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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KA

(Amendment No. 3)

 

(Mark One)

 

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

 

For the fiscal year ended August 31, 2014

 

or

 

¨  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 333-170662

 

DIXIE FOODS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Florida   80-0608195

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

 

4033 South Dean Martin Drive; Las Vegas, NV   89103
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (702) 834-7101

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to section 12(g) of the Act:

 

Common Stock

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes  x  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

¨ Yes  x  No

 

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.

x Yes  ¨  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes  ¨  No

 

 
 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

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 ¨ 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  x  No

 

As of December 18, 2014 issuer had 43,030,976 shares of common stock issued and outstanding.

 

As of February 28, 2014 the aggregate market value of our common stock held by non-affiliates of registrant was $2,802,100 based on the last stock sale.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

Explanatory Note

 

This Amendment No. 3 to the Annual Report on Form 10-K/A (“Amendment No. 1”) of Dixie Foods International, Inc. (the “Company”) is being filed to amend the Company’s Annual Report on Form 10-K for the year ended August 31, 2014, which was filed originally with the Securities and Exchange Commission (the “SEC”) on December 19, 2014 (the “Original Filing”). During final edits of the proofs for EDGARizing, the following was moved from "STOCKHOLDERS' DEFICIT" on the Balance Sheet to a space above "STOCKHOLDERS' DEFICIT' 'LONG-TERM LIABILITIES". However, that entry was not removed from 'STOCKHOLERS' DEFICIT', thus, creating a redundant entry. Also, $120,000 of the value of Class B membership units was reclassified to accounts payable as the amounts are due to third parties for administrative fees and are non-refundable to the investor.

 

 
 

 

DIXIE FOODS INTERNATIONAL, INC.

Consolidated Balance Sheets

 

   August 31,   August 31, 
   2014   2013 
         
ASSETS  
         
CURRENT ASSETS          
Cash  $24,033   $255,293 
Accounts receivable   75,216    29,698 
Other receivables   4,632    15,000 
Food inventory   103,367    104,230 
Prepaid expenses and other current assets   111,678    130,094 
Total Current Assets   318,926    534,315 
           
OTHER ASSETS          
Prepaid franchise and territory rights fees, net   897,846    1,095,527 
Property and equipment, net   3,418,743    2,871,786 
Debt issuance costs, net   -    519,718 
           
TOTAL ASSETS  $4,635,515   $5,021,346 
           
 LIABILITIES AND STOCKHOLDERS' DEFICIT   
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $829,109   $715,216 
Checks issued in excess of cash   104,398    - 
Deferred income   95,186    35,829 
Related party notes payable   -    7,060 
Short-term notes payable   7,366,299    6,682,187 
Short-term convertible notes payable   300,000    300,000 
Derivative liability   -    604,553 
Total Current Liabilities   8,694,992    8,344,845 
           
LONG-TERM LIABILITIES          
Long-term notes payable   500,000    500,000 
Long-term convertible notes payable   550,000    550,000 
Total Liabilities   9,744,992    9,394,845 
           
Class B membership units, no par value, 4 units authorized, 2 and -0- units issued and outstanding, respectively   1,000,000      
           
STOCKHOLDERS' DEFICIT          
Preferred stock, $0.001 par value, 15,000,000
shares authorized, no shares issued or outstanding
   -    - 
Common stock, $0.001 par value, 150,000,000 shares authorized,          
42,570,975 and 15,611,146 shares issued and outstanding, respectively   42,572    15,612 
Additional paid-in capital   14,311,918    5,372,309 
Accumulated deficit   (20,463,967)   (9,761,420)
Total Stockholders' Deficit   (6,109,477)   (4,373,499)
           
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $4,635,515   $5,021,346 

 

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

 

3
 

 

DIXIE FOODS INTERNATIONAL, INC.

Consolidated Statements of Operations

 

   For the Years Ended 
   August 31, 
   2014   2013 
         
REVENUE  $6,369,754   $4,503,571 
           
OPERATING EXPENSES          
Restaurant operating costs:          
Food, beverage and packaging   2,345,621    1,780,839 
Labor and related   1,675,281    1,367,656 
Occupancy   278,178    540,755 
Other restaurant operating   805,922    950,613 
Total Restaurant Operating Expenses   5,105,002    4,639,863 
           
Income (Loss) from Restaurant Operations   1,264,752    (136,292)
           
General and administrative   3,157,567    1,387,239 
Depreciation and amortization   482,767    402,705 
Salary and wages   5,173,991    2,188,986 
Royalty and franchise fees   433,359    296,377 
Pre-opening costs   522,839    181,639 
Total   9,770,523    4,456,946 
           
LOSS FROM OPERATIONS   (8,505,771)   (4,593,238)
           
OTHER INCOME (EXPENSES)          
Interest expense   (2,801,329)   (1,494,972)
Derivative income (expense)   604,553    (308,728)
Total Other Income (Expenses)   (2,196,776)   (1,803,700)
           
LOSS BEFORE INCOME TAXES   (10,702,547)   (6,396,938)
PROVISION FOR INCOME TAXES   -    - 
           
NET LOSS  $(10,702,547)  $(6,396,938)
           
BASIC AND DILUTED LOSS PER COMMON SHARE  $(0.38)  $(0.47)
           
BASIC AND DILUTED WEIGHTED AVERAGE          
NUMBER OF COMMON SHARES OUTSTANDING   27,896,390    13,513,320 

 

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

 

4
 

 

DIXIE FOODS INTERNATIONAL, INC.

