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EX-3.1 - EXHIBIT 3.1 - Southern Concepts Restaurant Group, Inc.ex3x1.htm
EX-21.1 - EXHIBIT 21.1 - Southern Concepts Restaurant Group, Inc.ex21x1.htm
EX-31.1 - EXHIBIT 31.1 - Southern Concepts Restaurant Group, Inc.ex31x1.htm
EX-10.5.1 - EXHIBIT 10.5.1 - Southern Concepts Restaurant Group, Inc.ex10x5x1.htm
EX-10.5X2 - EXHIBIT 10.5.2 - Southern Concepts Restaurant Group, Inc.ex10x5x2.htm
EX-31.2 - EXHIBIT 31.2 - Southern Concepts Restaurant Group, Inc.ex31x2.htm
EX-32.2 - EXHIBIT 32.2 - Southern Concepts Restaurant Group, Inc.ex32x2.htm
EX-10.5 - EXHIBIT 10.5 - Southern Concepts Restaurant Group, Inc.lease.htm
EX-32.1 - EXHIBIT 32.1 - Southern Concepts Restaurant Group, Inc.ex32x1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

  FORM 10-K

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

For fiscal year ended:  December 31, 2015

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

For the transition period from ____ to ____

Commission file number: 000-538-53
 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
 
 
 (Exact name of the registrant as specified in its charter)
 
 
 
 Colorado
 
 80-0182193
 (State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
2 N. Cascade Avenue, Suite 1400
Colorado Springs, CO 80903
 
 
(Address of principal executive offices)
 
 
 
 
719-265-5821
 
 
Telephone number, including Area code
 

 
Securities registered under Section 12(b) of the Exchange Act: None

Title of Each Class
 
Name of Each Exchange on Which Registered
NONE
 
NONE

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value

(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 o No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o No R

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes R No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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).
Yes R   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 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.
Yes No R 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer        Accelerated filer        Non-accelerated filer        Smaller reporting Company

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

There were 70,818,764 shares of the issuer's common stock, no par value, outstanding as of March 15, 2016.
 
The aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2015, computed by reference to the closing sales price on that date was approximately $18,178,316.  



 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
FORM 10-K
FOR THE PERIOD ENDED DECEMBER 31, 2015
 
CONTENTS
 
 
 
 
PART I
 1
 
 
Item 1.  Business
 1
 
 
Item 1A. Risk Factors
 3
 
 
Item 2.  Properties
 9
 
 
Item 3. Legal Proceedings
 9
 
 
Item 4. Mine Safety Disclosures 
 9
 
 
PART II 
 10
 
 
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 
 10
 
 
Item 6. Selected Financial Data
 11
 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 12
 
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 17
 
 
Item 8. Financial Statements and Supplementary Data
 17
 
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 17
 
 
Item 9A. Controls and Procedures 
 18
 
 
Item 9B. Other Information
 19
 
 
PART III
 20
 
 
Item 10.  Directors, Executive Officers and Corporate Governance
 20
 
 
Item 11. Executive Compensation 
 22
 
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters  
 27
 
 
Item 13. Certain Relationships and Related Transactions, and Director Independence  
 29
 
 
Item 14. Principal Accountant Fees and Services
 30
 
 
Item 15. Exhibits, Financial Statement Schedules
 32
 
 
Signatures
 33
 
 
 
Cautionary Statement about Forward-Looking Statements
 
This Form 10-K contains forward-looking statements regarding future events and the Company’s future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the Company’s management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of the Company’s future financial performance, the continuing development of the Company’s business plan operations, the Company’s anticipated growth and potentials in its business, the financial performance and/or gains by companies in which the Company holds a position, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified elsewhere herein, including under “Risk Factors.” Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
 
The Company is under no duty to update any of these forward-looking statements after the date of this report. You should not place undue reliance on these forward-looking statements.
 
 
i

 
PART I
Item 1. BUSINESS.

General Discussion

Southern Concepts Restaurant Group, Inc. (“SCRG” or the “Company”) is a Colorado corporation that was formed on January 29, 2008. The Company, on March 9, 2015, with approval of a majority of the Company’s shareholders, changed its name from Bourbon Brothers Holding Corporation to Southern Concepts Restaurant Group, Inc.

The Company operates and manages restaurants through its wholly-owned and majority-owned subsidiaries, including:

SH Franchisee & Licensing Corp. (“SH”)
Southern Hospitality Denver Holdings, LLC (“SHDH”)
Southern Hospitality Denver, LLC (“SHD”)
Southern Hospitality Lone Tree, LLC (“SHLT”)
Carve Restaurant Group, LLC (“CRG”)
Carve BBQ Glendale, LLC (“CARVEG”)
Southern Hospitality Southern Kitchen Colorado Springs, LLC (“SHSK”)
Bourbon Brothers Holding Company, LLC (“BBHCLLC”)
Bourbon Brothers Restaurant Group, LLC (“BBRG”)

The Company began revenue generating activities in late February 2013, with the opening of its first Denver-based restaurant. In January 2014, the Company opened its second restaurant in Colorado Springs, Colorado, and in April 2015, the Company opened its third restaurant in Lone Tree, Colorado. The Company’s fourth restaurant opened November 5, 2015.

The Company has developed a fast casual concept, in which the Company opened its first fast casual restaurant in November 2015. This restaurant, located in Glendale, Colorado, is called Carve Barbecue, and it’s operated through a newly-formed 66.075% owned subsidiary, CARVEG.
 
The Company is a party to a franchise agreement (the “FA” or the “Franchise Agreement”) with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor” or “SHFL”).  In February 2015, the Company also executed a sixth amendment to the Franchise Agreement which specifically granted SCRG the right to develop two new full service Southern Hospitality restaurants during 2015, the locations of which were named in the amendment to be Lone Tree, Colorado and downtown Colorado Springs, Colorado.  The Company did execute and open a Southern Hospitality restaurant in Lone Tree, Colorado in April 2015.  At this time, the Company has no plans to open a location in downtown Colorado Springs, Colorado. Additionally, the sixth amendment granted the Company the right to rebrand its Bourbon Brothers Southern Kitchen restaurant in northern Colorado Springs into a Southern Hospitality-branded full service franchised restaurant operating under the trade name Southern Hospitality Southern Kitchen, a differentiated and slightly more upscale concept to that of the original concept.

In February 2015, the Company entered into a Master License Agreement (“MLA”) with SHFL which grants the Company the right to license up to five Southern Hospitality-branded fast casual restaurants (SHQ) in the Denver and Colorado Springs markets through August 2016. SHFL and SCRG have agreed to a royalty of 2.5% of gross sales on each of the new SHQ locations. The agreement pertains exclusively to the Company’s right to develop the SHQ locations and does not restrict the Company from developing a similar, competitive brand in the future. Finally, in developing the SHQ concept, SCRG will retain joint ownership of this concept, which pertains to the functionality of the restaurant.  The Company does not anticipate opening a SHQ in the near future.
 
 
1


 
During 2016, the Company is exploring options for growth for the Company’s two brands, Southern Hospitality and Carve Barbecue.  Specifically, the Company is looking at building the Southern Hospitality growth model on the footprint and profitability similar to its Southern Hospitality Lone Tree location, with real estate between 4,000 to 5,000 square feet.  In regards to the Carve model, the Company is identifying real estate partners and locations for its 2,500 square feet footprint.

The Company dissolved several subsidiaries in February 2016 that were non-operational, including Southern Hospitality Tejon, LLC, Bourbon Brothers Franchise, LLC, Bourbon Brothers Brand, LLC and Bourbon Brothers Seafood and Chophouse Colorado Springs, LLC.  An organizational chart is filed with this Form 10-K.
Competition
We have a limited operating history, and therefore, anticipate that we will compete with national and regional casual and upscale casual dining restaurants. Our competition may also include a variety of locally owned restaurants and several major store chains. The number, size and strength of competitors vary by region, market and even restaurant. Competitors to our restaurants compete based on a number of factors, including taste, quality, speed of service, price and value, name recognition, location, customer service and the ambience and condition of the competitor.
Restaurant Site Selection
We believe that site selection is critical to our success and thus we devote substantial effort to evaluating potential locations. Our site selection process includes the use of external real estate brokers with expertise in specific markets. Locations proposed by real estate managers are reviewed on site by an executive of the Company. We study the surrounding trade area, demographic and business information within that area, and available information on competitors.
 Employees
As of December 31, 2015, the Company had 126 employees, of which 44 are full-time employees. 
Additional Information
 
The Company files reports with the Securities and Exchange Commission (the “SEC”) as required by Section 13(a) of the Exchange Act. The public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
 
 
2

 
  
Item 1A.  RISK FACTORS
 
Our future performance is subject to a variety of risks and uncertainties. Although the risks described below are the risks that we believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the information available to us that later may prove to be material. The Company’s securities are highly speculative and involve a high degree of risk, including among other items the risk factors described below.

