debt discount			(78,818	)			(115,508	)
Total			416,182				3,404,492
Less: Current portion			(80,308	)			-
Long-term portion		$	335,874			$	3,404,492

  

The Company generated proceeds of $125,000 and $1,869,955 from the issuance of convertible promissory notes during the nine-month period ended September 30, 2014 and 2013, respectively.

 

The Company issued 3,620,700 and 1,696,833 shares of its common stock to satisfy its obligations pursuant to convertible notes during the nine-month period ended September 30, 2014 and 2013, respectively. The aggregate amount of principal and accrued interest satisfied by the issuance of shares of common stock amounted to $3,620,697 and $565,045 during the nine-month period ended September 30, 2014 and 2013, respectively.

 

In connection with the issuance of the convertible notes payable issued during the nine-month period ended September 30, 2014, the Company granted 166,667 non-detachable warrants to the noteholder, issuable upon conversion of such note. The warrants are exercisable at a price of $1.50 per share and will mature within 3 years from their issuance date.

 

In connection with the issuance of the convertible notes payable issued during the nine-month period ended September 30, 2013, the Company issued 935,000 warrants to the noteholders and 352,000 warrants to its placement agent. The warrants issued to the noteholders and the placement agent are exercisable at a price of $2.00 and $2.40 per share, respectively and mature within 3 years from their issuance date.

 

The beneficial conversion feature of the convertible notes and related warrants issued to the noteholders amounted to $62,500 and $89,743 during the nine-month period ended September 30, 2014 and 2013, respectively, and was recorded as debt discount of the corresponding debt.

 

The Company recognized interest expense of $602,258 and $509,506, including amortization of debt discount of $99,190 and $207,178 and amortization of deferred financing costs of $227,213 and $61,338, during the nine-month ended September 30, 2014 and 2013, respectively.

 

The Company recognized interest expense of $49,349 and $131,010 during the three-month ended September 30, 2014 and 2013, respectively.

 

  

8.

Promissory Notes Payable

 

On September 21, 2012, September 24, 2012 and October 1, 2012, the Company entered into three secured promissory notes totaling $37,500 due on December 6, 2012 and bearing interest at 12% per annum. In March 2013, the note holders agreed to extend the maturity date of the notes to September 30, 2013. These notes were in default at December 31, 2013. At January 23, 2014, the Company satisfied its obligations under such promissory notes by issuing 75,000 shares of its Common Stock as well as 9,375 warrants. The fair value attributed to the consideration given by the Company to satisfy such obligations was based on the pricing of its subscription agreement (which are priced at $1.25 per share including the warrant) which is contemporaneous to this transaction. The excess of the fair value of the consideration given by the Company, which amounted to $93,750, over the carrying value of the promissory notes and related interest payable, which amounted to $42,852, was recognized as interest expense of $50,898 in the accompanying unaudited consolidated statement of operations during the nine-month period ended September 30, 2014.

 

On December 27, 2013, the Company entered into an unsecured promissory note totaling $44,000 bearing interest at 10% per annum. The Company satisfied its obligations under the note by repaying it in January 2014.

 

On May 23, 2014, the Company issued a promissory note payable of $5,000. The Company satisfied its obligations under such the note payable by repaying it in June 2014.

 

Promissory Notes Payable – Related Party

 

On September 12, 2012, the Company entered into a secured promissory note (the “Chord Note”) with Chord Advisors, LLC. The Chord Note totaled $12,500, was due on December 6, 2012 and bears interest at 12% per annum. In March 2013, Chord Advisors, LLC agreed to extend the maturity date of the note to December 31, 2013. The Company’s former Chief Financial Officer, David Horin, is the President of Chord Advisors, LLC. This note was in default at December 31, 2013. At January 23, 2014, the Company satisfied its obligations under such promissory notes by issuing 25,000 shares of its Common Stock as well as 3,125 warrants. The fair value attributed to the consideration given by the Company to satisfy such obligations was based on the pricing of its subscription agreement (which are priced at $1.25 per share including the warrants) which is contemporaneous to this transaction. The excess of the fair value of the consideration given by the Company, which amounted to $31,250, over the carrying value of the promissory notes and related interest payable, which amounted to $14,002, was recognized as interest expense of $17,248 in the accompanying unaudited consolidated statement of operations during the nine-month period ended September 30, 2014.

   

9.

Notes Payable

 

Notes payable at September 30, 2014 and December 31, 2013 consists of the following:

 

		September 30,				December 31,
		2014				2013
Notes payable		$	-			$	65,986
Less payments			-				(12,506	)
Total		$	-			$	53,390

  

On August 8, 2013, the Company entered into an Asset Purchase Agreement. As part of the Asset Purchase Agreement, the Company assumed a liability totaling $53,390 for a finance arrangement relating to the purchase of a vehicle (see Note 15). In January 2014, the Company sold the vehicle to pay-off the above note. As of December 31, 2013, the Company reclassified the vehicles from property and equipment to vehicles held for sale.

 

10.

Warrants

 

Warrants issued concurrent with convertible notes:

  

In connection with the issuance of its convertible notes, the Company issued 166,667 and 1,286,979 warrants to the noteholders during the nine-month period ended September 30, 2014 and 2013, respectively. The Company accounts for the warrant valuation in accordance with FASB ASC 470-20, Debt with Conversion and Other Options. The Company records the fair value of warrants issued in connection with those instruments. The discount recorded in connection with the warrant valuation is recognized as non-cash interest expense and is amortized over the term of the convertible note. The fair value of the warrants, which amounted to $62,500 and $252,920 during the nine-month period ended September 30, 2014 and 2013, respectively, has been recognized as beneficial conversion feature and debt discount.

 

  

The fair value of these warrants issued and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:

  

Significant assumptions:
Risk-free interest rate at grant date			0.60%-0.85	%
Expected stock price volatility			80.00	%
Expected dividend payout			—
Expected option life-years			(a)

 

(a) All warrants issued expire in 3-5 years.

  

Warrants issued pursuant to Private Placement

 

The Company issued 1,824,500 warrants in connection with a private placement consisting of shares of common stock during the nine-month period ended September 30, 2014. The warrants expire in three years from their issuance date and are exercisable at price of $2.50 per share.

 

Warrants issued pursuant to Settlement of Promissory notes

 

The Company issued 9,375 and 3,125 warrants pursuant to the settlement of certain promissory notes and promissory notes-related party in January 2014. The warrants expire in January 2017 and are exercisable at a price of $2.00 per share.

 

Warrants issued pursuant to Settlement of Payables to Vendors, Officers, and Directors

 

The Company issued 330,000 warrants pursuant to the settlement of certain accounts payable and accounts payable-related party during the nine months ended September 30, 2014. The warrants expire in May 2017 and are exercisable at a price of $1.25 per share.

 

The Company issued 120,951 warrants pursuant to the settlement of certain accounts payable and accounts payable-related party during the nine months ended September 30, 2014. The warrants expire in June 2017 and are exercisable at a price of $1.25 per share.

 

The warrants were issued to the following parties:

 

Party (ies)		Number of warrants issued
Certain Vendors			80,951
Company’s Chief Executive Officer			112,000
Company’s Chief Financial Officer			36,000
Company’s Creative Officer			70,000
One of the Company’s Directors			112,000
A relative of one of the Company’s Directors			40,000

 

The relative of one of the Company’s directors performed advisory services in connection with veteran affairs, separate from the Clark Group Agreement.

 

Warrants issued for services

 

During the nine months ended September 30, 2014, the Company issued 658,000 warrants valued at $294,790 for services rendered. The warrants expire between April and September 2017 and are exercisable at a price ranging between $2.00 and $2.50 per share.

 

During the nine-month period ended September 30, 2013, the Company issued 500,000 warrants valued at $259,119 to one of its directors in connection with its compensation arrangement. The warrants expire in September 2016 and are exercisable at a price of $1.00 per share.

 

Warrants issued pursuant to asset purchase

 

During the nine-month period ended September 2013, the Company issued 250,000 warrants valued at $128,993 pursuant to an asset purchase agreement. The warrants expire in August 2016 and are exercisable at a price of $1.00 per share.