Consolidated Statement of Changes in Stockholders' Deficit

 

                   Additional   Stock         
   Class B Membership Units   Common Stock   Paid-in   Subscriptions   Accumulated     
   Units   Amount   Shares   Amount   Capital   Receivable   Deficit   Total 
                                 
Balance, August 31, 2012   -   $-    11,453,135   $11,453   $3,346,654   $(1,119,278)  $(3,364,482)  $(1,125,653)
                                         
Cash and services received for subscriptions receivable   -    -    -    -    -    1,119,278    -    1,119,278 
Cash received for exercise of warrants   -    -    1,878,846    1,879    4,121    -    -    6,000 
Common stock issued for debt issuance costs   -    -    1,574,598    1,575    1,004,105    -    -    1,005,680 
Common stock issued for services   -    -    704,567    705    449,295    -    -    450,000 
Fair value of stock options issued for debt   -    -    -    -    111,191    -    -    111,191 
Fair value of vested stock options   -    -    -    -    456,943    -    -    456,943 
Net loss for the year ended August 31, 2013   -    -    -    -    -    -    (6,396,938)   (6,396,938)
                                         
Balance, August 31, 2013   -    -    15,611,146    15,612    5,372,309    -    (9,761,420)   (4,373,499)
                                         
Class B membership units issued for cash   2    1,000,000    -    -    -    -    -    - 
Common stock issued for cash, pre-recapitalization   -    -    7,137,654    7,138    3,342,862    -    -    3,350,000 
Common stock issued for services   -    -    2,045,163    2,045    909,524    -    -    911,569 
Cash received for exercise of warrants   -    -    3,909,226    3,909    96,091    -    -    100,000 
Common stock issued for debt issuance costs   -    -    1,587,738    1,588    1,012,484    -    -    1,014,072 
Common stock issued for debt modifications   -    -    1,373,914    1,374    745,593    -    -    746,967 
Cash received and services credited for exercise of warrants   -    -    2,844,134    2,844    72,158    -    -    75,002 
Fair value of stock options issued for debt   -    -    -    -    2,669,846    -    -    2,669,846 
Fair value of vested stock options, pre-recapitalization   -    -    -    -    133,767    -    -    133,767 
Recapitalization   -    -    8,006,000    8,006    (79,648)   -    -    (71,642)
Common stock issued for cash, post-recapitalization   -    -    56,000    56    27,944    -    -    28,000 
Fair value of vested stock options, post-recapitalization   -    -    -    -    8,988    -    -    8,988 
Net loss for the year ended August 31, 2014   -    -    -    -    -    -    (10,702,547)   (10,702,547)
                                         
Balance, August 31, 2014   2   $1,000,000    42,570,975   $42,572   $14,311,918   $-   $(20,463,967)  $(6,109,477)

 

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

 

5
 

 

DIXIE FOODS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

 

   For the Years Ended 
   August 31, 
   2014   2013 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(10,702,547)  $(6,396,938)
Adjustments to reconcile net loss to net          
cash used in operating activities:          
Depreciation and amortization   1,031,947    893,699 
Amortization of debt discounts and debt issuance costs   1,491,237    485,962 
Change in derivative liability   (604,553)   308,728 
Services credited for exercise of warrants and stock options   75,000    - 
Common stock issued for services   836,569    450,000 
Fair value of stock options vested   142,755    456,943 
Fair value of warrants issued for debt   3,466,667    111,191 
Stock issued in reverse recapitalization   (71,643)   - 
Changes in operating assets and liabilities:          
Accounts receivable   (35,150)   (17,488)
Inventories   863    (66,913)
Prepaid expenses and other current assets   18,416    (60,606)
Accounts payable and accrued expenses   (6,104)   621,987 
Deferred revenue   59,357    22,085 
Related party payables   -    (337,113)
Net Cash Used in Operating Activities   (4,297,186)   (3,528,463)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property and equipment   (1,167,223)   (1,769,081)
Cash paid for territory and franchise rights   (214,000)   (164,000)
Cash paid for asset acquisitions   (107,187)   (562,813)
Net Cash Used in Investing Activities   (1,488,410)   (2,495,894)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Change in bank overdraft   104,398    - 
Net proceeds from related party debt   72,940    - 
Net proceeds from notes payable   778,998    5,050,000 
Cash received for subscriptions receivable   -    896,459 
Proceeds from Class B membership units issued for cash   1,120,000    - 
Proceeds from common stock issued for cash   3,378,000    - 
Cash received for exercise of warrants and stock options   100,000    6,000 
Net Cash Provided by Financing Activities   5,554,336    5,952,459 
           
NET INCREASE (DECREASE) IN CASH   (231,260)   (71,898)
CASH AT BEGINNING OF PERIOD   255,293    327,191 
           
CASH AT END OF PERIOD  $24,033   $255,293 

 

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

 

6
 

 

DIXIE FOODS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

 

   For the Years Ended 
   August 31, 
   2014   2013 
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
           
CASH PAID FOR:          
Interest  $1,176,590   $778,880 
Income Taxes  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Note payable executed for asset acquisitions  $-   $620,000 
Debt discounts on notes payable  $169,200   $- 
Services credited for subscriptions receivable  $-   $222,819 
Common stock issued for debt issuance costs  $1,014,072   $1,005,680 

 

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

 

7
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS

 

Dixie Foods International, Inc. (the “Company”; OTCQB:”DIXI”) was formed in May 2010 to operate a specialty food business for salad dressing, sauces and condiments.  The Company was organized and still operates under the laws of the State of Florida. In November 2014, the Company changed its name to “Preferred Restaurant Brands” and is in process of effecting that change with the Financial Industry Regulatory Authority (“FINRA”), the Securities and Exchange Commission (“SEC”) and other regulatory authorities.  The fiscal year end for the Company and all of its subsidiaries is August 31. The Company has aggregated its operations into one reportable segment.

 

On June 4, 2014, the Company completed the purchase (the “Reverse Acquisition”) of KCI Investments, LLC (“KCI”).  In connection with the Reverse Acquisition, the Company acquired 100 percent of the issued and outstanding membership interests of KCI from KCI Holding I, LLC ("KCI Holding"), and an entity that, until the consummation of the Reverse Acquisition, held 100% of the membership interests in KCI.