RISKS RELATED TO OUR BUSINESS

General Company Risks

The Company has a limited operating history.  The Company did not begin active business operations until late February 2013.  Therefore the Company is subject to many risks common to enterprises with limited or no operating history, including potential under-capitalization, limitations with respect to personnel, financial and other resources, and limited customers and revenue sources.  Our ability to successfully generate sufficient revenues from operations is dependent on a number of factors, including availability of funds to fund our current and anticipated operations, and to commercialize our business concept.  There can be no assurance that we will not encounter setbacks with the on-going development and implementation of our business plan.  In addition, our assumptions and projections may not prove to be accurate, and unexpected capital needs may arise. If such needs arise, our inability to raise additional funds, either through equity or debt financing, will materially impair our ability to implement our business plan and generate revenues.  Further, as a result of a general tightening of lending standards, and a general decrease in equity financing and similar type transactions, it could be difficult for us to obtain funding to allow us to continue to develop our business operations.
We likely will need additional capital in the future and it may not be available on acceptable terms.  The development of our business model will likely require significant additional capital in the future to, among other things, fund our operations and growth strategy.  We may rely on bank financing and also may seek access to the debt and/or equity capital markets.  There can be no assurance, however, that these sources of financing will be available on reasonable terms, or at all.  Our ability to obtain additional financing will be subject to a number of factors, including market/economic conditions, our operating performance, and investor sentiment.  These factors may make the timing, amount, terms and conditions of additional financings unattractive to us.  If we are unable to raise additional capital, our growth could be significantly impeded and/or we may be unable to execute upon our business model.
New or less mature restaurants, once opened, may vary in profitability and levels of operating revenue for six months or more and may under perform compared to existing or established restaurants.   New and less mature restaurants typically experience higher operating costs in both dollars and percentage of revenue initially when compared to restaurants in the comparable restaurant base.  Further, restaurants located in one city or location may not perform as well as restaurants in another city or location.  We expect that our restaurants may take up to one or more years to reach normalized operating levels due to inefficiencies typically associated with new restaurants.  These include operating costs, which are often significantly greater during the first year or two of operation.
The restaurant industry is highly competitive and subject to changes in consumer preferences.  The Company’s business is to own and operate southern-food themed restaurants in several cities in the United States.  Competition in the restaurant industry is increasingly intense. Our competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators that have opened restaurants to well-capitalized national restaurant companies. Many of our competitors are well established, and some of our competitors have substantially greater financial, marketing, and other resources than do we. Accordingly, they may be better equipped than us to increase marketing or to take other measures to maintain their competitive position.

Moreover, the bar and restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and habits.  Our success depends on the popularity of Southern U.S. based foods and drinks, and shifts in consumer preferences away from this cuisine and style would likely have a material adverse effect on our future profitability.
 
 
3

 

 
Our operating results will likely experience significant fluctuations. Our operating results may fluctuate significantly due to various risks and unexpected circumstances, increases in costs, seasonality, weather, and other factors outside our control.  The restaurant and bar business is subject to a number of significant risks such as: general economic conditions; extended periods of inclement weather which may affect guest visits as well as limit the availability of key commodities and items that are important ingredients in our products; increases in energy costs, costs of food, supplies, maintenance, labor and benefits, as well as other operating costs; and unanticipated expenses such as repairs to damaged or lost property. Moreover, our business may be subject to seasonal fluctuations. Accordingly, our results of operations from any given period may not necessarily be indicative of results to be expected for any particular future period.

Our expansion into new markets may present increased risks due to our unfamiliarity with those areas.  Our expansion strategy also entails opening restaurants in markets in which we have little or no operating experience. These new markets may have different competitive conditions, consumer tastes and discretionary spending patterns. In addition, our new restaurants will typically take several months to reach budgeted operating levels due to problems associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. Restaurants opened in new markets may never reach expected sales and profit levels, thereby affecting our overall profitability. Although we have attempted to mitigate these factors by paying careful attention to training and staffing needs, there can be no assurance that we will be successful in operating new restaurants on a profitable basis.

Our ability to open new restaurants on schedule in accordance with our targeted capacity growth rate may be adversely affected by delays or problems associated with securing suitable restaurant locations and leases and by other factors, some of which are beyond our control and the timing of which is difficult to forecast accurately. Our objective is to grow our business and increase shareholder value primarily by (i) establishing and then expanding our base of restaurants that are profitable; and (ii) once established, increasing sales at existing restaurants.  Due in part to the unique nature of each proposed restaurant location, we cannot predict the timing or ultimate success of our site selection process or these lease negotiations. Delays encountered in negotiating, or our inability to finalize to our satisfaction, the terms of a restaurant lease may delay our actual rate of new restaurant growth and cause a significant variance from our targeted capacity growth rate. In addition, our scheduled rate of new restaurant openings may be adversely affected by other factors, some of which are beyond our control, including the following:

 
 
the availability and cost of suitable restaurant locations for development;
 
 
our ability to compete successfully for suitable restaurant locations;
 
 
the availability of adequate financing;
 
 
the timing of delivery of leased premises from our landlords so we can commence our build-out construction activities;
 
 
construction and development costs;
 
 
labor shortages or disputes experienced by our landlords or outside contractors, including their ability to manage union activities such as picketing or hand billing which could delay construction and which could create adverse publicity for our business and operations;
 
 
any unforeseen engineering or environmental problems with the leased premises;
 
 
our ability to hire, train and retain additional management and restaurant personnel;
 
 
our ability to secure governmental approvals and permits, including liquor licenses;
 
 
our ability to successfully promote our new restaurants and compete in the markets in which our new restaurants are located;
 
 
weather conditions or natural disasters; and,
 
 
general economic conditions.
 
4

 
 
As a franchisee and licensee we have obligations to our Franchisor.  We are obligated to pay the Franchisor royalties on gross sales from all Southern Hospitality restaurants, including those under the Master License Agreement that we entered into with the Franchisor.  These fees will require that the Company devote a substantial amount of its financial resources to paying such fees, which could negatively affect the Company’s results of operations and liquidity.
Our success depends on our ability to protect intellectual property used in our business operations. We rely on trade secrets and proprietary know-how in operating our restaurants, and we expect to employ various methods to protect those trade secrets and that proprietary know-how. However, such methods may not afford adequate protection and others could independently develop similar know-how or obtain access to our know-how, concepts and recipes.  We cannot offer any assurance that third parties will not claim that the trademarks or menu offerings we utilize infringe upon their proprietary rights. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations, financial condition or liquidity.
If we fail to manage our growth effectively, it could harm our business. Failure to manage our growth effectively could harm our business.  Our business model anticipates that we may open multiple restaurants in various cities across the United States.  Our restaurant management systems, financial and management controls and information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to develop and enhance these systems, procedures and controls and to locate, hire, train and retain management and operating personnel. We cannot offer any assurance that we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our infrastructure. If we are unable to manage our growth effectively, our business and operating results could be materially adversely impacted.
Our operations will be susceptible to the changes in cost and availability of food which could adversely affect our operating results. Our profitability will depend in part on our ability to anticipate and react to changes in food costs. Various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability, recalls of food products, and seasonality, as well as the impact of the current macroeconomic environment on our suppliers, may affect our food costs or cause a disruption in our supply chain. Changes in the price or availability of commodities for which we do not have fixed price contracts could materially adversely affect our profitability. Expiring contracts with our food suppliers could also result in unfavorable renewal terms and therefore increase costs associated with these suppliers or may even necessitate negotiations with alternate suppliers. We cannot predict whether we will be able to anticipate and react to changing food costs by negotiating more favorable contract terms with suppliers or by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, the ability of our suppliers to meet our supply requirements upon favorable terms, if at all, may be impacted by the economic recovery.