 

The fair value of the detachable warrants issued for services, in connection with the issuance of convertible notes payable and in connection with the asset purchase agreement and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:

 

		Nine-Month Period Ended
		September 30, 2014				September 30, 2013
Significant assumptions
Exercise Price			$2.00-2.50				$1.00-$2.40
Market Price		$	1.25			$	1.00
Expected stock volatility			80%				80%
Expected dividend payout			0%				0%
Rsik-free interest rate			0.93%				0.6-0.85%
Terms (years)			3				3-5

 

  

11.

Contingencies

  

The Company is subject to certain legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

 

12.

Stockholders’ Deficit

 

Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock consisting of 1,000,000 shares of Series A Convertible Preferred Stock $0.001 par value per share ("Series A Preferred Stock"), and 9,000,000 shares of blank check preferred stock, $0.001 par value per share.

 

Outstanding shares of Series A Preferred Stock, if any, shall automatically be converted into shares of Common Stock upon the earlier of (i) one year from the date of initial issuance of any shares of the Series A Preferred Stock at a conversion rate equal to $0.50 per share of Common Stock or (ii) the effectiveness of a registration statement filed with the SEC covering the resale of Common Stock issued by the Company in its next PIPE transaction (the "PIPE"). 

 

As of September 30, 2014 and December 31, 2013, no preferred stock was issued and outstanding.

 

Common Stock

 

The Company is authorized to issue 100,000,000 shares of Common Stock.

 

Shares issued pursuant to Private Placement

 

The Company generated gross proceeds of $2,280,625 by issuing 1,824,500 shares of its Common Stock pursuant to a private placement during the nine-month period ended September 30, 2014.

 

Shares issued pursuant to Settlement of Promissory Notes

 

The Company satisfied its obligations under $37,500 and $12,500 promissory notes and promissory notes-related party and accrued interest by issuing 100,000 shares of its Common Stock valued at $125,000 during the nine-month period ended September 30, 2014.

 

Shares issued pursuant to Satisfaction of Accounts Payable and Accrued Compensation

 

The Company satisfied its obligations with certain parties during the nine-month period ended September 30, 2014, as follows:

 

		Shares of				Carrying value of
Party (ies)		common stock issued				liability satisfied
Certain Vendors			98,951			$	123,689
Company's Chief Executive Officer			112,000				140,000
Company's Chief Financial Officer			36,000				45,000
Company's Chief Creative Officer			70,000				87,500
One of the Company's Directors			112,000				140,000
A relative of one of the Company's Directors			40,000				50,000

 

The fair value of the price per share for the aforementioned transactions was based on the price per share of its private placement, which occurred contemporaneously with such transactions.

 

The relative of one of the Company’s directors performed advisory services in connection with veteran affairs, separate from the Clark Group agreement.

 

Shares issued pursuant to Services

  

The Company issued to certain consultants 190,000 and 768,500 shares of its Common Stock in consideration for services rendered during the nine-month period ended September 30, 2014, and September 30, 2013, respectively. The fair value of the shares amounted to $237,500 and $768,500 during the nine-month period ended September 30, 2014 and September 30, 2013, respectively. The fair value of the price per share for the aforementioned transactions was based on the price per share of its private placement during the corresponding periods, which occurred contemporaneously with such transactions.

 

  

The Company issued to former board member 31,750 shares of its Common Stock in consideration for services rendered during the nine-month period ended September 30, 2014. The fair value of the shares amounted to $39,688 during the nine-month period ended September 30, 2014. The fair value of the price per share for the aforementioned transactions was based on the price per share of its private placement during the corresponding periods, which occurred contemporaneously with such transactions.

 

Shares issued pursuant to Conversion of Convertible Note Payable

 

The Company issued 3,620,700 shares of its common stock valued at $3,620,697 upon conversion of convertible notes payable of $3,150,000 and accrued interest of $470,697 during the nine months ended September 30, 2014.

 

In May 2013, the Company issued 1,696,833 shares of its Common Stock as a result of converting $512,500 of principal and $52,545 of interest of its pre reverse merger convertible notes holders.

 

Shares issued pursuant to Asset Purchase Agreement

 

During the nine-month period ended September 30, 2013, the Company issued 500,000 shares of its Common Stock in connection with an asset purchase agreement. The fair value of the shares amounted to $500,000.

 

Stock Compensation Plan

  

During September 2013, the Company adopted the 2013 Equity Plan ("2013 Plan"). An aggregate of 4,000,000 shares of our Common Stock are reserved for issuance under the 2013 Plan. The 2013 Plan may be administered, interpreted and constructed by the Board or a committee designated by the Board (the “Designee”). The 2013 Plan allows the Designee to grant stock options to employees, directors, senior management and consultants (under certain circumstances described in the 2013 Plan).

 

The Company recorded share-based payment expenses amounting to $277,188 and $27,860 during the nine-month period ended September 30, 2014 and 2014 in connection with all options outstanding respectively. The amortization of share-based payment was recorded in general and administrative expenses.

 

The Company granted 1,000,000 options in September 2013, as follows: (i) 250,000 options with an exercise price of $2.00 per share (ii) 250,000 options with an exercise price of $3.00 per share (iii) 250,000 options with an exercise price of $4.00 per share, and (iv) 250,000 options with an exercise price of $5.00 per share. Each of the options are exercisable for a term of 10 years. These were the only options granted and outstanding at September 30, 2014 and 2013, respectively.

 

The total compensation cost related to options not yet recognized amounted to approximately $404,853 at September 30, 2014 and the Company expects that it will be recognized over the remaining period of 23 months.

 

13.

Related Party Transactions

 

The related party transactions for the nine-month periods ended September 30, 2014 and 2013 and as of September 30, 2014 and December 31, 2013, respectively, are summarized below:

 

Stockholders advance funds to the Company from time to time to provide financing for operations.

 

		September 30,				December 31,
		2014				2013
Advances from stockholders		$	311			$	311

 

Advances from stockholders carry no interest, have no terms of repayment or maturity, and are payable on demand.

 

a.

Cohen Advisory Agreement

 

On June 15, 2012, the Company entered into an advisory agreement with Richard M. Cohen Consultants, Inc. (the “Advisor”). The parties agreed that from June 15, 2012 until June 14, 2013, the Advisor would perform advisory and consulting services for the Company. The Company will pay the Advisor $120,000, consisting of: (i) $60,000 of shares of the Company’s Common Stock to be based on the per share price of the Common Stock sold in a 2012 private placement offering, and (ii) $60,000 of cash to be paid in monthly payments of $5,000 pursuant to the terms of the agreement. The agreement may be terminated by the Company for cause, as defined in the agreement. Richard M. Cohen is also the Chairman of Chord Advisors LLC (“Chord”) and David Horin, our former Chief Financial officer, is the President of Chord. The advisory agreement contains a share provision, whereby the Company will issue 60,000 shares over the requisite service period based upon a $1.00 per share price of Common Stock sold in a 2012 private placement offering. For the nine-month period ended September 30, 2013, the Company incurred fees of $15,000 and issued 60,000 shares of its Common Stock with a fair value of $60,000 and has an accounts payable balance of $0 as of September 30, 2014 and December 31, 2013. This agreement expired on June 14, 2013 and was not renewed.

 

 

b.

TRIG Capital Advisory Agreement

 

On July 16, 2012, the Company entered into a advisory agreement with TRIG Capital Group, LLC whose members are Alfonso J. Cervantes, a shareholder and the Company’s former President, Secretary and a director of the Company, Robert Lee, the Executive Chairman, Principal Financial Officer and a director of the Company and Peter Goldstein, a shareholder and financial advisor to the Company, at that time. The term of the agreement shall begin on the effective date and continue until such agreement is terminated by the parties. Pursuant to the advisory agreement, TRIG Capital will provide the Company with foreign and domestic marketing services, management advice and support regarding operations, administrative services, and assist with business development as required by the Company. In addition, TRIG Capital will assist management in establishing its franchising operations and assisting in the sale of these franchises. Under the advisory agreement, TRIG Capital may engage third parties reasonably acceptable to the Company to assist in its efforts to satisfy the terms of the Agreement, but TRIG Capital shall be liable for any such payments made to third parties engaged by TRIG Capital.