 

KCI Investments, LLC, a Nevada limited liability company headquartered in Las Vegas, Nevada, was formed on November 8, 2004, but did not engage in any business operations until November 2010.  Currently, KCI is engaged in developing, owning and operating a multi-brand chain of restaurants, currently under two franchise brands: Capriotti’s Sandwich Shops and Papa John’s Pizza.  KCI also owns and operates various other restaurant concepts.  KCI and its various subsidiaries, currently operate 15 restaurants: 12, franchised Capriotti's Sandwich Shops; two franchised Papa John’s Pizza restaurants, and Elements Kitchen & Martini Bar and a tapas restaurant (“TAPAS”).  Additionally, the Company has in various stages of development and construction: four Capriottis; nine Papa John’s; a tapas restaurant, and the Italian Steakhouse, all of which it anticipates opening over the next 12 months.

 

NOTE 2—GOING CONCERN

 

These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of August 31, 2014, the Company has a working capital deficit of $8,256,066 and an accumulated deficit of $20,463,967. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to: identify future investment opportunities and obtain the necessary debt or equity financing and generate profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt 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 its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of the Company, including wholly-owned subsidiaries and investees that the Company controls. All intercompany balances and transactions have been eliminated.

 

8
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Use of Estimates

 

The preparation of consolidated financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

 

Revenue Recognition

 

Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable primarily consists of receivables from third party gift card distributors, tenant improvement receivables, payroll-related tax receivables, vendor rebates and receivables arising from the normal course of business from catering sales. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable based on a specific review of account balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.

 

Inventory

 

Inventory (consisting principally of food, beverages and supplies), is valued at the lower of first-in, first-out cost or market. Certain key ingredients bread, meats vegetables, cheeses and beverages are purchased from a small number of suppliers.

 

Property and Equipment

 

Property and equipment, including leasehold improvements, are recorded at cost, except for individual items costing less than $2,500, which are expensed as incurred. Internal costs directly associated with the acquisition, development and construction of a restaurant are expensed as incurred and included are pre–opening expenses. Expenditures for major renewals and improvements are capitalized while expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured options periods, or the estimated useful lives of the assets. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss, if any, is reflected in loss on disposal of assets in the consolidated statement of income and comprehensive income.

 

At least annually, the Company evaluates, and adjusts when necessary, the estimated useful lives. The changes in estimated useful lives did not have a material impact on depreciation in any period. The estimated useful lives are:

 

Leasehold improvements and buildings 3-20 years
Furniture and fixtures 4-10 years
Equipment 3-7 years

 

9
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of reviewing restaurant assets to be held and used for potential impairment, assets are grouped together at the market level, or in the case of a potential relocation or closure, at the restaurant level. The Company manages its restaurants as a group with significant common costs and promotional activities. As such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment expense was recognized on long-lived assets during the years ended August 31, 2014, and 2013, respectively.

 

Income Taxes

 

Under the asset and liability method prescribed under ASC 740, Income Taxes, The Company uses the liability method of accounting for income taxes.  The liability method measures  deferred income taxes by applying  enacted  statutory rates in effect at the  balance  sheet date to the  differences  between the tax basis of assets and  liabilities  and their  reported  amounts on the financial statements.  The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur.  A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.

 

The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a “more-likely-than-not” threshold, the amount recognized in the financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of August 31, 2013, the Company has had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal or state tax examinations nor has it had any federal or state examinations since its inception. All of the Company’s tax years are subject to federal and state tax examination.

Advertising and Marketing Costs

 

Advertising and marketing costs are expensed as incurred and totaled $381,717 and $360,309 for the years ended August 31, 2014 and 2013, respectively. Advertising and marketing costs are included in other operating costs in the consolidated statements of operations.

 

Rent

 

Rent expense for the Company’s leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The lease term is the lesser of 20 years inclusive of reasonably assured renewal periods, or the lease term. The lease term begins when the Company has the right to control the use of the property, which is typically before rent payments are due under the lease. The difference between the rent expense and rent paid is recorded as deferred rent in the consolidated balance sheet. Pre-opening rent is included in pre-opening costs in the consolidated income statement. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of rent expense over the term of the lease.

 

Additionally, certain of the Company’s operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense provided the achievement of that target is considered probable.

 

10
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Basic and Diluted Loss per Share

 

Basic loss per share is calculated by dividing the Company’s net loss applicable to shareholders by the weighted average number of shares during the period. Diluted loss per share is calculated by dividing the Company’s net loss available to shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is adjusted for any potentially dilutive debt or equity. There were no common stock equivalents outstanding as of August 31, 2014, which were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

 

Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

 

Stock-Based Compensation

 

The Company follows the provisions of ASC 718, “Share-Based Payment”, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  The Company uses the Black-Scholes pricing model for determining the fair value of stock based compensation.

 

The Company accounts for non-employee share-based awards based upon ASC 505-50, “Equity-Based Payments to Non-Employees.”  ASC 505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment is reached or the date that performance is complete.  Generally, our awards do not entail performance commitments.  When an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date.  When the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value on the date the performance is complete.

 

The Company recognizes the cost associated with share-based awards that have a graded vesting schedule on a straight-line basis over the requisite service period of the entire award.

 

New Accounting Pronouncements

 

The Company’s management has considered all recent accounting pronouncements. Management believes that these recent pronouncements will not have a material effect on the Company’s financial statements. 

 

11
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 4—PROPERTY AND EQUIPMENT

 

As of August 31, 2014 and 2013 the Company’s property and equipment consisted of the following:

 

   2014   2013 
Building and leasehold improvements  $3,161,646   $2,387,422 
Machinery and equipment   1,022,299    673,098 
Furniture and fixtures   358,390    314,592 
Less: Accumulated depreciation   (1,123,592)   (503,326)
Property and equipment, net  $3,418,743   $2,871,786 

 

Depreciation expense included as a charge to income (including restaurant-related depreciation recorded in “Other operating costs”) was $621,916 and $400,323 for the years ended August 31, 2014 and 2013, respectively.