The restaurant business is subject to a significant amount of regulation and licensing requirements. Our proposed business is subject to various federal, state, and local government regulations, including those relating to the food safety and disclosure, alcoholic beverage sale and control, public accommodations, and public health and safety. These regulations are subject to continual changes and updating. Difficulties or failures in obtaining or maintaining the required licenses and approvals or maintaining compliance with existing or newly enacted requirements could delay the opening or affect the continued operation and profitability of one or more restaurants in a particular area.
We are also subject to "dram shop" statutes in certain states, such as Colorado.  These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Failure to comply with alcoholic beverage control or dram shop regulations could subject the Company to liability and could adversely affect our business.
Various federal and state employment laws will govern our relationship with our team members and affect operating costs.  These laws govern minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, workers' compensation rates, citizenship or residency requirements, labor relations, child labor regulations, and discriminatory conduct. Additional government-imposed increases in federal and state minimum wages, overtime pay, paid leaves of absence, and mandated health benefits, increased tax reporting and tax payment requirements for team members who receive tips or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results.
 
5

 
 
The food service industry is affected by litigation and publicity concerning food quality, health and other issues, which can cause guests to avoid our restaurants and result in significant liabilities or litigation costs.  Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging guests from eating at our restaurants. We could also incur significant liabilities if a lawsuit or claim results in a decision against us or litigation costs regardless of the result.
Health concerns relating to the consumption of certain food products could affect consumer preferences and could negatively impact our results of operations.   Like other restaurants, consumer preferences could be affected by health concerns about the consumption of certain food products (such as beef or chicken), or negative publicity concerning food quality, illness and injury in general. In recent years there has been negative publicity concerning e-coli, hepatitis A, "mad cow," "foot-and-mouth" disease and "bird flu." The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests, resulting in legislation in some jurisdictions which require nutritional information to be disclosed to guests. Nutritional labeling could be enacted in many additional states, counties or cities as well as on a federal level. Nutritional labeling requirements and negative publicity concerning any of the food products we serve may adversely affect demand for our food and could result in a decrease in guest traffic to our restaurants. If we react to the labeling requirements or negative publicity by changing our concept or our menu offerings or their ingredients, we may lose guests who do not prefer the new concept or products, and we may not be able to attract sufficient new guests to produce the revenue needed to make our restaurants profitable. In addition, we may have different or additional competitors for our intended guests as a result of a change in our concept and may not be able to compete successfully against those competitors. A decrease in guest traffic to our restaurants as a result of these health concerns or negative publicity or as a result of a change in our menu or concept could materially harm our business.
Uncertainty regarding the economic recovery may negatively affect consumer spending and has adversely impacted our revenues and our results of operations and may continue to do so in the future.   Current uncertainty regarding economic conditions and the existence and rate of any economic recovery may have an adverse effect on the businesses, results of operations and financial condition of the Company and its customers, distributors and suppliers. These conditions include continued unemployment, weakness and lack of consistent improvement in the housing markets; downtrend or delays in residential or commercial real estate development; volatility in financial markets; inflationary pressures and reduced consumer confidence. As a result, our customers may continue to remain apprehensive about the economy and maintain or further reduce their already lowered level of discretionary spending. This could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues and potentially negatively affecting our operating results. We believe there is a risk that prolonged negative economic conditions might cause consumers to make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis, which would have an adverse effect on our business.
We expect to rely heavily on information technology, and any material failure, weakness or interruption could prevent us from effectively operating our business.  The restaurant industry relies heavily on information systems, including point-of-sale processing in restaurants, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our ability to efficiently and effectively manage our business will in part depend on the reliability and capacity of these systems.  The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms could result in delays in guest service and reduce efficiency in our operations.  Remediation of such problems could result in significant, unplanned capital investments.
 
6

 
 
A security failure in our information technology systems could expose us to potential liability and loss of revenues.  We accept credit and debit card payments in our restaurants.  A number of retailers have recently experienced actual or potential security breaches in which credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers.  If we experienced a security breach, either intentionally or inadvertently, we could become subject to claims, lawsuits or other proceedings for purportedly fraudulent transactions arising out of the theft of credit or debit card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims.  Any such incidents or proceedings could disrupt the operation of our restaurants, adversely affect our reputation, guest confidence, and our results of operations, or result in the imposition of penalties or cause us to incur significant unplanned losses and expenditures, including those necessary to remediate any damage to persons whose personal information may have been compromised.  We do not maintain a separate insurance policy covering cyber security risks and, in light of recent court rulings and amendments to policy forms, there is uncertainty as to whether traditional commercial general liability policies will be construed to cover the expenses related to a cyber-attack and breaches if credit and debit card information is stolen.
We identified material weaknesses in our disclosure controls and procedures and our Internal Controls Over Financial Reporting.  Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess our internal controls over financial reporting (“ICFR”) pursuant to a defined framework.  In making that assessment, management identified a material weakness in our disclosure controls as a result of several material weaknesses identified in our ICFR as described in Item 9A below.  There are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective ICFR can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements.  Material weaknesses make it more likely that a material misstatement of annual or interim financial statements will not be prevented or detected.  In addition, effective ICFR at any point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.

We have signed leases under long-term non-cancelable terms for which we may remain obligated to perform under even after a restaurant closes, and we may be unable to renew leases at the end of their terms. Our current SHD lease for our first Denver restaurant is a non-cancelable ten-year lease with an option to renew for two five year terms. Our current Colorado Springs lease is a non-cancelable ten-year lease with an option to renew for a ten-year term.  Our current Lone Tree lease is a non-cancelable ten-year lease with an option to renew for two five-year terms.  Our current Glendale lease is a non-cancelable lease expiring July 31, 2020 with an option to renew for three five-year terms. If we were to close or fail to open a restaurant at a location we lease, we would generally remain committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations in respect of leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we cannot renew such a lease we may be forced to close or relocate a restaurant, which could subject us to construction and other costs and risks.

The Company is significantly leveraged and has significant debt service requirements.  The Company has a significant amount of indebtedness which could limit the Company’s ability to incur additional indebtedness for capital raising purposes, securing a line of credit, or otherwise. The Company’s indebtedness could adversely affect the Company’s operations, including among other things its ability to obtain additional financing if necessary, and a significant portion of the Company’s cash flow from operations could be dedicated to the repayment of interest and principal on the debts which would reduce the amount of funds available for other corporate purposes.  The Company’s ability to meet its debt service obligations and reduce its indebtedness will be dependent upon the Company’s future performance, which will be subject to the success of its business strategy, general economic conditions, and other factors affecting the Company’s operations, many of which are beyond the Company’s control.

The Company is not required to establish a sinking fund (or any similar type of segregated accounts) for the repayment of its debt. There can be no assurance that the Company’s business operations will generate sufficient cash flow from operations to meet its debt service requirements and the potential payment of principal in cash when due, and if the Company is unable to do so, it may be required to liquidate assets, to refinance all or a portion of the indebtedness or seek to obtain additional financing.
 
 
7

 
RISKS RELATED TO OUR SECURITIES
 
The Company does not intend to declare any dividends in the foreseeable future.  The Company intends to retain any of its profits to fund the Company’s business operations.  Investors who require income from dividends should not purchase our common stock.
 
As our stock is not listed on a national securities exchange, trading in our shares will be subject to rules governing "penny stocks," which will impair trading activity in our shares.   Our stock is not on a national securities exchange. Therefore, our stock is subject to rules adopted by the SEC regulating broker dealer practices in connection with transactions in "penny stocks." Those disclosure rules applicable to "penny stocks" require a broker dealer, prior to a transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the SEC. That disclosure document advises an investor that investment in "penny stocks" can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and must make a special written determination that the "penny stock" is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.
 