 

As compensation for such services, the Company granted TRIG Capital the TRIG Warrant to purchase 1,800,000 shares of Common Stock. The TRIG Warrant is exercisable until July 16, 2017. The TRIG Warrant is exercisable at $2.00 or on a cashless basis if the market price of the Company’s Common Stock is less than the exercise price or $2.00. The 1,800,000 warrants were subsequently transferred to Mr. Cervantes, Mr. Goldstein and Mr. Lee, equally. In addition to the warrant, the Company will pay TRIG Capital a cash bonus of ten (10%) percent of the purchase price of any franchises that TRIG Capital may sell on behalf of the Company after completion of the Share Exchange Transaction for a period of five (5) years. Additionally, TRIG Capital will receive a monthly fee of $7,000 on the last day of each month for a period of no less than 18 months. During the nine-month period ended September 30, 2014 and 2013, the Company incurred fees of $0 and $63,000, respectively. The Company has an accounts payable balance of $58,451 and $58,451 as of September 30, 2014 and December 31, 2013, respectively. This agreement lapsed in January 2014.

   

c.

Trilogy IR Agreement

 

On July 16, 2012 the Company entered into the Investor Relations Agreement with Trilogy. The parties agreed to an eighteen (18) month contract, whereby Trilogy will provide the Company with the services to develop and implement a proactive financial communications program designed to increase the investor awareness of the Company in the investment community. In addition, Trilogy will assist the Company in preparing and disseminating investor relations documents, materials, and Company presentations, including press releases, online communications, and the Company’s website.

 

The Company will pay Trilogy $10,000 per month for these services. In addition, the Company paid Trilogy $25,000 as an engagement fee. Additionally, the Company paid Trilogy $40,000 upon the consummation of the initial closing of a 2012 private placement offering and an additional $40,000 upon the final closing of a 2012 private placement offering. This agreement lapsed in January 2014.

 

During the nine-month period ending September 30, 2014 and 2013, the Company incurred fees of $0 and $90,000 and has no accounts payable at September 30, 2014 and $50,000 at December 31, 2013. Our former President, Secretary and director and current shareholder, Alfonso J. Cervantes, owns a 100% equity interest in Trilogy.

 

d.

Villard Advisory Agreement

 

On July 16, 2012, the Company entered into an advisory agreement (the “Villard Advisory Agreement”) with Dimitri Villard (the “Advisor”). The parties agreed that from July 1, 2012 until June 30, 2013, the Advisor would perform advisory services for the Company, as well as serving as member of the Company’s Board. The Advisor will devote, on a non-exclusive basis, the necessary time, energy and efforts to the business of the Company and to use his best efforts and abilities to faithfully and diligently promote the Company’s business interests. The Company will pay the Advisor $45,000, consisting of: (i) $22,500 of shares of the Company’s Common Stock to be issued equally on a monthly basis pursuant to the terms of the Villard Advisory Agreement, and (ii) $22,500 of cash to be paid in monthly payments of $1,875 pursuant to the terms of the Villard Advisory Agreement. The Villard Advisory Agreement contains a share provision, whereby the Company will issue $22,500 of shares or 45,000 shares over the requisite service period based upon a 50% discount of the $1.00 per share price of Common Stock sold in the 2012 private placement offering. On September 6, 2013, the Company amended the Villard Advisory Agreement by extending the term of the agreement through February 28, 2014. During the nine-month period ended September 30, 2014 and 2013, the Company incurred fees of $16,375 and $16,875, respectively, and has an accounts payable of $55,175 and $54,375 at September 30, 2014 and December 31, 2013, respectively. During the nine-month period ended September 30, 2014, the Company issued 13,100 shares of its Common Stock to satisfy certain obligations to Mr. Villard amounting to $16,375. Additionally, the Company issued 31,750 and 45,000 shares of its Common Stock to Mr. Villard for services rendered during the nine-month period ended September 30, 2014 and 2013, respectively. The fair value of the shares amounted to $39,688 and $22,500. On September 6, 2013, Mr. Villard resigned from the Board. His resignation was not the result of any disagreement with the Company on any matter relating to its operation, policies (including accounting or financial policies) or practices.

 

  

e.

Grandview Capital Advisory Agreement

 

On July 16, 2012, the Company entered into the Grandview Advisory Agreement with Grandview Capital Partners, Inc. (‘Grandview”) whose majority shareholder is Peter Goldstein, a shareholder and financial advisor to the Company at that time. Pursuant to the Grandview Advisory Agreement, Grandview will provide the Company primarily with assistance and advice in seeking out a potential merger or acquisition partner or target.

 

The Company will pay Grandview $10,000 per month for a period of 18 months. In the event that the Company enters into any transaction involving a sale of the Company or the sale of any substantial or material assets within 36 months of the date of the Grandview Advisory Agreement, Grandview will receive a fee between two (2%) and ten (10%) percent of the total transaction, depending on the transaction value, as defined in the Grandview Advisory Agreement. Additionally, the Company paid Grandview a cash success fee of $40,000 upon the consummation of the initial closing of the 2012 private placement offering and an additional cash success fee of $40,000 upon the final closing of the 2012 private placement offering. During the nine-month period ended September 30, 2013, the Company incurred fees of $90,000 and has an accounts payable balance of $2,470 and $106,789 as of September 30, 2014 and December 31, 2013, respectively. Additionally, the Company issued 330,000 warrants to Grandview as one of the private placement agents during the nine-month period ended September 30, 2013. The fair value of the warrants amounted to $152,978.

 

On September 6, 2013, the Company entered into the Termination Agreement, whereby the company terminated the Grandview Advisory Agreement with Grandview. The Grandview Advisory Agreement was mutually terminated by the parties because Mr. Goldstein’s relationship with the Company changed. As provided in the Grandview Advisory Agreement and the Termination Agreement, the Company agreed that the provisions relating to the payment of fees (including but not limited to the tail fees specified in the Grandview Advisory Agreement relating to any entities or individuals Grandview introduced to the Company prior to the execution of the Termination Agreement), reimbursement of expenses, indemnification and contribution, independent contractor, conflicts, confidentiality and waiver of the right to trial by jury survive such termination. Peter Goldstein, the recently appointed President, interim Chief Financial Officer, Secretary and Director of the Company, is the founder, chairman, chief executive officer and registered principal of Grandview. Mr. Goldstein was also the Company’s founder and served as President and Director of the Company from December 31, 2009 to April 12, 2012. Mr. Goldstein did not hold any officer or director positions with the Company when the Grandview Advisory Agreement was consummated and through the Company’s 2013 private placement offering related to its debentures.

 

f.

Clark Group Agreement

 

On August 15, 2012, we entered into the Clark Group Agreement with the Clark Group. General Wesley K. Clark currently serves as Chairman and CEO of the Clark Group and as one of the Company’s directors. The agreement commenced upon the completion of the Share Exchange Transaction and will continue for a period of two years. This agreement was amended on September 6, 2013.

 

General Clark will supervise the development and implementation of recruitment and “vetting” for prospective veteran franchisees. Wesley Clark, Jr.’s responsibilities will be the supervision and administration of the selection process for prospective veteran franchisees, working directly with, and reporting to, Wesley Clark, Sr. in the execution of that process. During the nine-month period ended September 30, 2014 and 2013, the Company incurred fees of $180,000 and $106,668 and had an accounts payable balance of $146,668 and $106,668 as of September 30, 2014 and December 31, 2013, respectively. The Company issued 112,000 shares of its Common Stock to General Clark in satisfaction of liabilities amounting to $140,000 during the nine-month period ended September 2014.

 

  

g.

Chord Advisors Agreement

 

On August 15, 2012, the Company entered into an agreement (the “Chord Agreement”) with Chord. Pursuant to the Chord Agreement, Chord will provide the Company with comprehensive outsourced accounting solutions. The Company will pay Chord $6,250 per month for a period of 12 months. In addition, on September 1, 2012, the Company granted Chord 100,000 warrants with a term of three (3) years and an exercise price of $2.00. Our former Chief Financial Officer, David Horin, is the President of Chord. During the nine-month period ended September 30, 2013, the Company incurred fees of $18,750 and has an accounts payable balance of $0 as of September 30, 2014 and December 31, 2013. As of September 30, 2013, this agreement was terminated.

 

h.