 

NOTE 5—ASSET PURCHASES

 

Mission Valley, San Diego

 

On October 19, 2011, the Company, entered into an asset purchase agreement with Capriotti of SD, Mission Valley, LLC, to purchase the assets of Capriotti of SD, Mission Valley, LLC, as well as territory rights owned by that entity. Pursuant to the asset purchase agreement, the purchase price of the assets consisted of a one-time payment of $100,000 in cash and a loan of $400,000. The Company also paid a security deposit of $5,644 to the landlord of the space occupied by the location acquired.

 

The total purchase price was allocated as follows:

 

Consideration paid:    
Cash paid  $100,000 
Notes payable   400,000 
Transfer fees paid   20,000 
Total purchase price  $520,000 
      
Consideration received:     
Territory and franchise rights  $383,410 
Property and equipment   136,590 
Total Assets Acquired  $520,000 

 

San Marcos, San Diego and Green Valley Ranch, Las Vegas

 

On September 30, 2012, the Company, entered into an asset purchase agreement with BBC Holdings, LLC, to purchase the assets of BBC Holdings LLC, as well as territory rights owned by that entity. Pursuant to the asset purchase agreement, the purchase price of the assets consisted of a one-time payment of $50,000 in cash, and a loan of $620,000.

 

 

12
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 5—ASSET PURCHASES (CONTINUED)

 

San Marcos, San Diego and Green Valley Ranch, Las Vegas (Continued)

 

The total purchase price was allocated as follows:

 

Consideration paid:    
Cash paid  $50,000 
Notes payable   620,000 
Total purchase price  $670,000 
      
Consideration received:     
Property and equipment  $117,215 
Territory and franchise rights – San Marcos   267,950 
Territory and franchise rights – Green Valley Ranch   284,835 
Total assets acquired  $670,000 

 

NOTE 6—INTANGIBLE ASSETS

 

Intangible assets consist of capitalized prepaid territory rights and franchise fees paid. The costs are amortized over the remaining life of the contract executed with the franchisor.

 

As of August 31, 2014 and 2013 the Company’s territory and franchise rights consisted of the following:

 

   August 31,
2014
   August 31,
2013
 
Territory and franchise rights  $1,926,194   $1,712,194 
Less: Accumulated amortization   (1,028,348)   (616,667)
Territory and franchise rights, net  $897,846   $1,095,527 

 

Amortization expense on intangible assets included as a charge to income was $419,033 and $375,249 for the years ended August 31, 2014 and 2013, respectively.

 

NOTE 7—DEBT ISSUANCE COSTS

 

Debt issuance costs represent common stock issued to note holders at the execution of note payable agreements. The Company has capitalized the fair value of member interests issued with an offset to debt issuance costs. Such discounts are then amortized to interest expense over the estimated life of the note.

 

As of August 31, 2014 and 2013 the Company’s debt issuance costs consisted of the following:

 

   August  31,   August  31, 
   2014   2013 
Capitalized debt issuance costs  $1,969,898   $1,005,680 
Less: Accumulated amortization   (1,969,898)   (485,962)
Debt issuance costs, net  $-   $519,718 

 

Interest expense on debt issuance costs included as a charge to income was $1,483,936 and $485,962 for the years ended August 31, 2014 and 2013, respectively.

 

13
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 9—NOTES PAYABLE

 

As of August 31, 2014 and 2013 the Company’s notes payable consisted of the following:

 

   August 31,   August 31, 
   2014   2013 
Note payable bearing interest at 13.5% per annum, originated June 22, 2012, original maturity date of June 22, 2013, modified maturity date of January 19, 2014  $2,700,000   $3,000,000 
           
Note payable bearing interest at 12.0% per annum, originated December 27, 2012, original maturity date of December 27, 2013, modified maturity date of March 27, 2014   1,000,000    1,000,000 
           
Note payable bearing interest at 12.0% per annum, originated February 1, 2013, original maturity date of August 1, 2014   550,000    550,000 
           
Note payable bearing interest at 12.0% per annum, originated February 1, 2013, original maturity date of August 1, 2014   650,000    650,000 
           
Note payable bearing interest at 12.0% per annum, originated February 1, 2013, original maturity date of August 1, 2014   800,000    800,000 
           
Note payable bearing interest at 12.0% per annum, originated October 3, 2013, original maturity date of November 2, 2013   100,000    - 
           
Note payable bearing interest at 15.0% per annum, originated July 29, 2013, due on demand   -    150,000 
           
Note payable bearing interest at 15.0% per annum, originated July 29, 2013, due on demand   -    150,000 
           
Note payable bearing interest of $2,500 per year, originated August 8, 2013, original maturity date of November 6, 2013   -    100,000 
           
Note payable bearing interest at 13.3% per annum, originated August 28, 2013, original maturity date of February 28, 2014   90,000    90,000 
           
Note payable bearing interest at 13.3% per annum, originated August 28, 2013, original maturity date of February 28, 2014   10,000    10,000 
           
Note payable bearing interest at 10.0% per annum, originated December 4, 2013, due on demand   560,000    - 
           
Note payable bearing interest at 12.0% per annum, originated June 7, 2013, original maturity date of June 7, 2016   500,000    500,000 
           
Note payable bearing no interest, originated August 31, 2013, due on demand   -    75,000 
           
Note payable bearing interest at 5.0%, originated August 31, 2014, due on demand   80,000    - 
           
Note payable bearing interest at 18%, originated May 8, 2014, due on demand   250,000    - 

 

14
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 9—NOTES PAYABLE (CONTINUED)

 

   August 31,   August 31, 
   2014   2013 
         
Note payable bearing interest at 7.4%, originated April 13, 2014, due on demand   126,577    - 
           
Balance due on sales of future accounts receivable, net of debt discounts of $161,899   449,722    - 
           
Installment loan on asset acquisition, originated September 18, 2012, maturity date of September 5, 2013   -    107,187 
           
Total notes payable  $7,866,299   $7,182,187 
Less: current portion   (7,366,299)   (6,682,187)
           
Long-term note payable  $500,000   $500,000 

 

Secured Borrowing

 

On August 11, 2014, the Company entered three financing arrangements with a third party for a combined principal amount of $470,000.  The terms of the arrangement require the Company to pay the $470,000 principal balance plus an additional $169,200 for total remittance of $639,200.  The terms of repayment require the Company to remit to the lender 24 percent of all future receivables arising from credit card, debit card and prepaid transactions until such time as the total remittance is paid in full.  This borrowing is secured by the assets of the Company.