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for shareholders to dispose of their shares. You will also find it difficult to obtain accurate information about, and/or quotations as to the price of, our common stock.  In general, buying low-priced penny stocks is very risky and speculative.  The Company’s common stock is currently defined as a penny stock under the Securities and Exchange Act of 1934, and rules thereunder.   You may not be able to sell your shares when you want to do so, if at all.  The penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.
 
The over-the-counter market for stock such as ours is subject to extreme price and volume fluctuations. You may not be able to resell your shares at or above the public sale price. The securities of companies such as ours have historically experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in the our industry and in the investment markets generally, as well as economic conditions and quarterly variations in our operational results, may have a negative effect on the market price of our common stock.
 
As a company with a class of securities registered pursuant to the Exchange Act the Company has significant obligations under the Exchange Act. Having a class of securities registered under the Exchange Act is a time consuming and expensive process and subjects the Company to increased regulatory scrutiny and extensive and complex regulation.  Complying with these regulations is expensive and requires a significant amount of management’s time.  For example, public companies are obligated to institute and maintain financial accounting controls and for the accuracy and completeness of their books and records.  These requirements could necessitate additional corporate spending on procedures and personnel requiring us to reallocate funds from other business objectives.

We are a holding company and depend on the cash flow of our subsidiaries. We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations depends upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries directly or indirectly to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.
 
 
8

 

There may be future sales or other dilution of our equity which may adversely affect the market price of our common stock. We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. Our Board of Directors is authorized to issue additional shares of common stock and additional classes or series of preferred stock without any action on the part of the stockholders. Our Board of Directors also has the discretion, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, rights and preferences with respect to dividends or upon the liquidation, or winding up of our business and other terms. If we issue additional preferred shares in the future that have a preference over our common stock with respect to the payment of dividends or upon liquidation, dissolution or winding up, or if we issue additional preferred shares with voting rights that dilute the voting power of our common stock, the rights of our common stockholders or the market price of our common stock could be adversely affected.
 
 
Item 2. PROPERTIES
 
The Company’s principal executive office, for all operations, is located at 2 North Cascade Avenue, Suite 1400, Colorado Springs, CO 80903.  The Company does not own any real property.  The following table provides certain information regarding our businesses leased as of December 31, 2015:
 
 
 
 
 
 
Operating
 
 
 
 
Principal
Lease
 
Square
 
 
Location
 
Uses
Commenced
 
Feet
 
Interest
Denver, Colorado
 
Restaurant
2012
   
7,464
 
Leased (a)
Colorado Springs, Colorado
 
Corporate Office
2013
   
4,450
 
Leased (b)
Colorado Springs, Colorado
 
Restaurant
2013
   
9,191
 
Leased (c)
Lone Tree, Colorado
 
Restaurant
2014
   
5,513
 
Leased (d)
Glendale, Colorado
 
Restaurant
2015
   
2,500
 
Leased (e)
 
(a)
(b)
Occupied under the terms of a 124.5 month lease with an unaffiliated party.  We pay $15,550 per month escalating up to $20,289 per month in year 10.
Occupied under the terms of a 78 month lease with an unaffiliated party ending December 31, 2016.  We pay approximately $6,000 per month in year 6.
(c)
Occupied under the terms of a 120 month lease with a related party.  We pay $33,340 per month escalating by approximately 10% every 60 months.
(d)
Occupied under the terms of a 120 month lease with an unaffiliated party.  We pay approximately $8,960 per month escalating up to $9,855 in year 10.
(e)
Occupied under the terms of a lease expiring on July 31, 2020 with an unaffiliated party. We pay approximately $11,100 per month escalating by 12.5% every 60 months.
 
Item 3. LEGAL PROCEEDINGS

None.

Item 4.  MINE SAFETY DISCLOSURES

None.
 
9

 
 
PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is currently quoted on the OTCQB under the symbol “RIBS”. The table below sets forth the high and low bid prices of the Company’s common stock during the periods indicated as reported on Yahoo Finance (http://finance.yahoo.com).  The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not reflect actual transactions.
 
Quarter Ended
 
High
   
Low
 
December 31, 2015
 
$
0.24
   
$
0.24
 
September 30, 2015
   
0.27
     
0.21
 
June 30, 2015
   
0.27
     
0.27
 
March 31, 2015
   
0.27
     
0.26
 
December 31, 2014
 
$
0.81
   
$
0.15
 
September 30, 2014
   
0.67
     
0.30
 
June 30, 2014
   
0.97
     
0.31
 
March 31, 2014
   
1.01
     
0.34
 

The closing sales price of the Company’s common stock as reported on March 14, 2016, was $0.16 per share, which was last reported trade of the Company’s common stock on the OTCQB.
 
Holders
 
As of December 31, 2015, there were 258 holders of record of the Company’s common stock and 6 holders of record of our Series A preferred stock. On February 3, 2016, 4,428,791 shares of Series A Preferred Stock, converted to common shares, leaving 456,068 Series A Preferred Stock issued and outstanding and 2 holders of record. This does not include persons who hold our common stock in brokerage accounts and otherwise in “street name.”
 
Dividends
 
Since its inception, the Company has not declared or paid cash or other dividends on its common stock.  The Company has no plans to pay any dividends, although it may do so if its’ financial position changes.  There are no restrictions in the Registrant’s articles of incorporation or bylaws that restrict it from declaring dividends.  
 
Equity Compensation Plan Information
 
The Company has adopted one equity compensation plan being its 2012 Stock Option Plan (the “Plan”).   The Company’s shareholders approved the adoption of the Plan on November 14, 2012.  A total of 1,500,000 shares of Company common stock were reserved for issuance under the Plan as of December 31, 2013. That amount was increased to 3,000,000 on January 22, 2014, with approval of the Company’s shareholders and subsequently increased to 4,000,000 in December of 2014, with the approval of the Company’s shareholders..
 
 
10

 
 
Under the Plan, the Company may grant stock options, restricted and other equity awards to any employee, consultant, independent contractor, director or officer of the Company.    The purpose of the Plan is to provide financial incentives for selected employees, advisors, consultants and directors of the Company, thereby promoting the long-term growth and financial success of the Company.
 
The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under the Company’s compensation plans as of December 31, 2015.

 
Plan Category
 
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
 
 
Weighted average exercise
price of outstanding
options, warrants and rights
 
 
Number of securities
remaining available for
future issuance
 
 
 
 
 
 
 
 
 
 
 
Equity compensation plans approved by security holders
 
 
2,867,876
 
 
 
$0.30
 
 
 
1,132,124
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recent Sales of Unregistered Securities
 
All sales of unregistered equity securities that occurred during the period covered by this report, and through February 24, 2016, have been previously reported as required in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Between January 1, 2016 and March 7, 2016, the Company sold 1,075,000 shares of its common stock and warrants at $0.20 per share for total gross proceeds of $215,000.  The Company relied on the exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506(b) promulgated thereunder.  No commission or other remuneration were paid on the sales.

Repurchases of Equity Securities
 
The Company did not repurchase any shares of the Company’s common stock during the year ended December 31, 2015.  
 
Item 6. SELECTED FINANCIAL DATA

Not applicable.
 
 
11

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
In this Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including:
 
·
Key events and recent developments within our Company;
·
Our results of operations for the years ended 2015 and 2014;
·
Our liquidity and capital resources;
·
Any off balance sheet arrangements we utilize;
·
Any contractual obligations to which we are committed;
·
Our critical accounting policies;
·
The inflation and seasonality of our business; and
 ·
New accounting standards that affect our Company.
 
The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this annual report.
 
Results of Operations – Years ended December 31, 2015 and 2014

Revenues

The Company opened its first restaurant in Denver, Colorado on February 21, 2013 (the “SHD” restaurant).  The Company’s second restaurant opened in Colorado Springs, CO on January 27, 2014 (the “SHSK” restaurant). The Company’s third restaurant opened in Lone Tree, Colorado on April 27, 2015 (the “SHLT” restaurant).  The Company’s fourth restaurant opened on November 5, 2015 (the “CARVEG” restaurant).  The Company recognized $6,579,100 and $5,144,500 in revenues for the years ended December 31, 2015 and 2014, respectively.  The primary increase in 2015 over 2014 was due to the additional two store openings in 2015, along with same stores sales growth at SHD in 2015.