Issuance of shares to the Company’s officers

 

During the nine-month period ended September 30, 2014, the Company satisfied the following liabilities with certain officers of the Company by issuing shares of its Common Stock as follows:

 

		Shares of
		Common stock				Carrying value of
Party (ies)		and warrants issued				liability satisfied
Company's Chief Executive Officer			112,000				140,000
Company's Chief Financial Officer			36,000				45,000
Company's Chief Creative Officer			70,000				87,500
A relative of one the Company's directors			40,000				50,000

 

Additionally, the Company issued to one of its former Board members 31,750 shares of its Common Stock during the nine-month period ended September 30, 2014. The fair value of the shares amounted to $39,688.

 

The relative of one of the Company’s directors performed advisory services in connection with veteran affairs, separate from the Clark Group agreement.

 

14.

Concentrations

 

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s cost of goods sold for the nine-month period ended September 30, 2014 and 2013, respectively.

 

Suppliers		Nine-month period ended September 30, 2014				Nine-month period ended September 30,2013
A			19	%			33	%
B			-				14

 

For the nine-month period ended September 30, 2014, the Company had one supplier who accounted for approximately $177,000 of their purchases used for production or approximately 19% of total purchases for the period then ended.

 

For the nine-month period ended September 30, 2013, the Company had two suppliers who accounted for approximately $297,000 of their purchases used for production or approximately 47% of total purchases for the period then ended. The amount payable to supplier A at September 30, 2014 amounted to $78,000.

 

  

15.

Asset Purchase Agreements

 

On August 8, 2013, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), by and among Hook & Ladder Draught House, LLC, a Texas limited liability company (“HL”), KOW Leasing Co., LLC, a Texas limited liability company (“KOW”), Mr. Devaraj, as sole member of HL and KOW, respectively (“Mr. Devaraj” together with HL and KOW, the “Sellers”), the Company and GCT Texas Master, LLC, a Nevada limited liability company and a licensee of the Company (“GCT-TX”, together with the Company, the “Buyer”).  HL is a mobile food service business that provides food and alcohol out of renovated fire engines.  Pursuant to the Asset Purchase Agreement, the Company agreed to purchase substantially all of the Seller’s rights, title and interests in and to certain assets, properties and rights of every kind, nature and description, tangible and intangible, real, personal or mixed, accrued and contingent, which are owned or leased by Sellers and used in the Seller’s business, including but not limited to all equipment, customer contracts, property leases, intellectual property, vehicles, books and records, licenses and corporate and trade names.

 

As consideration for the Seller to enter into the Asset Purchase Agreement, the Company agreed to: (i) issue to Sellers 500,000 shares of the Company’s Common Stock, and (ii) issue a warrant to Sellers to purchase up to 250,000 shares of Common Stock (the “HL Warrant”).  The 500,000 shares of Common Stock issued to the Sellers under the Asset Purchase Agreement are subject to customary piggy-back registration rights and were valued at $1.00 per share. The HL Warrant is exercisable at a price of $1.00 per share, contains customary piggyback registration rights and shall be exercisable for a period of three (3) years. In total the value of the common shares issued were $500,000 and the value of the warrants issued were $128,993 for total consideration of $628,993.

 

  

The assets purchased were fixed assets of equipment and vehicles totaling $543,439, which initially were recorded at the carrying value, which at the time the Company estimated to approximate their fair market value and intellectual property valued at $138,944. The fair value allocation of intellectual property is based on management estimates. At December 31, 2013, the Company determined a full impairment of the identifiable intellectual property, including but not limited to all customer contracts, property leases, intellectual property, vehicles, books and records, licenses and corporate and trade names, was necessary. In addition the Company assumed a liability totaling $53,390 for a finance arrangement relating to the purchase of a vehicle which it sold in January 2014 (see Note 6).

 

The Company also agreed to appoint Mr. Devaraj to the Company’s Board, and, for so long as Mr. Devaraj holds any shares of Common Stock, the Board shall take all reasonable actions such that Mr. Devaraj shall be nominated to serve as a member of the Board. Additionally, the Company entered into an employment agreement with Mr. Devaraj, whereby Mr. Devaraj will be employed by the Company as the Director of Business Development for a period of three (3) years.

 

On August 8, 2013, HL and KOW (assignors) and the Company (assignee) entered into assignment agreement to ensure that all the intellectual property subject of the Asset Purchase Agreement is properly transferred to assignee.

 

On August 8, 2013, H&L (assignor) and the Company (assignee) entered into assignment and assumption of sublease agreement to assign and transfer to assignee all of right, title and interest in tenant under sublease. Assignor is the holder of tenant’s interest in that certain sublease dated as of March 1, 2013 between KOW as landlord and assignor as a tenant.

 

On August 8, 2013, KOW (assignor) and the Company (assignee) entered into assignment and assumption of lease agreement to assign and transfer to assignee all of right, title and interest as tenant in lease and desires to succeed to the interest of assignor under the lease and to assume the obligation of assignor. Assignor is the holder of tenant’s interest in that certain lease dated as of May 17, 2012 between Southern Methodist University as landlord and assignor as a tenant.

 

On November 13, 2013, the Company and AFT closed (the “AFT Closing”) the transactions contemplated by the Asset Sale Agreement. At the AFT Closing, the Company transferred to AFT certain intellectual property that was developed and owned by KOW, which was part of the assets purchased by the Company from KOW pursuant to that certain Asset Purchase Agreement, dated August 8, 2013, between the Company, KOW, HL and Mr. Devaraj. The Company sold to AFT one domain name, hookandladder.biz, which had nominal value and did not include any of the other intellectual property acquired on August 8, 2013 by the Company. The domain name was carried on the Company's balance sheet at $-0-. In consideration, AFT paid the Company an aggregate cash payment of $450,000 and issued to the Company membership interests equal to a twenty percent (20%) interest of the issued and outstanding membership interests in AFT. In addition, at the AFT Closing, the Company and AFT agreed to entered into a truck rental lease agreement pursuant to which AFT shall lease to the Company, franchise or licensed operators of the Seller, One Hundred (100) new Food trucks, at prevailing market rates and on such other terms and conditions as substantially set forth in the Truck Rental Lease Agreement (the “ Truck Rental Agreement ”), in accordance with the lease commencement schedule as follows: (i) Twenty (20) trucks on or before March 31, 2014; and (ii) a minimum of Ten (10) trucks per month after March 31, 2014. The Company recorded the full $450,000 as a deferred sale. AFT has yet to deliver any of the twenty trucks agreed to be leased by the Company from AFT before June 30, 2014.  Accordingly, the Company has not recognized the $450,000 and is still evaluating the accounting treatment as it fulfills its remaining obligation to lease these trucks.  

 

16. Subsequent Events

 

On November 17, 2014, the Company issued 1,000,000 restricted shares of its Common Stock to charitable foundations that assist veterans. The issuance of the restricted shares of Common Stock to the charitable foundations is subject to the following resale restriction: no more than 1/12^th of the shares initially donated may be sold in any given month following the eligibility for resale either pursuant to 1) a registration statement filed by the Company to register such shares or 2) pursuant to Rule 144.

 

On November 18, 2014, the Company entered into Amendment No. 1 to its employment agreement with Peter Goldstein (the "Amended Goldstein Agreement"), which amends Mr. Goldstein's employment agreement dated September 6, 2013. The Amended Goldstein Agreement provides that Mr. Goldstein will serve as Treasurer of the Company in addition to his roles as President, Interim Chief Financial Officer and Secretary of the Company. The Amended Goldstein Agreement has a term ending December 31, 2015 and provides that in the event that the Company completes a private placement offering commencing in May 2013, Mr. Goldstein shall receive a cash payment of $100,000 if the Company raises a minimum of $5,000,000 in that offering. Also, pursuant to the Amended Goldstein Agreement, the Company shall pay Mr. Goldstein a success fee, if the Company closes on an acquisition, merger or joint venture or similar transaction, payable in the same form of consideration paid by the Company, in the amount of (i) 2.5% of the first $5,000,000 of total consideration paid, or any part; (ii) plus, 2% of the second $5,000,000 of total consideration paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total consideration, or any part; (iv) plus, 1% of the next $5,000,000 of total consideration, or any part; (v) plus, 0.5% of the balance of total consideration paid. No other material amendments were made to Mr. Goldstein's employment agreement.