 

The additional $169,200 will be recognized as interest expense over the estimated term of the agreement.  The term is not fixed due to the variable repayment terms, however management currently estimates such term to be approximately 11 months.

 

15
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 10—CONVERTIBLE NOTES PAYABLE

 

As of August 31, 2014 and 2013 the Company’s convertible notes payable consisted of the following:

 

   August 31,   August  31, 
   2014   2013 
Convertible note payable bearing interest at 10.0% per annum, originated April 23, 2012, original maturity date of April 23, 2017. The note is convertible into KCI Investments, LLC member units of the Company at $1.00 per unit.  $500,000   $500,000 
           
Convertible note payable bearing interest at 9.0% per annum, originated July 25, 2013, original maturity date of July 25, 2018. The note is convertible into KCI Investments, LLC member units of the Company at $1.50 per unit.   50,000    - 
           
Convertible note payable bearing interest at the market interest rate plus 6.0% per annum, originated May 1, 2012, original maturity date of May 1, 2015. The note is convertible into KCI Investments, LLC member units of the Company at $0.30 per unit.   300,000    300,000 
           
Total convertible notes payable  $850,000   $800,000 
Less: current portion   (300,000)   (300,000)
           
Total long-term convertible notes payable  $550,000   $500,000 

 

On December 15, 2011, the Company executed a note payable with a face value of $150,000, bearing interest at 12 percent per annum with a maturity date of April 15, 2012. The note was convertible at any time into a 10 percent equity interest in the Company. The note along with all accrued interest was paid in full as of the maturity date.

 

The intrinsic value of the beneficial conversion feature and the debt discount associated with all convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded for the convertible notes equaled $150,000 on December 15, 2011. During the years ended December 31, 2013 and 2012, the Company recognized amortization on debt discounts of $-0- and $130,328, respectively leaving unamortized debt discounts of $-0- and $-0-.

 

NOTE 11—DERIVATIVE LIABILITY

 

Effective July 31, 2009, the Company adopted ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The conversion price of certain convertible notes and exercise price of certain warrants are variable and subject to the fair value of the Company’s shares on the date of conversion or exercise. As a result, the Company has determined that the conversion and exercise features are not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion and exercise features of the instruments to be recorded as a derivative liability.

 

ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as items of other income or expense. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with convertible notes payable and warrants.

 

16
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 11—DERIVATIVE LIABILITY (CONTINUED)

 

At origination and subsequent revaluations, the Company valued the derivative liabilities using the Black-Scholes options pricing model under the following assumptions:

 

   2014   2013 
        
Risk-free interest rate   0.59% - 1.37%    0.59% - 1.31% 
Expected life   4.46 - 6.22    4.13 - 5.89 
Expected dividend yield   -    - 
Expected price volatility   518% - 643%    391% - 643% 

 

During the year ended August 31, 2014, the Company’s derivative liability decreased from $604,553 to $-0- and recognized a gain on derivative liability of $604,553 in conjunction with settlement of convertible notes payable, additions of new derivative liabilities and subsequent revaluations of existing derivative liabilities.

 

During the year ended August 31, 2013, the Company’s derivative liability decreased from $295,825 to $604,553 and recognized a loss on derivative liability of $308,728 in conjunction with settlement of convertible notes payable, additions of new derivative liabilities and subsequent revaluations of existing derivative liabilities.

 

NOTE 12—STOCKHOLDERS’ EQUITY

 

Our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value per share, and 15,000,000 shares of preferred stock, par value $0.001 per share. As of August 31, 2014 and August 31, 2013, there were and 42,570,976 and 15,611,146 shares of common stock issued and outstanding, respectively, and zero shares of preferred stock issued and outstanding, respectively.

 

Preferred Stock

 

Our board of directors has the authority, without stockholder approval, to issue up to 15,000,000 shares of preferred stock, $.001 par value. The authorized preferred stock may be issued by the Board of Directors in one or more series and with the rights, privileges and limitations of the preferred stock determined by the Board of Directors. The rights, preferences, powers and limitations on different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and other matters.

 

At August 31, 2013 and August 31, 2012, the Company had -0- shares outstanding, respectively of its Series A Convertible Preferred Stock (“Series A”). Series A has a stated liquidation preference value of $15 per share, and each preferred share is convertible to 100 shares of the Company’s common stock upon written notice of the record holder to the Company at any time.

 

Class B Membership Units – KCI Restaurant I, LLC and KCI Restaurant II, LLC

 

The Company’s subsidiaries, KCI Restaurant I, LLC (“Restaurant I”) and KCI Restaurant II, LLC (“Restaurant II”) are authorized to issue up to 2 Class B membership units with no par value each, of which 2 and -0- units were issued and outstanding as of August 31, 2014 and 2013, respectively.

 

Each Class B membership unit was sold for $500,000, plus $60,000 for administrative costs payable to third parties. $120,000 of the value of Class B membership units was reclassified to accounts payable as the amounts are due to third parties for administrative fees and are non-refundable to the investor. Each unit carries equal voting rights to Restaurant I and Restaurant II’s Class A membership units. Each Class B unit is entitled to receive distributions equal to 0.5 percent of the value of the units held each year.

