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EXCEL - IDEA: XBRL DOCUMENT - Preferred Restaurant Brands, Inc. | Financial_Report.xls |
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 17—Income 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.
22 |
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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