 

On November 18, 2014, the Company entered into Amendment No. 2 to its employment agreement with Robert Y. Lee (the "Second Amended Lee Agreement"), which amends Mr. Lee's employment agreement originally dated July 16, 2013, as amended by Amendment No. 1 dated September 6, 2013. The Second Amended Lee Agreement has a term ending December 31, 2015 and provides that in the event that the Company completes a private placement offering commencing in May 2013, Mr. Lee shall receive a cash payment of $100,000 if the Company raises a minimum of $5,000,000 in that offering. Also, the Company shall pay Mr. Lee a success fee, if it closes on an acquisition, merger or joint venture or similar transaction, payable in the same form of consideration paid by the Company in the amount of (i) 2.5% of the first $5,000,000 of total consideration paid, or any part; (ii) plus, 2% of the second $5,000,000 of total consideration paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total consideration paid, or any part; (iv) plus, 1% of the next $5,000,000 of total consideration paid, or any part; (v) plus, 0.5% of the balance of total consideration paid. No other material amendments were made to Mr. Lee's employment agreement.

 

On November 18, 2014, the Company entered into Amendment No. 1 to its employment agreement with David Danhi (the "Amended Danhi Agreement"), which amends Mr. Danhi's employment agreement dated October 18, 2012. The Amended Danhi Agreement provides that if Mr. Danhi and the Company enter into a services agreement with a third party, pursuant to which Mr. Danhi provides services to a third party for which the Company receives a fee, the Company shall pay a bonus to Mr. Danhi equal to 100% of such fee, in cash or shares of Common Stock, provided that such bonus shall not be greater than $25,000. In addition, Mr. Danhi shall receive a cash payment of $160,000 if the Company raises a minimum of $5,000,000 in a private placement financing. No other material amendments were made to Mr. Danhi's employment agreement.

 

On November 18, 2014, the Company entered into Amendment No. 1 to its advisory agreement (the "Amended PBNJ Agreement") with PBNJ Advisors, Inc. ("PBNJ"), which amends PBNJ's advisory agreement dated April 14, 2014. The Amended PBNJ Agreement has a term that continues through December 31, 2015 and provides for compensation to PBNJ in the amount of 75,000 shares of Common Stock and 75,000 warrants to purchase Common Stock, such warrants exercisable for a period of 3 years at price of $2.00 per share. The Amended PBNJ Agreement also provides that both parties may terminate the agreement upon 30 days written notice. No other material amendments were made to PBNJ's advisory agreement.

 

On November 18, 2014, the Company entered into Amendment No. 2 to the term sheet (the "Second Amended Clark Agreement") with Wesley K. Clark & Associates, LLC (the "Clark Group"), which amends the term sheet with the Clark Group originally dated August 15, 2012 (the "Clark Agreement"), as amended by Amendment No. 1 dated September 6, 2013 (the "Amended Clark Agreement"). The Second Amended Clark Agreement provides that as of the date thereof, the Company shall issue to the Clark Group 500,000 warrants to purchase Common Stock, such warrants exercisable through December 31, 2016 at a price of $1.00 per share and without the condition that a certain number of veteran franchise agreements be executed (as set forth in the Clark Agreement). The Second Amended Clark Agreement has a term that continues through December 31, 2015. No other material amendments were made to Clark Group's agreement with the Company.

 

  

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report on Form 10-Q (this “Report”). This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forwarding looking statements as a result of certain factors, including but not limited to, those which are not within our control.

 

  

Overview

 

TRIG Acquisition 1, Inc. was incorporated in the State of Nevada on December 31, 2009 as GSP-1, Inc. The Company was formed as a vehicle to pursue a business combination. On October 18, 2012 (the “Closing Date”), Trig Acquisition 1, Inc. (the “Company”) entered into a share exchange agreement (the “Exchange Agreement”) by and among (i) the Company, (ii) Grilled Cheese, Inc., a California corporation, (“Grilled Cheese”), (iii) GCT, Inc., a Nevada corporation and wholly-owned subsidiary of the Company (“GCT”), whereby the Company acquired Grilled Cheese ( the “Share Exchange Transaction”). The Company selected December 31 as its fiscal year end. On July 6, 2011, the Company filed a Certificate of Amendment to its Articles of Incorporation to change its name from “GSP-1, Inc.” to “TRIG Acquisition 1, Inc.” On February 19, 2013, following the Share Exchange Transaction, the Company changed its corporate name from “TRIG Acquisition 1, Inc.” to “The Grilled Cheese Truck, Inc.”

 

From inception until the closing of the Share Exchange Transaction, we solely existed as a vehicle to pursue a business combination. As a result of the Share Exchange Transaction, we ceased our prior operations on October 18, 2012 and, through our wholly-owned subsidiary, Grilled Cheese, now operate as a gourmet food truck Company, specializing in gourmet grilled cheese.

 

Grilled Cheese, Inc. was a privately held California S corporation, incorporated on September 18, 2009. Immediately prior to the closing of the Share Exchange Transaction, David Danhi was the majority shareholder of Grilled Cheese. Grilled Cheese’s operations to date have consisted of sales of grilled cheese and food related items in their food trucks, business formation, strategic development, marketing, website development, negotiations with prospective licensees and franchisees and capital raising activities.

 

The Grilled Cheese Truck is a gourmet food truck that sells various types of gourmet grilled cheese and other comfort foods principally in the Los Angeles, California area and in Phoenix, Arizona. Each of our trucks currently makes approximately ten stops per week (lunch and dinner five days a week) at prearranged locations. We are a hub and spoke operator, whereby all the food preparation occurs at our kitchens which support streamlined operations within the truck by limiting truck activity to assembly and grilling to focus on customer service, allowing the truck to achieve maximum revenues per hour and delivering melts, Tater Tots™, soups and sides efficiently and consistently to its customers. Our business model implements the use of social media and advance location booking to secure high sales per stop. Our website, www.thegrilledcheesetruck.com lists the weekly schedule where the trucks will be stopping.

  

We are capitalizing on the burgeoning food truck industry through our established food service operations and social media strategy. Driving our growth, we have received national media visibility and as of the date of this quarterly report, have accumulated over 120,000 followers through a variety of social media platforms, including Facebook and Twitter. The gourmet food truck industry is in an early stage of development and is highly fragmented and is expected to grow year over year for the foreseeable future.

 

We believe that the use of social media allows us to communicate with a large group of an interested customers and our fan base in real time, letting them know exactly where and when our food trucks will be located.  We believe that providing potential customers with up-to-date information regarding the time and location of our trucks helps promote and drive additional customers to our trucks, therefore increasing our sales at each prospective location. We believe we have established brand presence in certain locations, such as Southern California and Phoenix, Arizona, but have sustained losses to date.

 

We currently qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (which we refer to herein as the JOBS Act), which permits us to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

 

·

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

·

taking advantage of an extension of time to comply with new or revised financial accounting standards;

 

·

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

·

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

Although we qualify as an emerging growth company under the JOBS Act, we have elected not to take advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and such election not use such transition period is irrevocable.

 

The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2013 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses totaling $5,612,919 of which $3,050,682 were non-cash items and cash used in operations totaling $2,562,237. Our business will require significant amounts of capital to sustain operations and make the investments we need to execute our longer term business plan. Our net loss for the nine-month period ended September 30, 2014 amounted to approximately $4.4 million and the accumulated deficit amounted to approximately $12.3 million at September 30, 2014. These matters raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated unaudited financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

  

In order to continue as a going concern and achieve a profitable level of operations, we will need, among other things, additional capital resources.  Management’s plan to continue as a going concern includes raising capital through debt or equity transaction which could further dilute our existing shareholders and increased sales and growing operations to profitability. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans of raising additional funds. Our ability to continue as a going concern is dependent upon the management’s ability to successfully implement the plans described above. Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for us to raise additional capital on an immediate basis. There can be no assurance that we will be able to continue to raise funds in our current offering or subsequent debt or equity financings, in which case the Company may be unable to meet its obligations.