 

17
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 12—STOCKHOLDERS’ EQUITY (CONTINUED)

 

Class B Membership Units – KCI Restaurant I, LLC and KCI Restaurant II, LLC (Continued)

 

Adjudication and Redemption of Class B Membership Units

 

The Class B membership units are linked to approval of an EB-5 Visa, which requires a foreign investor to invest $1,000,000 (or at least $500,000 in a "Targeted Employment Area" - high unemployment or rural area), in projects that create at least 10 jobs for U.S. workers.  The terms of the instrument state that the Class B membership units have a five-year life but that, once adjudication is reached in the EB-5 Visa approval process, the managing member of the LLC may, in its sole discretion, elect to have the Company purchase, for fair market value, the unit holders Class B Units at any time following an offer by such member to sell his or her Class B Units. This election is optional on the part of the managing member and member has no rights to cause the managing member or the Company to repurchase or redeem such member’s Class B unit. As such, the units (1) are not mandatorily redeemable, (2) are redeemable at the sole discretion of the Company and (3) not redeemable at the sole option of the unit holder and the redemption must be agreed to by Company.

 

As Class B units are not entitled to the distribution of profits and losses, and as they are not mandatorily redeemable, the shares have been presented as permanent equity on the face of the balance sheet and no adjustments for noncontrolling interests have been made.

 

During the year ended August 31, 2014, the Restaurant I issued one (1) Class B membership unit in exchange for total cash proceeds of $560,000 (inclusive of $60,000 received for administrative fees). During the year ended August 31, 2014, Restaurant II also issued one (1) Class B membership unit in exchange for total cash proceeds of $560,000 (inclusive of $60,000 received for administrative fees).

 

Common Stock

 

The holders of our common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50 percent of the shares voting for the election of directors can elect all of the directors then up for election. The holders of our common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefore. In the event of liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. Holders of shares of our common stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock. All of the outstanding shares of common stock are fully paid and non-assessable.

 

The Company is authorized to issue up to 150,000,000 shares of common stock at $0.001 par value, of which 42,570,975 and 15,611,146 shares of common stock were issued and outstanding as of August 31, 2014 and 2013, respectively.

 

During the year ended August 31, 2014, the Company issued 26,959,829 shares of common stock as follows:

 

Description  Shares Issued 
Common stock issued for cash proceeds of $3,378,000   7,193,654 
Common stock issued for services of $911,569   2,045,163 
Cash received for exercise of options and warrants at $0.03 per share   3,909,226 
Common stock issued for debt issuance costs   1,587,738 
Common stock issued for debt modifications   1,373,914 
Cash received and services credited for exercise of options and warrants at $0.03 per share   2,884,134 
Common stock issued in reverse recapitalization   8,006,000 
Total   26,959,829 

 

18
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 12—STOCKHOLDERS’ EQUITY (CONTINUED)

 

During the year ended August 31, 2013, the Company issued 4,158,011 shares of common stock as follows:

 

Description  Shares Issued 
Cash received for exercise of options and warrants at $0.003 per share   1,878,846 
Common stock issued for debt issuance costs   1,574,598 
Common stock issued for services valued at $450,000   704,567 
Total   4,158,011 

 

NOTE 13—STOCK OPTIONS AND WARRANTS

 

Stock Options

 

During the year ended August 31, 2014 (prior to the Reverse Acquisition), the Company granted 6,900,000 options to purchase Units in KCI @ $0.13 per KCI Unit. In connection with the Reverse Acquisition, which took effect on June 4, 2014, these and all other options previously granted by KCI to purchase membership units in KCI Investments, LLC were cancelled. During the year ended August 31, 2014, 947,825 stock options to purchase KCI Units were exercised for cash proceeds of $948.

 

Post-reverse acquisition and the cancellation of the aforementioned options, the Company issued 9,573.604 options to purchase common stock at $0.50 per share to the Company employees and consultants.

 

During the year ended August 31, 2013, the Company did not grant any new stock options.

 

Stock compensation expense is recognized on a pro-rata basis over the vesting period of the options. During the period from inception through August 31, 2014 the Company recognized $1,579,636 in compensation expense arising from options issued, leaving $9,911,411 of compensation expense on stock options to be recognized subsequent to August 31, 2014. The Company recognized stock compensation expense of $185,251 and $456,943 for the years ended August 31, 2014 and 2013, respectively.

 

A summary of the status of the Company’s member unit and common stock options as of August 31, 2014 and changes during the periods ended August 31, 2014 and 2013 is presented below:

 

   Number of Options and Warrants 
     
Outstanding at August 31, 2012   14,000,000 
      
Options and warrants granted   5,615,073 
Options and warrants exercised   (3,000,000)
Options and warrants forfeited, cancelled or expired   - 
Outstanding at August 31, 2013   16,615,073 
Exercisable at August 31, 2013   14,648,407 
      
Options and warrants granted   41,245,400 
Options and warrants exercised   (947,825)
Options and warrants forfeited, cancelled or expired   (47,339,044)
Outstanding at August 31, 2014   9,573,604 
Exercisable at August 31, 2014   - 

 

19
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 13—STOCK OPTIONS AND WARRANTS (CONTINUED)

 

Warrants

 

During the year ended August 31, 2014, the Company issued 25,358,996 warrants to acquire its common stock. The warrants were issued in connection with existing debt arrangements and the fair value of the warrants were recorded as interest expense during the period. In connection with the reverse recapitalization which took effect on June 4, 2014, 28,824,069 options to purchase membership units in KCI Investments, LLC were cancelled.

 

During the year ended August 31, 2013, the Company issued 1,985,948 warrants to acquire its common stock. The warrants were issued in connection with existing debt arrangements and the fair value of the warrants were recorded as interest expense during the period.