During 2015, SHD grew comparable same store sales 2015 over 2014 by 14.1%, which management attributes to increasing Southern Hospitality brand awareness in the metro Denver market, through the opening of the Lone Tree, Colorado location as well as innovative marketing campaigns the Company launched throughout the year. The Company anticipates continuing to grow comparable same store sales at SHD, and is forecasting an annual revenue increase of 8% for 2016.

Further, management expects SHLT to grow comparable same store sales during its second year of operations in 2016, by building on the increase in comparable sales metrics at SHD as well as expanded menu offerings. It is important to note that SHLT is currently the most efficient location in the system, having generated $311 in revenue per square foot in the eight months of operations in 2015. Management is conservatively estimating a same store sales increase for SHLT of 8% in 2016.

Additionally, management is anticipating same store sales increases for SHSK of between 10% and 12% for 2016, based on the anticipated traffic increases at the Polaris Pointe development, the Bass Pro Shops anchored development, where the Company’s Colorado Springs store is located. The traffic increases are primarily due to new tenants in the development such as Kneaders Bakery and Café, Sprouts Farmers Market, and the upcoming groundbreaking of the Colorado Grand Resort, a planned 300 room resort and indoor water park. Additionally, the Company is in the process of growing catering and offsite sales through an increase in business development efforts in the field.

Finally, the Company is very optimistic about the revenue potential in 2016 for its newly opened, fast casual barbecue concept, Carve Barbecue. The first location of Carve Barbecue opened in Glendale, Colorado on November 5, 2015 and generated $171, 700 in revenue during the approximate two months of operations. As a new concept, the Company will focus on increasing brand awareness for Carve Barbecue throughout the year as it works to refine and perfect operations for its planned regional rollout.
 
 
12

 

 
Operating Expenses

For the years ended December 31, 2015 and 2014, the Company’s operating expenses were approximately $9,738,000 and $8,776,000, respectively.  The operating expenses in 2015 included costs to open the two restaurant locations of SHLT and CARVEG.  SHD earned $78,200 in net operating income for 2015 after store level operating expenses. Management attributes SHD’s profitability to an increase in comparable same store sales as well as increased operating efficiencies throughout the store level operating expenses of SHD. SHLT was the strongest performing unit for the Company during 2015. For the eight months of operation during the year, SHLT was able to earn $140,300 in store level net operating income (excluding pre-opening expenses), which represents 8.2% of revenue. Management attributes the positive operating performance of SHLT to its lease terms as well as exceptional management of store level operating expenses.  SHSK has been the lowest sales volume Southern Hospitality store in the system to date, causing its operating expenses as a percentage of revenue to struggle. The Company is confident that the store will become cash flow positive during 2016. Furthermore, management is currently working alongside its current landlord for the landlord to sell the building to an institutional owner of single tenant buildings at a reduced rental rate, which will increase SHSK’s earning potential. Over the long term, management believes SHSK will develop into one of the top earning stores for the Company, which will experience traffic catalysts over the coming years of additional retail and restaurants, a new intersection at I-25 and Powers, as well as the development of the Colorado Grand Resort.  Finally, the initial location of Carve Barbecue, which opened on November 5, 2015, had revenues of $171,700. Management expects certain marketing and labor expenses to not reoccur into 2016 that were associated with grand opening of Carve Barbecue. Specifically, labor was notably higher than where management believes they will normalize, however it is still too early for management to confidently issue guidance for 2016. The Company anticipates a Carve restaurant should earn approximately $360,000 in net operating income on average unit revenue volumes of $1,800,000 over the long term.

Pre-opening costs, which are expenses as incurred, consist of the costs of labor, hiring and training for the initial work force for our new restaurants; occupancy costs incurred prior to opening; travel expenses for our training team members; the cost of food and beverages used in training; marketing and supplies costs; and other direct costs related to the opening of new restaurants.

The operating expenses in 2014 included organization costs, merger costs with BBHC and its subsidiaries, and opening the SHSK restaurant. The largest expense in 2015 and 2014 was the restaurant operating costs totaling approximately $6,754,000 and $5,490,500, respectively. The Company’s next largest operating expenses during 2015 and 2014 were its general and administrative expenses totaling approximately $2,055,000 and $2,405,000, respectively. These expenses primarily included recurring corporate costs (such as payroll and related expenses) and costs incurred related to the initiation and organization of the corporate business component. General and administrative and selling and marketing expenses for the years ended December 31, 2015 and 2014 also included approximately $325,000 and $497,000 of (non-cash) stock-based compensation. Additionally, the Company incurred approximately $350,200 and $444,200 in selling and marketing expenses during the years ended December 31, 2015 and 2014, respectively. The Company expects to incur general and administrative expenses going forward as it grows its operations. The Company anticipates that net losses may continue in the foreseeable future due to the overall expansion of the Company and its subsidiaries due to expenses such as marketing and pre-opening.

Other Income (Expense)

For the years ended December 31, 2015 and 2014, the Company recognized other expense of approximately $729,700 and $137,400, of which all was attributable to interest expense. The increase in 2015 over 2014 was primarily due to the additional expense incurred as a result of the additional related party promissory note which was entered into at the end of 2014.

Liquidity and Capital Resources

As of December 31, 2015, the Company had a working capital deficiency of approximately $126,000 and had $1,107,300 of cash, which represents a $74,800 decrease in cash from December 31, 2014. The Company’s total assets and current assets increased as of December 31, 2015, when compared to December 31, 2014 due to the increase in prepaid expenses, property and equipment, deposits, and inventory. As noted above, the Company had a net loss for each of the years ended December 31, 2015 and 2014. Further, as of December 31, 2015, the Company had an accumulated deficit of approximately $12,092,100. Although the Company believes its revenues will continue to increase in 2016, for at least the near term, the Company expects to continue to in part rely on outside sources of capital to fund its current and planned operations.

The Company believes that the proceeds from the issuance of its equity securities and notes, coupled with its cash on hand and projected revenues, will be sufficient to cover its costs and expenses through 2016. However, estimates for expenses may change, in which case the Company’s capital would not be sufficient for this time period. The Company will continue to seek additional capital to help fund its operations in the near term. However, there can be no assurance that additional financing will be available to the Company on reasonable terms, if at all. As a result of the Company’s losses from operations and limited capital resources, the Company’s independent registered public accounting firm’s report in the Company’s financial statements as of, and for the year ended December 31, 2015, includes an explanatory paragraph discussing that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue to pursue its plan of operations is dependent upon its ability to increase revenues and/or raise the capital necessary to meet its financial requirements on a continuing basis.

 
13


Current Liabilities

The Company’s current liability for convertible and other notes payable and accrued interest as of December 31, 2015 and 2014, is $913,500 and $465,900. Accounts payable as of December 31, 2015, is $256,200 compared to $91,800 as of December 31, 2014. Accrued expenses as of December 31, 2015, were $272,300 compared to $229,500 as of December 31, 2014.  The increase in accrued expenses and accounts payable is due to operating two additional restaurant locations in 2015 over 2014.

Operating Activities

Net cash used in operating activities was approximately $2,258,600 in 2015, as compared to net cash used in operating activities of approximately $2,355,300 in 2014. The increase in net cash used in operating activities in 2015 (compared to 2014) was primarily due to the increase in net loss for the 2015 period, as compared to the 2014 period.

Investing Activities

Net cash used in investing activities in 2015 was approximately $1,867,400, as compared to net cash provided by investing activities of approximately $493,800 for the period of 2014. Net cash used in investing activities in 2015 for two additional restaurants and cash provided by investing activities in 2014 were primarily the result of cash used for purchases of property and equipment offset by cash acquired in the BBHCLLC acquisition.

Financing Activities

Net cash provided by financing activities in 2015 was approximately $4,051,200, compared to approximately $3,030,000 in 2014. Approximately $2,686,500 of cash was provided in 2015 from the issuance of common stock and warrants compared $1,255,000 in 2014. Additionally, the net cash included in financing activities in 2014 included cash of $1,772,000 in exchange for promissory notes, compared to $280,000 of cash for promissory notes in 2015.  The non-controlling interest holders contributed $984,000 in 2015 (compared to none for the year ended December 31, 2014). 