 

We generated revenue from retail sales through nine company operated food trucks and two trucks operated by third-party licensees. We added five (5) Company trucks and one (1) licensed truck in the fourth quarter of 2013 and have maintained this level during the first nine-months of 2014. We have also finalize an area licensing arrangement during the third quarter of 2014. All trucks are rented or leased. For our company operated trucks, we receive 100% of reported revenue and bear all associated costs. On licensed trucks, we collect 6% of gross revenue of the third-party licensees. We intend to expand and generate revenue from additional company trucks, company stores, third-party license agreements at airports, stadiums, malls and other locations, as well as franchise revenues, to consist primarily of royalties based on a percentage of sales reported by franchise revenue and franchise fees paid by franchisees, as well as the development of Company operated and the acquisition of grilled cheese stores. However, we cannot provide any assurance or guarantee that we will be able to implement our expansion of food trucks and stores or collect any royalties based on a percentage of sales reported by licensees or franchisees.

 

We implemented a new POS system during fiscal year 2013 to include the implementation of more efficient systems and equipment. Management recognizes the importance of efficient cash and accounting management systems and with implementing this advanced point-of-sales (POS) platform that will work for both company and franchised outlets. In addition to quicker customer order process, this system will also streamline the financial reporting, cost of goods, performance metrics and finance processes. It will also track franchised operations, once established, and remotely calculate and collect royalties, all in real time and on a daily basis.

 

  

During 2013 our focus was to design, develop and build two kitchens, with one in Los Angeles and one in Phoenix and to create the infrastructure to support rapid expansion and growth within these markets. Additionally, we focused on the development, testing and implementation of a training program for US veterans. In the fourth quarter of 2013 we expanded to include a total of nine Company operated and two licensed trucks in operations. During the first nine-months of fiscal 2014, our focus was to start refining and evaluating our operations in their initial stage of deployment and develop relationships with individuals and entities that could undertake licensing and replicating our business model From time to time, we evaluate acquisition targets which could provide certain benefits to us, such as accelerating time to market our products, geographic expansion, and workforce in place, among other things.

 

Additionally, we reduced our obligations under convertible promissory notes, certain accounts payable and accrued compensation by issuing shares of our Common Stock aggregating $4.3 million during May through July 2014. Furthermore, we generated proceeds from the issuance of our Common Stock aggregating $2.3 million during the nine-month period ended September 30, 2014.

 

Results of Operations:

 

Three Month and Nine-Month Period Ended September 30, 2014 and 2013

 

The following table summarizes changes in selected operating indicators, illustrating the relationship of various income and expense items to food and beverage sales for the respective periods presented:

 

		Three-month								Three-month								Increase/				Increase/				Nine-month								Nine-month								Increase/				Increase/
		period ended				As a %				period ended				As a %				Decrease in $				Decrease in %				period ended				As a %				period ended				As a %				Decrease in $				Decrease in %
		September 30, 2014				of revenues				September 30, 2013				of revenues				2014 vs 2013				2014 vs 2013				September 30, 2014				of revenues				September 30, 2013				of revenues				2014 vs 2013				2014 vs 2013
Revenue:
Food truck sales		$	585,211				59	%		$	303,922				72	%		$	281,289				93	%		$	1,848,204				72	%		$	998,179				74	%		$	850,025				85	%
Catering and special events			194,390				20	%			76,965				18	%			117,425				153	%			490,503				19	%			231,181				17	%			259,322				112	%
Licensed truck			215,994				22	%			39,693				9	%			176,301				444	%			235,885				9	%			118,810				9	%			117,075				99	%
Total revenue			995,595				100	%			420,580				100	%			575,015				137	%			2,574,592				100	%			1,348,170				100	%			1,226,422				91	%
Cost of Sales:
Food and beverage			255,297				26	%			144,496				34	%			110,801				77	%			729,196				28	%			422,800				31	%			306,396				72	%
Food truck expenses			540,481				54	%			210,694				50	%			329,787				157	%			1,500,907				58	%			559,832				42	%			941,075				168	%
Commissary and kitchen expenses			124,766				13	%			108,459				26	%			16,307				15	%			376,796				15	%			327,212				24	%			49,584				15	%
Total cost of sales			920,544				92	%			463,649				110	%			456,895				99	%			2,606,899				101	%			1,309,844				97	%			1,297,055				99	%
Gross (Loss) Profit:			75,051				8	%			(43,069	)			-10	%			118,120				-274	%			(32,307	)			-1	%			38,326				3	%			(70,633	)			-184	%
Operating Expenses:
General and administrative			769,785				77	%			766,956				182	%			2,829				0	%			3,266,050				127	%			1,920,460				142	%			1,345,590				70	%
Selling costs			55,004				6	%			54,110				13	%			894				2	%			152,900				6	%			218,340				16	%			(65,440	)			-30	%
Consulting expense - related parties			116,525				12	%			325,035				77	%			(208,510	)			-64	%			247,775				10	%			1,310,712				97	%			(1,062,937	)			-81	%
Depreciation			17,777				2	%			22,619				5	%			(4,842	)			-21	%			57,313				2	%			26,876				2	%			30,437				113	%
Total operating expenses			959,091				96	%			1,168,720				278	%			(209,629	)			-18	%			3,724,038				145	%			3,476,388				258	%			247,650				7	%
Loss From Operations:			(884,040	)			-89	%			(1,211,789	)			-288	%			327,749				-27	%			(3,756,345	)			-146	%			(3,438,062	)			-255	%			(318,283	)			9	%
Other Expenses:
Interest expense			(49,349	)			-5	%			(131,010	)			-31	%			(81,661	)			62	%			(602,258	)			-23	%			(509,506	)			-38	%			92,752				-18	%
Interest expense - related party			-				0	%			(427	)			0	%			(427	)			100	%			(17,248	)			-1	%			(1,138	)			0	%			16,110				NM
Loss on disposal of equipment			(5,800	)			-1	%			-				0	%			5,800				NM				(43,800	)			-2	%			-				0	%			43,800				NM
Interest income			-				0	%			-				0	%			-				NM				11,018				0	%			-				0	%			11,018				NM
Net loss		$	(939,189	)			-94	%		$	(1,343,226	)			-319	%		$	251,461				-19	%		$	(4,408,633	)			-171	%		$	(3,948,706	)			-293	%		$	(154,603	)			4	%

 

NM: not meaningful

 

  

Revenue. The increase in sales during the three-month period and nine-month periods ended September 30, 2014, when compared to the comparable prior year periods, is primarily due to the increased number of trucks in the fourth quarter of 2013 and the popularity of the Company’s truck sales and catered events. We also recognized an area licensing fee of $200,000 during the third quarter of 2014. We added five (5) Company trucks and one (1) licensed truck in the fourth quarter of 2013 and we have maintained the same level of trucks during the first nine-months of 2014.

 

We believe our revenues for the remainder of 2014 will continue to increase when compared to the prior year periods.

 

Cost of sales. Cost of sales is mainly comprised of food and beverage products used to make grilled cheese sandwiches, other food products, beverages and paper products and the operating costs related to the food truck, including food truck employee compensation and benefits, commissary kitchen costs, maintenance and fuel. The increase in cost of sales is primarily related to the increase in the number of trucks during 2013 and specifically in the fourth quarter of 2013, the popularity of the Company’s truck sales and catered events as well as the start-up costs for the additional source of revenue generated from company and our licensed truck sales.

 

Food and beverage expenses consist primarily of bread, cheese, meats, seafood and other types of foods and various types of beverages. The increase in food and beverage cost of sales during the three-month and nine-month period ended September 30, 2014, when compared to the comparable prior year period, is primarily related to the increase in sales, slightly offset by a more efficient deployment of the types of food by trucks as we gain experience in the demand of our products.

 

Food truck expenses consist of truck staff payroll, truck insurance, gas, repairs and maintenance and other truck related expenses. The increase in food truck cost of sales was primarily related to the expansion of the Company’s operations in Phoenix and Los Angeles. This increase in Food truck expenses was related to startup costs and training of truck staff personnel for expanding operations and from three (3) to eleven (11) truck during the three and nine-month period ended September 30, 2014 when compared to prior year periods. Additionally, during the three-month period ended September 30, 2014, we participated in a few events located outside Phoenix and Los Angeles, such as Las Vegas and South Dakota, to showcase our products for licensing purposes which increased our food truck expenses during such period. We did not attend such events during the three-month and nine-month periods ended September 30, 2013.