 

In applying the Black-Scholes options pricing model to the options and warrant grants, the fair value of our share-based and member unit-based awards granted were estimated using the following assumptions for the periods indicated below:

 

   2014   2013 
        
Risk-free interest rate   0.71% - 1.33%    1.33% - 1.62% 
Expected options life   2.50 - 5.00    2.50 - 5.00 
Expected dividend yield   -    - 
Expected price volatility   201% - 549%    136% - 201% 

 

The following table summarizes information about options and warrants as of August 31, 2014:

 

Options and Warrants
Outstanding
   Options and Warrants
Exercisable
 
Range of Exercise Prices  Number Outstanding   Weighted Average Remaining Contractual Life (in years)   Weighted Average Exercise Price   Number Exercisable   Weighted Average Exercise Price 
                     
$0.001 to $0.01  -   -   -   -   - 
$0.02 to $0.05   -    -    -    -    - 
$0.06 to $0.50   9,573,604    5.00   $0.50    -    - 
    9,573,604    5.00   $0.50    -    - 

 

20
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 13—STOCK OPTIONS AND WARRANTS (CONTINUED)

 

The following table summarizes information about options and warrants as of August 31, 2013:

 

Options and Warrants
Outstanding
   Options and Warrants
Exercisable
 
Range of Exercise Prices  Number Outstanding   Weighted Average Remaining Contractual Life (in years)   Weighted Average Exercise Price   Number Exercisable   Weighted Average Exercise Price 
                     
$0.001 to $0.01  8,253,534   2.48   $0.003   8,253,534   $0.003 
$0.02 to $0.05   5,000,000    2.27   $0.05    3,333,334   $0.05 
$0.06 to $0.50   3,361,539    4.24   $0.17    3,061,539   $0.18 
    16,615,073    2.77   $0.05    14,648,407   $0.05 

 

NOTE 14—LEASES

 

The Company operates all its restaurants in leased premises. Lease terms for building leases generally include combined initial and option terms of between 5 and 10 years. The options terms in each of these leases are typically in five-year increments. Typically, the lease includes rent escalation terms every five years including fixed rent escalations, escalations based on inflation indexes, and fair market value adjustments. Certain leases contain contingent rental provisions based upon the sales of the underlying restaurants. The leases generally provide for the payment of common area maintenance, property taxes, insurance and various other use and occupancy costs by the Company. In addition, the Company is the lessee under non-cancelable leases covering certain offices.

 

Future minimum lease payments required under existing operating leases as of August 31, 2014 are as follows:

 

2015  $1,170,098 
2016   1,615,135 
2017   1,631,971 
2018   1,518,735 
2019   1,396,321 
Thereafter   7,279,228 
Total future minimum lease payments  $14,611,488 

 

Rent expense was $862,809 and $460,686 for the years ended August 31, 2014 and 2013, respectively.

 

NOTE 15—COMMITMENTS AND CONTINGENCIES

 

The Company President and CEO, Kenneth Antos, has personally guaranteed virtually all the outstanding obligations due by the Company. This includes: virtually all of the outstanding notes payables on all loans; leases with the various landlords, and all of the obligations to franchisors.

 

 

21
 

 

DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 16—FAIR VALUE MEASUREMENTS

 

The company uses the Black-Sholes model to calculate the fair value of the derivative liability.

 

Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of August 31, 2014 and 2013, consisted of the following:

 

       Fair Value Measurements Using 
Description  Total Fair Value at August
31, 2014
   Quoted Prices in Active Markets (Level 1)   Significant Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                    
Derivative liability  $-   $-   $-    - 
                     
       Fair Value Measurements Using 
Description  Total Fair Value at August 31, 2013   Quoted Prices in Active Markets (Level 1)   Significant Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                    
Derivative liability  $604,553   $-   $604,553    - 

 

Note 17Income taxES

 

Net deferred tax assets consist of the following components:

 

   August 31,
2014
   August 31,
2013
 
Deferred tax asset:          
Net operating loss carryforwards  $(8,287,907)  $(3,953,375)
Valuation allowance   8,287,907    3,953,375 
Net deferred tax asset  $-   $- 

 

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income statutory tax rates to pretax income (loss) from continuing operations as follows:

 

   August 31,
2014
   August 31,
2013
 
         
Tax benefit at statutory rates  $(4,334,532)  $(2,590,760)
Change in valuation allowance   4,334,532    2,590,760 
Net provision for income taxes  $-   $- 

 

The Company has accumulated net operating loss carryovers of approximately $8,287,907 as of August 31, 2014 which are available to reduce future taxable income.  Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes may be subject to annual limitations. A change in ownership may limit the utilization of the net operating loss carry forwards in future years. The tax losses begin to expire in 2033. The fiscal years 2014 and 2013 remains open to examination by federal tax authorities and other tax jurisdictions.

 

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DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 18—SUBSEQUENT EVENTS

 

New Store Openings

 

Subsequent to August 31, 2014, the Company:

 

§Opened its first two franchised Papa John's locations:

 

1.Papa John's Sunset (in Rocklin, California) on November 13, 2014, and

 

2.Papa John's Foothills (in Roseville, California) on November 29, 2014.

 

Other Pending Operating-Related Transactions

 

Subsequent to August 31, 2014 the Company:

 

§Signed leases to open nine franchised Papa John's locations in Northern California;

 

§Entered into a definitive agreement to acquire two franchised Papa John's locations in Northern California, both of which currently are open and operating, and

 

§Entered into a series of definitive agreements: to take over a previously-closed restaurant space in high-end retail center in the Summerlin area of Las Vegas, Nevada; enter into a new lease with the landlord, and open up a new restaurant: TAPAS. Upon completion of various requirements of the Seller, the Company shall issue to the Seller 50,000 share of the Company’s Common Stock.