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our shareholders.
 
Critical Accounting Policies
 
The preparation of consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the consolidated financial statements.
 
Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. Our significant accounting policies are disclosed in Note 2 to the Financial Statements included in this Form 10-K.  Our critical accounting policies are outlined below.
 
 
14

Intangible Assets

The intangible asset at December 31, 2015 and 2014, represents franchise license costs for SHD. These costs are amortized over the ten-year term of the franchise agreement using the straight line method. The Company assesses potential impairment to intangible assets when there is evidence that events or changes in circumstances indicate that the recovery of the assets’ carrying value is not recoverable.

Property and Equipment

Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired. The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired. Management bases this assessment upon the carrying value versus the fair value of the asset and whether or not that difference is recoverable. Such assessment is to be performed on a restaurant-by-restaurant basis and is to include other relevant facts and circumstances including the physical condition of the asset. If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value.

Leasehold improvements, property and equipment are stated at cost. Internal costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Construction in process (leasehold improvements in process) and other property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.

The estimated useful lives are as follows:

Leasehold improvements 10 years
Furniture and fixtures 3-10 years
Equipment 3-7 years

Leases and Deferred Rent

The Company leases and intends to continue to lease substantially all of its restaurant properties. For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period. Deferred rent also includes tenant improvement allowances the Company may receive, which is amortized as a reduction of rent expense, also on a straight-line basis over the initial term of the lease.

Convertible Debt and Warrants

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards. Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption.

In addition, the Company has issued warrants to purchase common shares of the Company; in some instances along with debt.  Warrants are valued using a fair value based method, whereby the fair value of the warrant is determined at the warrant issue date using a market-based option valuation model based on factors including an evaluation of the Company’s value as of the date of the issuance, consideration of the Company’s limited liquid resources and business prospects, the market price of the Company’s stock in its mostly inactive public market and the historical valuations and purchases of the Company’s warrants.  When warrants are issued in combination with debt or equity securities, the warrants are valued and accounted for based on the relative fair value of the warrants in relation to the total value assigned to the debt or equity securities and warrants combined.
 
15

 

Revenue Recognition

The Company generates revenue through its restaurant operations.  The Company recognizes revenue pursuant to Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and applicable related guidance.

Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is to be reported on the Company's consolidated statements of operations net of sales taxes collected. The amount of sales tax collected is to be included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.
 
Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Standards Codification (“ASC”) 718, Share-Based Payment. ASC 718 requires the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718 also requires the stock-based compensation expense to be recognized over the period of service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using an option pricing model, typically the Black-Scholes model.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized. The Company determines its income tax expense in each of the jurisdictions in which it operates. The income tax expense includes an estimate of the current income tax expense, as well as deferred income tax expense, which results from the determination of temporary differences arising from the different treatment of items for book and tax purposes. The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. Many of the Company’s subsidiaries  are limited liability companies (“LLCs”) and treated for tax purposes as pass-through entities. As a result, any taxes are the responsibility of the respective members. The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying financial statements. The Company recognizes tax-related interest and penalties, if any, as a component of income tax expense. 
 
Recently Issued and Adopted Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.  The guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early application permitted.  The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
 
 
16

 

 
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. Once effective, ASU No. 2015-02 will apply to the consolidation assessment of all entities. This standard is effective for public reporting entities in fiscal periods beginning after December 15, 2015. The Company does not anticipate any material impact upon the adoption of this new standard.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Simplifying the Measurement of Inventory, which changes the measurement from lower of cost or market to lower of cost and net realizable value. The guidance requires prospective application for reporting periods beginning after December 15, 2016 and permits adoption in an earlier period. The Company intends to adopt this ASU in the first quarter of 2016; the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company intends to adopt this ASU in the first quarter of 2016, at which time the Company will reclassify debt issuance costs (if any) associated with the Company's debt from other noncurrent assets to debt. A reclassification will also be applied retrospectively to each prior period presented.

In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"), Leases (Topic 842) , which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

The Company reviews new accounting standards as issued.  Management has not identified any recently issued accounting standards that it believes will have a significant impact on the Company’s consolidated financial statements.
 
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial Statements following the signature page of this Form 10-K.
 
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
None.
 
 
17

 
Item 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
As required by Rule 13a-15(e) under the Exchange Act, as of December 31, 2014, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (the person who performs the functions of our principal executive officer) and our Chief Financial Officer (the person who performs the functions of our principal financial officer). Based upon that evaluation, our Chief Executive Officer (the person who performs the functions of our principal executive officer) and Chief Financial Officer (the person who performs the functions of our principal financial officer) concluded that because of the material weakness in our internal control over financial reporting, described below, that our disclosure controls and procedures were not effective as of December 31, 2015.  A material weakness is a deficiency or a combination of deficiencies in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Management Report on Internal Control Over Financial Reporting.
 
Management of the Company is also responsible for establishing and maintaining  internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act.
 
The Company’s internal controls over financial reporting are intended to be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal controls over financial reporting are expected to include those policies and procedures that management believes are necessary that:
 
(i)   
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii)   
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)   
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
As of December 31, 2015, management assessed the effectiveness of the Company's internal control over financial reporting (ICFR) based on the criteria for effective ICFR established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and SEC guidance on conducting such assessments by smaller reporting companies and non-accelerated filers.
 
Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of December 31, 2015 and that material weaknesses in ICFR existed as more fully described below.
 
 
18

 
Management identified the following control deficiencies that represent material weaknesses as of December 31, 2015:
 
(1)
Lack of an independent audit committee or audit committee financial expert.  We have not identified an audit committee financial expert on our board of directors.  These factors are counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management.
 
(2)
Limited staffing within our accounting operations.  The relatively small number of personnel who are responsible for accounting functions prevents us from fully segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews which may result in a failure to detect errors in spreadsheets, calculations, or assumptions used to prepare the financial statements and related disclosures as filed with the SEC. Additionally, we did not maintain a sufficient number of financial and accounting staff with the appropriate level of knowledge and experience to ensure that accurate and reliable financial statement of the Company are prepared and reviewed timely in accordance with accounting principles generally accepted in the United States.

Our management determined that these deficiencies constituted material weaknesses.
 
Due to a lack of financial and personnel resources, we likely will not take any immediate action to remediate these material weaknesses.  However, we expect to implement further controls as circumstances and working capital permit.  Notwithstanding the assessment that our ICFR was not effective and that there were material weaknesses as identified in this report, we believe that our financial statements contained in this Annual Report on Form 10-K for the fiscal year ended December 31, 2015, fairly present our financial position, results of operations and cash flows for the years covered thereby in all material respects.
 
We are committed to improving our financial organization. As part of this commitment, we will (when funds and/or additional resources are available to the Company) consider taking the following actions: (1) appoint outside directors to our Board of Directors and utilize an independent audit committee of the Board of Directors who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; (2) create a position to segregate duties consistent with control objectives and will increase our personnel resources; and (3) hire independent third parties to perform expert advice.  We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
 
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to the permanent exemption from such requirement for smaller reporting companies.
 
Item 9B. OTHER INFORMATION
 
On February 3, 2016, 4,428,791 shares of Series A Preferred Stock converted to common shares, leaving 456,068 shares of Series A Stock issued and outstanding.  The Certificate of Designation of the Company’s Series A Stock requires that any shares of Series A Stock that are converted into Common Stock be cancelled and are not available for reissuance by the Company.  At the annual meeting of the Company's shareholders held on March 9, 2016, (the "Annual Meeting") the shareholders approved an amendment to the Company's Articles of Incorporation to increase the authorized shares of common stock of the Company from 120,000,000 shares to 125,000,000 shares.  On March 9, 2016, the Company filed amendments to its Articles of Incorporation with the Colorado Secretary of State cancelling the 4,428,791 shares of Series A Preferred Stock that was converted to common stock and increasing the authorized shares of common stock of the Company to 125,000,000 shares.

In addition to the approval of the increase in authorized shares of common stock by the shareholders at the Annual Meeting, the shareholders also elected five directors (being, James J. Fenlason, Robert L. Cohen, Mitchell R. Roth, Heather Atkinson, and Kenneth Cutshaw), ratified the appointment of GHP Horwath as the independent registered public accounting firm, and approved the compensation of the Company’s named executive officers.
 