 

Kitchen expenses consist of occupancy, equipment and commissary employee compensation. The kitchen expenses increased during the three-month and nine-month ended September 30, 2014 when compared to the comparable prior year periods as we hired and trained new kitchen personnel and implemented and tested our recipes during such periods.

 

We believe our costs of sales for the remainder of 2014 will continue to increase commensurate with our expected increase in revenues.

 

Gross profit. The change in gross profit relates to the increase in the aforementioned revenues, food and beverage costs as well as food truck expenses and kitchen expenses.

  

We are unable to determine whether our gross profit and gross profit margin will increase during the remainder of 2014. It will be a function of our increase in non-licensing revenues and the timing of the costs of sales we incur, some of which are fixed in nature (kitchen expenses), some of which are semi-fixed (food truck expenses), and some of which are variable (food expenses).

 

  

General and administrative expenses. General and administrative expenses consists of general corporate expenses, including but not limited to market development, insurance, professional costs, clerical and administrative overhead. The increase in general and administrative expenses during nine-month periods ended September 30, 2014 is primarily related to the expenses associated with the increased consulting fees, professional fees and executive compensation, which are needed to expand the business and support its growing operations and prepare the Company for public trading, which were mostly incurred during the first half of 2014. Our general and administrative expenses during the three-month period ended September 30, 2014 were at comparable levels with those incurred during the three-month period ended September 30, 2013.

 

Selling costs. Selling costs include, but are not limited to, marketing and promotion, printing, processing fees and utility vehicle rental which is used to transport employees to and from the food trucks. The decrease in selling costs during the nine-month periods ended September 30, 2014, when compared to the comparable prior year periods, relates to certain marketing events held in Los Angeles and Phoenix when we opened these markets during the first half of 2013, which we did not have to incur during the three and nine-month periods ended September 30, 2014. Our selling costs during the three-month period ended September 30, 2014 were at comparable levels than those incurred during the three-month period ended September 30, 2013.

 

Consulting expense, related party. The decrease in consulting expenses-related parties is primarily due to the termination of a number of agreements with such parties which occurred during the latter part of fiscal 2013.

 

Depreciation. The increase in depreciation relates to the addition of fixed assets during the third quarter of fiscal 2013, which were reflected for nine-months during the periods presented in 2014 but only two months during the periods presented in 2013.

 

Other Expenses. Other expenses include interest and amortization expense. The changes in other expenses are primarily due to an increase in amortization of debt discount related to debt satisfied during the three and nine-month periods ended September 30, 2014 and was amortized through that period offset by an increase in interest expense primarily attributable to the excess of fair value of shares of our Common Stock in excess of the carrying value of the liabilities settled during the first quarter of 2014.

 

Liquidity and Capital Resources

 

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The business will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer term business plan. The Company had cash of $81,000 and working capital deficiency approximately $2.1 million at September 30, 2014. The Company’s cash and working capital amounts were derived from the proceeds of financing transactions through the issuance of notes, convertible notes and Common Stock purchase warrants and shares of our Common Stock. The Company’s net loss for the nine-month period ended September 30, 2014 was approximately $4.4 million and our accumulated deficit amounts to $12.3 million as of September 30, 2014. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

  

In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources.  Management’s plan to continue as a going concern includes raising capital, which could further dilute our existing Shareholders, and to implement the execution of its business plan to become cash flow positive from the completion of its offering and equity financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon the management’s ability to successfully implement the plans described above, including securing additional sources of financing and attain profitable operations.   Management also cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis. There can be no assurance that we will be able to continue to raise funds in which case the Company may be unable to meet its obligations.

 

The Company's liquidity and capital needs relate primarily to working capital and other general corporate requirements. To date, the Company has funded its operations with convertible loans and by the sale of Common Stock and through private placement offerings.

 

Nine-month period ended September 30, 2014

 

Cash used in operations of $2.3 million during the nine-month period ended September 30, 2014 consists primarily of our net loss of approximately $4.4 million, adjusted by depreciation and amortization of $383,716, and the fair value of options, warrants, and shares of our Common Stock of $733,801. Additionally, our accounts payable and accrued compensation, included payables to related parties, and accrued interest increased by $896,499 during the nine-month ended September 30, 2014, as we delayed cash payments with certain agreeable parties to keep a certain level of liquidity and ultimately satisfied certain payable and accrued compensation aggregating $711,519 by issuing shares of our Common Stock.

 

Cash provided by financing activities of $2,351,625 during the nine-month period ended September 30, 2014 consists primarily of proceeds generated from the issuance of shares of our Common Stock and promissory notes, which amounted to $2,460,625, offset by principal repayments of notes payable aggregating $99,000. Additionally, the Company issued shares of its Common Stock to satisfy obligations under convertible promissory notes and accrued interest aggregating $3.6 million.

 

Nine-month period ended September 30, 2013

 

Cash used in operations of $2.1 million during the nine-month period ended September 30, 2013 consists primarily of our net loss of approximately $4 million, adjusted by depreciation and amortization of $299,427, and the fair value of options, warrants, and shares of our Common Stock of approximately $1.2 million. Additionally, our accounts payable and accrued compensation, including payables to related parties and accrued interest, increased by approximately $735,279 during the nine-month ended September 30, 2013, as we delayed payments with certain agreeable parties to keep a certain level of liquidity.

 

Cash provided by financing activities of $1.9 million during the nine-month period ended September 30, 2013 consists primarily of proceeds generated from the issuance of our convertible notes of $1.87 million.

 

Financial Position

 

The Company's liquidity and capital needs relate primarily to working capital and other general corporate requirements. Since inception, the Company raised approximately $3,520,000 in senior secured notes, of which $3,150,000 was converted in shares of our Common Stock as of September 30, 2014, and $2.3 million in issuance of our shares of Common Stock during the nine-month period ended September 30, 2014. Management plans to continue raising capital to implement the expansion plan and become cash flow positive within twelve months. The Company expects to use the proceeds for operating and working capital and significantly expanding the number of trucks and stores and professional fees.

 

Total assets remained at comparable levels at September 30, 2014 and December 2013, with the exception that our property and equipment, including vehicle held for sale decreased by approximately $225,000 following the sale of a number of trucks as well as depreciation.

 

Total liabilities decreased by $3.3 million, primarily from the conversion of convertible promissory notes.

 

  

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of September 30, 2014 and December 31, 2013.

 

Inflation

 

We do not believe that inflation has had a material effect on our Company’s results of operations.

 

Critical Accounting Policies

 

Our significant accounting policies are more fully described in Note 3 to our unaudited consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements:

 

Estimated Useful Lives of Property and Equipment

 

The estimates of useful lives for property and equipment are significant estimates. Expenditures for the leasehold improvements and equipment when a food truck is first contracted are material. In addition, periodic refurbishing takes place and those expenditures can be material. We estimate the useful life of those assets by considering, among other things, expected use and life of the food truck. The assets are then depreciated using a straight line method over those estimated lives. These estimated lives are reviewed periodically and adjusted if necessary. Any necessary adjustment to depreciation expense is made in the income statement of the period in which the adjustment is determined to be necessary.

  

 

Stock-Based Compensation

 

We adopted the provisions of ASC 718. We estimate the fair value of stock options using a binomial model, consistent with the provisions of ASC 718 and SEC Staff Accounting Bulletin No. 107, Share-Based Payment. Option-pricing models require the input of highly subjective assumptions, including the price volatility of the underlying stock. We determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. The expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting binomial calculation provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase plan, we decided to continue to use the Black-Scholes model to calculate the estimated fair value.

 

In addition, the Company determined a fair value of $1.25 per share of Common Stock for the first nine-months of 2014. The fair value of the Company’s Common Stock was determined based on valuation performed by Management, which took into consideration, where applicable, cash received for similar securities during the first half of fiscal 2014.

 

Revenue Recognition

 

The Company's revenue is derived from three sources. The primary source is from truck stop sales and lesser portions are from catering and event services and licensed truck sales. Truck stop sales are primarily received in cash and revenue for these sales, net of sales tax, is reported at that time.