 

Note that, as of this date:

 

§Construction has commenced for three of the Papa John's locations under lease (in addition to the two already operating);

 

§The Company currently anticipated consummating the pending acquisition of the two operating Papa John's locations before the end of this calendar year - subject to access to financing, and

 

§The Company currently anticipates opening TAPAS before the end of January 2015.

 

The Company, in December 2015, closed one of its locations in Texas. The Company is in negotiations to sublet the space to another business and is moving the equipment and as much as possible of the tenant improvements to another Capriotti's location currently under construction.

 

The Company previously announced that it would be opening various concept restaurants in partnership with Chef Alex Stratta. In early December 2014, the Company ended its relationship with Stratta. The Company still intends to open these restaurants and explore opening other, unique concepts that it can open and then replicable in multiple locations and multiple markets.

 

Name Change

 

The Company, on November 17, 2014, announced that it has changed its name to "Preferred Restaurant Brands". As of this date, the Company is in the process of filing documents with FINRA, the Securities and Exchange Commission and other required regulatory bodies to effect this change. The Company intends to submit this change to a vote of shareholders either at its next-scheduled shareholder meeting or through an information statement (which will note that shareholders representing more than 95% of the Company's Common Stock have approved the name change.

 

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DIXIE FOODS INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

August 31, 2014 and 2013

 

NOTE 18—SUBSEQUENT EVENTS (CONTINUED)

 

Capriotti's Area Development Agreements

 

Subsequent to August 31, 2014, the Company entered into amended Area Development Agreements with the franchisor of Capriotti's Sandwich Shops. Pursuant to those agreements, the Company relinquished the exclusive right to develop Capriotti's Sandwich Shops in its five contractual territories, in return for which the Company's contractual obligations to open stores in each territory were decreased to one per year per territory.

 

Financings

 

Each of Restaurant I and Restaurant II issued one (1) Class B membership unit in exchange for total cash proceeds of $560,000 (inclusive of $60,000 received for administrative fees).

 

The Company’s subsidiary PRB I, LLC, issued one (1) Class B membership unit in exchange for total cash proceeds of $505,000 (inclusive of $5,000 received for administrative fees). In total, PRB II, LLC is authorized to issue up to five Class B membership units with no par value each.

 

In connection with the extension of certain agreements related to the Reverse Acquisition, the Company issued to certain shareholders of the Company, all of whom were shareholders prior to the Reverse Acquisition, 10,000 shares of Common Stock of the Company.

 

In connection with short-term loans made to the Company by two separate entities, the Company agreed to issue shares of Common Stock to those two lenders. To-date, the Company has issued 225,000 shares to each of these two lenders. For each two weeks that each such loan remains outstanding, the Company is required to issue another 37,500 shares of its Common Stock.

 

In connection with his assistance with facilitating EB-5 funding for the Company, as well as in consideration of other advise and services rendered, the Company issued to Company Director Mike Liu a Warrant entitling him, any time for five years after issuance, to acquire 400,000 shares of the Company's Common Stock at an exercise price of $0.84 per share.

 

In connection with assistance with facilitating EB-5 funding for the Company, as well as in consideration of other advise and services rendered, the Company issued to an individual a Warrant entitling that investor, any time for five years after issuance, to acquire $500,000 of Company Common Stock at an exercise price equal to 95% of the average trading price of the Company's Common Stock for the 30 days prior to any exercise.

 

NOTE 19 – RESTATEMENT OF FINANCIAL STATEMENTS

 

The Company has restated the August 31, 2014 financial statements as originally presented in its Form 10-K filed on December 19, 2104. The changes and explanation of such are as follows:

 

As of August 31, 2014:

 

   Originally
Reported
   Restatement
Adjustment
   As
Restated
 
Balance sheet:               
Accounts payable and accrued liabilities  $709,109   $120,000(a)  $829,109 
Class B membership units  $1,120,000   $(120,000)(a)  $1,000,000 

 

Notes:

(a)Reflects restatement due to adjustment to of value of Class B membership units net of portion due for administrative fees to third parties.

 

Other than this change, there are no other changes to the prior filings.

  

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Item 7.  Management’s Discussions and Analysis of Financial Condition and Results of Operations.

 

Going Concern

The Company has yet to generate internal cash flow sufficient to fund its growth, debt service and corporate expenses. Thus, the continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to: identify future investment opportunities and obtain the necessary debt or equity financing and generate profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

Results of Operations

Net Sales increased 40.8% ($1.83 million) due to: (1) the full year impact in fiscal 2014 of restaurants opened in fiscal 2013 (six); (2) same store sales growth, and (3) the impact of the five locations opened during fiscal 2014 (although three of those locations were open for less than two months of fiscal 2014).

 

Income From Operations increased from a loss of approximately $136,000 in fiscal 2013 to approximately $1.25 million in fiscal 2014. This improvement resulted from growth of restaurant revenues and continued focus on managing costs.

 

The Company's Loss From Operations was largely due to:

 

·a ramp up of General and Administrative Expenses and Corporate Salaries to support the past, current and expected store growth;

 

·significant pre-opening and one-time marketing expenses related to building the Capriotti's brand in the Company's markets;

 

·interest expenses and other-financing-related fees incurred in connection with the Company's borrowings to support operations and growth, and

 

·various noncash expenses related to the issuance of equity in consideration of: services rendered to employees and consultants, debt issued and extensions, modifications and guarantees thereto.

 

Liquidity and Capital Resources

As of August 31, 2014 and 2013, the Company had working capital deficits of $8,376,066 and $7,810,530, respectively. The Company has funded its recent growth with: equity and debt investments and advances from its CEO. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to: identify future investment opportunities and obtain the necessary debt and/or equity financing, and generate profitable operations from the Company’s future operations. Management's plan is to obtain such resources for the Company by obtaining equity and/or debt capital from existing shareholders and/or creditors and/or new investors and/or creditors sufficient to meet its minimal operating expenses and seeking equity and/or debt 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 its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations.

 

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