 
 
19

 
PART III
 
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Identification of Directors and Executive Officers
 
The table below sets forth the names, titles, and ages of the members of the Company’s Board of Directors and its executive officers.   Executive officers of the Company are appointed by the Board of Directors.  There was no agreement or understanding between the Company and any director,  or executive officer pursuant to whom he was selected as an officer or director.

 
Name
 
Position
 
Age
 
Year Appointed as Officer or Director
James J. Fenlason
 
Director, Co-Chairman
 
56
 
2014
Robert Cohen
 
Director
 
53
 
2014
Mitchell Roth
 
CEO, Director and Co-Chairman
 
27
 
2014
Kenneth Cutshaw
 
Director
 
62
 
2016
Heather Atkinson
 
CFO, Secretary, Treasurer and Director
 
38
 
2014
             
James J. Fenlason, age 56, was appointed as a member of the Board of Directors of the Company on June 1, 2014. Mr. Fenlason is currently a Member of the Board of Directors of Rocky Mountain Bank & Trust, a privately owned Colorado bank and has held that position since 2013. In addition, Mr. Fenlason is a member of the Advisory Board for Touch 4 Partners, LLC since April 2015. Furthermore, Mr. Fenlason is an active entrepreneur in the Colorado Springs region with involvement in several successful ventures including: Advantage Marketing, Inc., which he founded and has served as President since 1993; The Home Advantage, LLC which he founded and has served as President since 2005; Deerfield Mobile Home Community, LLC which he founded and has served as President since 2008; Bigg City Holdings, LLC where he has served as CEO since 2010. In addition to his business ventures, Mr. Fenlason served on the board and was the board chairman of America’s Family, LLC a non-profit organization with financial programs and loans for the working poor and an annual Christmas event for 8,000 to 14,000 in Colorado Springs, Colorado. He currently serves on the advisory board of PastorServe in the Western United States.  Mr. Fenlason graduated from Liberty University in 1981 in Lynchburg, Virginia with a Bachelor of Science degree in Accounting.

Robert Cohen, age 53, was appointed as a member of the Board of Directors of the Company on September 15, 2014. Mr. Cohen is currently the Chairman and CEO of IMA Financial Group, Inc., a diversified financial services company specializing in retail insurance brokerage, wholesale insurance brokerage, and discretionary money management. IMA is consistently ranked amongst the top 20 independently owned brokers in the United States. Mr. Cohen has been with IMA Financial Group, Inc. since 1986, a member of their Board of Directors since 1994, and served in his current role for the last 15 years. Since 2004, Mr. Cohen has also served as a Co-Founder and Partner of Iron Gate Capital, LLC, a private equity firm created by proven operating executives to invest their capital in compelling growth opportunities. Some of their most successful portfolio companies in the restaurant and hospitality industries include Smashburger, a fast-casual restaurant concept, and CPX Lone Tree Hotel, LLLP, the operator of Hampton Inn and Suites in south Denver, CO, as well as numerous successful real estate investments nationwide. In addition, Mr. Cohen currently serves on the Boards of Atlas Advertising since 2001, Dovetail Solutions since 2007 and Commerce Bank since 2010.  Mr. Cohen graduated from University of Texas at Austin where he received a Bachelor degree in Risk Management and Finance.

Kenneth Cutshaw, age 62, is a Director of the Company as of March 9, 2016, and currently the Chairman and CEO of Global Network Growth, LLC, a consulting business primarily in hospitality. Mr. Cutshawn has held this position since October 2015. Prior to this, Mr. Cutshawn was the President of Quiznos Global, LLC, from September 2012 through October 2015 and the Executive Vice President of Church’s Chicken from January 2006 through July 2012. Mr. Cutshaw holds numerous degrees including a Bachelor of Arts degree in Public Administration and a minor in Political Science where he graduated from the University of Tennessee in 1975, a Doctor of Jurisprudence from the University of Tennessee which he received in 1978 and a Master of Laws from American University received in 1987. In addition, Mr. Cutshaw holds an executive certificate from the Duke University Fuqua Business School received in 2007.
 
 
20

 

Mitchell Roth, age 27, was appointed President for the Company on June 1, 2014 and elected to the Board of Directors on March 9, 2015.  Mr. Roth began serving as Chief Executive Officer and Co-Chairman of the Board of Directors of the Company on June 16, 2015.  Mr. Roth joined the Company in November 2013 and has been primarily responsible for corporate development to include capital raising, real estate development, and strategy. Additionally, Mr. Roth is a Director of Roth’s LLC, a prepared foods manufacturer, distributor and retailer.  Prior to joining the Company, Mr. Roth worked at the investment-banking firm Laidlaw and Company, Ltd. in New York, NY from May 2013 through October 2013. Mr. Roth previously held summer internships at Accredited Members Acquisition Corporation, a Colorado corporation, in 2012 and 2013. Mr. Roth received a Bachelor of Science degree in May 2013 in Business Finance and Economics from Liberty University in Lynchburg, VA. Mr. Roth is licensed with FINRA and holds a Series 7/General Securities and Series 63 licenses.

Heather Atkinson, age 38, was appointed Chief Financial Officer effective January 22, 2014 and is a Director beginning March 9, 2016. Additionally, Ms. Atkinson is the CFO of Roth’s LLC, a prepared foods manufacturer, distributor and retailer.  Prior to joining the Company, Ms. Atkinson was the controller of Accredited Members Acquisition Corporation and subsidiaries and its predecessor, Accredited Members Holding Corporation, positions which she has held since 2010. Prior to these roles, Ms. Atkinson was an assistant worldwide consolidations controller, along with other accounting staff roles, at Lee Hecht Harrison for over eight years.  Ms. Atkinson has over 17 years of accounting, finance and financial reporting experience in both public and private companies including consolidations, shareholder and investor relations, SEC reporting, internal and external financial statement reporting, budgeting, cash forecasting, mergers and acquisitions, restructuring and international accounting while working closely with the outside audit and legal firms.  She is a licensed CPA and holds a Bachelor of Science degree in Accounting from Evangel University.
 
Involvement in Certain Legal Proceedings
 
During the past ten years, none of the persons serving as executive officers and/or directors of the Company has been the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation S-K including:  (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any criminal convictions; (c) any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (d) any finding by a court, the SEC or the CFTC to have violated a federal or state securities or commodities law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association or entity.  Further, no such legal proceedings are believed to be contemplated by governmental authorities against any director or executive officer.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the 1934 Act requires the Company’s directors and officers and any persons who own more than ten percent of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the “SEC”).  All directors, officers and greater than ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports files.  Based solely on our review of the copies of Forms 3, 4 and any amendments thereto furnished to us during the fiscal year completed December 31, 2014, and subsequently, all Forms 3 and Forms 4 were filed timely with the exception of the following: Ms. Atkinson inadvertently failed to file a report on a timely basis relating to one transaction in January 2015; Mr. Mitchell Roth inadvertently failed to file a report on a timely basis relating to one transaction in January 2015; Mr. JW Roth inadvertently failed to file a report on a timely basis relating to two transactions, one in December 2014 and one  in January 2015; and Ms. Norton inadvertently failed to file a Form 3 on a timely basis relating to her election as a director of the Company in March of 2015.
 
Code of Ethics
 
The Company adopted a code of ethics on January 22, 2014, and filed these with the Form 10-K for the period ended December 31, 2013, with the SEC on March 19, 2014.
 
No Audit Committee
 
The Company does not have a separately designated audit committee.  Instead, the entire Board as a whole acts as the Company’s audit committee.  Consequently the Company does not currently have a designated audit committee financial expert.
 