 

For catering and special event services, customers must sign and deliver the Company's standard catering agreement with a minimum payment of 50% of the agreed upon price of the event. The remaining balance is due by credit card payment within 2 days of the event or cash on the day of the event. The initial 50% deposit is fully refundable until 14 days prior to the event, between 4 and 13 days prior to the event, the deposit is non-refundable and if the customer cancels within 3 days of the event, 100% of the agreed-upon price of the event is due. Revenue is recognized, net of sales tax, at the time services are provided.

 

For recurring licensing revenue, which is based on 6% of gross revenue from truck stop sales collected by the licensee, revenue is recognized at the end of each month when the licensee is invoiced and the revenue is booked as a receivable.

 

For area licensing revenue, which is generally a fixed amount, the revenue is recognized when the Company has no remaining obligations or intent, either by agreement, trade practice, or law, to the extent it is collectible. 

 

Any amount receivable or received pursuant to licensing revenues, but unrecognized for revenue recognition purpose is recorded as deferred revenues.

 

  

Allowance for Doubtful Accounts

  

Accounts receivable arise primarily from catering and special event sales. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Such estimates inherently involve uncertainties and assessments of the outcome of future events, and changes in facts and circumstances may result in adjustments to the provision for doubtful accounts.

 

For other critical accounting policies, please refer Note 3 – Summary of Significant Accounting Policies in notes to unaudited consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

There are no recently issued accounting pronouncements that are expected to have a material impact on the unaudited consolidated financial statements or notes thereto.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this Report (the “Evaluation Date”), pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, due to material weaknesses in our control environment and financial reporting process. A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. Our management concluded that our internal controls over financial reporting were not effective and we had material weaknesses in our control environment and financial reporting process consisting of the following as of the Evaluation Date:

 

1)

lack of a functioning audit committee due to a lack of a majority of independent members and a  lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in  the establishment and monitoring of required internal control and procedures;

 

2)

inadequate segregation of duties consistent with control objectives;

 

3)

ineffective controls over period end financial disclosure and reporting processes; and

 

4)

lack of accounting personnel with adequate experience and training.

 

As of the date of this Report, the Company does not intend to remedy the foregoing and therefore such material weaknesses in our control environment and financial reporting process will continue. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

  

  

Change in Internal Control over Financial Reporting.

 

No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.

 

Item 1A .Risk Factors.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the quarter ended September 30, 2014, we issued 8,000 warrants to a vendor for services rendered to us.  The warrants were valued at $4,040. The warrants issued had an exercise price of $2.00 per share and such warrants expire in September 2017.

 

The issuance of the warrants was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”).

 

On November 17, 2014, the Company issued 1,000,000 restricted shares of its Common Stock to charitable foundations that assist veterans. The issuance of the restricted shares of Common Stock to the charitable foundations is subject to the following resale restriction: no more than 1/12^th of the shares initially donated may be sold in any given month following the eligibility for resale either pursuant to 1) a registration statement filed by the Company to register such shares or 2) pursuant to Rule 144.

 

The issuance of shares of Common Stock to the charitable foundations was exempt from registration under the Act since the shares were issued for no consideration and therefore did not involve a “sale” (as defined in Section 2(a)(3) of the Act).

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

On November 18, 2014, the Company entered into Amendment No. 1 to its employment agreement with Peter Goldstein (the “Amended Goldstein Agreement”), which amends Mr. Goldstein’s employment agreement dated September 6, 2013. The Amended Goldstein Agreement provides that Mr. Goldstein will serve as Treasurer of the Company in addition to his roles as President, Interim Chief Financial Officer and Secretary of the Company. The Amended Goldstein Agreement has a term ending December 31, 2015 and provides that in the event that the Company completes a private placement offering commencing in May 2013, Mr. Goldstein shall receive a cash payment of $100,000 if the Company raises a minimum of $5,000,000 in that offering. Also, pursuant to the Amended Goldstein Agreement, the Company shall pay Mr. Goldstein a success fee, if the Company closes on an acquisition, merger or joint venture or similar transaction, payable in the same form of consideration paid by the Company, in the amount of (i) 2.5% of the first $5,000,000 of total consideration paid, or any part; (ii) plus, 2% of the second $5,000,000 of total consideration paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total consideration, or any part; (iv) plus, 1% of the next $5,000,000 of total consideration, or any part; (v) plus, 0.5% of the balance of total consideration paid. No other material amendments were made to Mr. Goldstein’s employment agreement.

 

On November 18, 2014, the Company entered into Amendment No. 2 to its employment agreement with Robert Y. Lee (the “Second Amended Lee Agreement”), which amends Mr. Lee’s employment agreement originally dated July 16, 2013, as amended by Amendment No. 1 dated September 6, 2013. The Second Amended Lee Agreement has a term ending December 31, 2015 and provides that in the event that the Company completes a private placement offering commencing in May 2013, Mr. Lee shall receive a cash payment of $100,000 if the Company raises a minimum of $5,000,000 in that offering. Also, the Company shall pay Mr. Lee a success fee, if it closes on an acquisition, merger or joint venture or similar transaction, payable in the same form of consideration paid by the Company in the amount of (i) 2.5% of the first $5,000,000 of total consideration paid, or any part; (ii) plus, 2% of the second $5,000,000 of total consideration paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total consideration paid, or any part; (iv) plus, 1% of the next $5,000,000 of total consideration paid, or any part; (v) plus, 0.5% of the balance of total consideration paid. No other material amendments were made to Mr. Lee’s employment agreement.

 

On November 18, 2014, the Company entered into Amendment No. 1 to its employment agreement with David Danhi (the “Amended Danhi Agreement”), which amends Mr. Danhi’s employment agreement dated October 18, 2012. The Amended Danhi Agreement provides that if Mr. Danhi and the Company enter into a services agreement with a third party, pursuant to which Mr. Danhi provides services to a third party for which the Company receives a fee, the Company shall pay a bonus to Mr. Danhi equal to 100% of such fee, in cash or shares of Common Stock, provided that such bonus shall not be greater than $25,000. In addition, Mr. Danhi shall receive a cash payment of $160,000 if the Company raises a minimum of $5,000,000 in a private placement financing. No other material amendments were made to Mr. Danhi’s employment agreement.

 

On November 18, 2014, the Company entered into Amendment No. 1 to its advisory agreement (the “Amended PBNJ Agreement”) with PBNJ Advisors, Inc. (“PBNJ”), which amends PBNJ’s advisory agreement dated April 14, 2014. The Amended PBNJ Agreement has a term that continues through December 31, 2015 and provides for compensation to PBNJ in the amount of 75,000 shares of Common Stock and 75,000 warrants to purchase Common Stock, such warrants exercisable for a period of 3 years at price of $2.00 per share. The Amended PBNJ Agreement also provides that both parties may terminate the agreement upon 30 days written notice. No other material amendments were made to PBNJ’s advisory agreement.

 

On November 18, 2014, the Company entered into Amendment No. 2 to the term sheet (the “Second Amended Clark Agreement”) with Wesley K. Clark & Associates, LLC (the “Clark Group”), which amends the term sheet with the Clark Group originally dated August 15, 2012 (the “Clark Agreement”), as amended by Amendment No. 1 dated September 6, 2013 (the “Amended Clark Agreement”). The Second Amended Clark Agreement provides that as of the date thereof, the Company shall issue to the Clark Group 500,000 warrants to purchase Common Stock, such warrants exercisable through December 31, 2016 at a price of $1.00 per share and without the condition that a certain number of veteran franchise agreements be executed (as set forth in the Clark Agreement). The Second Amended Clark Agreement has a term that continues through December 31, 2015. No other material amendments were made to Clark Group’s agreement with the Company.

 

 

Item 6.  Exhibits

 

Exhibit No.		Description
31.1*		Certification of Principal Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes Oxley Act of 2002
31.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes Oxley Act of 2002
32.1†		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002
32.2†		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

 

*Filed herewith

† Furnished herewith

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 19, 2014	THE GRILLED CHEESE TRUCK, INC .
	By:	/s/ Robert Y Lee
		Robert Y Lee
		Interim Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)

  

Date: November 19, 2014	THE GRILLED CHEESE TRUCK, INC .
	By:	/s/ Peter Goldstein
		Peter Goldstein
		Interim Principal Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)