 
 
21

 
 
Item 11. EXECUTIVE COMPENSATION
 
The following table sets out the compensation received for the fiscal years December 31, 2015 and 2014 in respect to each of the individuals who served as the Company’s chief executive officer at any time during the last fiscal year, as well as the Company’s two most highly compensated executive officers: 
 
                       
             
Option
   
All Other
     
Name and
Fiscal
 
Salary
   
Bonus
   
Awards*
   
Compensation
   
Total
 
Principal Position
Year
 
($)
   
($)
   
($)
   
($)
   
($)
 
Mitchell Roth,
                     
CEO and Co-Chairman of the Board (1)
2015
 
$
90,000
   
$
2,165
   
$
53,606
 (6)  
$
4,890
   
$
150,661
 
2014
 
$
58,187
   
$
-
   
$
132,140
 (6)  
$
3,690
   
$
194,017
 
                                           
Shawn Owen,
                                         
Former Chief Operating Officer (2)
2015
 
$
90,463
   
$
-
   
$
42,056
 (7)  
$
14,671
   
$
147,190
 
2014
 
$
87,384
   
$
-
   
$
162,264
 (7)  
$
8,741
   
$
258,389
 
                                           
Robert B. Mudd,
                                         
Former Director, Former Chief Executive Officer (3)
2015
 
$
--
   
$
-
   
$
--
   
$
--
   
$
--
 
2014
 
$
65,385
   
$
-
   
$
13,900
 (8)  
$
6,160
   
$
85,445
 
                                           
JW Roth
                                         
Former Chairman of the Board (4) (10)
2015
 
$
87,135
   
$
-
   
$
87,327
   
$
14,671
   
$
189,133
 
2014
 
$
93,766
   
$
-
   
$
104,743
 (9)  
$
18,343
   
$
216,852
 
                                           
Heather Atkinson
                                         
Chief Financial Officer, Secretary and
2015
 
$
90,000
   
$
2,165
   
$
12,494
 (11)  
$
14,671
   
$
119,330
 
Treasurer (5)
2014
 
$
93,872
   
$
-
   
$
49,977
 (11)  
$
13,437
   
$
157,286
 
                                           
 
                         
(1)  Mr. Mitchell Roth served as the Company’s President since June 1, 2014, through June 16, 2015 at which time Mr. Mitchell Roth was appointed as the Chief Executive Officer and Co-Chairman of the Board of Directors.
                         
(2)  Mr. Owen served as the Chief Operating Officer from March 1, 2014, through December 2, 2015, whereas Mr. Owen resigned from his position as COO but remains working for the Company in a different capacity.
                         
(3)  Mr. Mudd served as the Interim Chief Executive Officer, Interim Chief Financial Officer and Interim Chairman of the Board from June 20, 2013, through January 22, 2014.  On January 22, 2014, he began serving as the Chief Executive Officer, President and Director until May 31, 2014, at which time he resigned as Chief Executive Officer and President.  He continued to serve as a Director through March 9, 2015.
(4)  Mr. JW Roth is a founder of the Company and served as the Company’s Chairman from August 15, 2012, through his resignation date of May 17, 2013.  He was a Director of the Company since its inception in August 2011 through his resignation date on May 17, 2013. He served as the Company’s Chairman of the Board from January 22, 2014, through March 9, 2015. The salary paid to Mr. JW Roth was in exchange for services as an employee of the Company and not on behalf of his position as a Director and Chairman of the Board.  Effective April 1, 2015, Mr. JW Roth agreed to sign a Founder Emeritus Agreement with the Company for a term of 10 years or until he is no longer liable on any Company obligations, to remain responsible to provide a personal guarantee on the royalty payments of Southern Hospitality restaurants, provide a personal guarantee on the Company’s Carve BBQ Glendale lease and provide a personal guarantee on a loan with Rocky Mountain Bank and Trust for restaurant equipment, which has subsequently been released. As part of this Founder Emeritus Agreement, Mr. JW Roth is to receive an annual wage of $90,000 increasing by 3% each year and be entitled to participate in all of the Company’s benefit plans.
                         
(5)  Ms. Atkinson has served as the Company's Chief Financial Officer since January 22, 2014 through the present.
     
 
 
22

 
 
 
(6)  Upon his appointment as the Company’s President, Mr. Mitchell Roth was granted an option to acquire 300,000 shares of Common Stock at $0.45 per share with 75,000 shares vesting immediately and the remaining shares vesting evenly over three years.  Upon serving as a Director of the Company, Mr. Mitchell Roth was granted options for 100,000 shares of Common Stock that vest in full on March 9, 2016 exercisable at $0.30 per share.
 
(7)  In March 2014, the Company granted Mr. Owen options to purchase up to 300,000 shares of Common Stock, vesting in equal shares annually over four years, with the first tranche vested fully by March 1, 2015, with an exercise price of $0.50 per share with a five-year term.  In addition, Mr. Owen holds options for 18,243 common shares to vest evenly over two years with the first tranche vested fully by September 30, 2014, with an exercise price of $0.14 with a five-year term. In addition, he holds options to purchase up to 30,000 shares of Common Stock vesting in equal parts annually over three years with the first tranche vested fully by February 5, 2015, with an exercise price of $0.45 with a five-year term. Finally, Mr. Owens hold options to purchase 30,000 common shares that vested evenly over two years, these options are fully vested, and have an exercise price of $1.50 with a five year term.
                         
(8)  On August 19, 2013, Mr. Mudd was granted options to acquire 304,854 shares of Common Stock to vest evenly over a three year vesting period.  The first tranche vested in August 2014 at an exercise price of approximately $0.000274 per share.  Upon Mr. Mudd’s resignation, these options were terminated.
 
(9)  In January 2014, the Company granted Mr. JW Roth options to purchase up to 729,707 shares of Common Stock vesting evenly over four years with the first tranche vested fully by January 9, 2015, with an exercise price of $0.0685 with a five-year term.  As of November 6, 2014, the Company entered into a financing agreement with Rocky Mountain Bank & Trust for up to $200,000 that Mr. JW Roth personally guaranteed. In turn for his personal guarantee, the vesting of these options for 729,707 shares of Common Stock became immediately vested.
(10)  On December 14, 2012, the Company entered into an indemnification agreement with JW Roth for his personal risk regarding personal guarantees in favor of Southern Hospitality Franchising & Licensing, LLC (the “Franchisor”), which are the subject of an Area Development Agreement between the Franchisor and Southern Hospitality Franchisee Holding Corporation, a wholly owned subsidiary of the Company. In addition to the indemnification agreements, the Company compensated Mr. Roth for his personal guarantee in the form of a warrant for 200,000 shares exercisable for ten years at $1.00 per share with the warrant vested immediately with a cashless exercise feature. In addition, Mr. Roth was granted a warrant for 5,000,000 shares of Common Stock at $0.10 per share for Mr. JW Roth’s personal guarantee on a Bourbon Brothers #14, LLC loan and his proportionate share of a Bourbon Brothers #14, LLC 7,000,000 share warrant to acquire 477,612 shares of Common Stock at $0.10 per share. As of February 2016, Mr. Roth gifted his warrant for 5,000,000 shares of Common Stock to an unrelated party, forfeited his right to his proportionate share to the Bourbon Brothers #14, LLC warrant and forfeited his warrant with the Company for 200,000 shares.
 
(11)  On August 19, 2013, the Company granted Ms. Atkinson options to purchase up to 364,854 shares of Common Stock of the Company which were scheduled to vest in substantially equal annual installments over four years beginning on August 19, 2014 with an exercise price approximately of $0.000274 per share. Ms. Atkinson has subsequently exercised 182,428 of these options in 2014 and 2015.
 
(*)  Amounts represent the calculated fair value of stock options granted to the named executive officers based on provisions of ASC 718-10, Stock Compensation. See note 7 to the consolidated financial statements for the annual reporting period ending December 31, 2015 regarding assumptions used to calculate fair value under the Black-Scholes valuation model.
 
 
23

 
Compensation Committee Interlocks and Insider Participation
The Board of Directors acting in lieu of a compensation committee, is charged with reviewing and approving the terms and structure of the compensation of the Company’s executive officers.  To date, the Company has not retained an independent compensation committee to assist the Company review and analyze the structure and terms of the Company’s executive officers.  
 
The Company considers various factors when evaluating and determining the compensation terms and structure of its executive officers, including the following:
 
1.
The executive’s leadership and operational performance and potential to enhance long-term value to the Company’s shareholders;
2.
The Company’s financial resources, results of operations, and financial projections;
3.
Performance compared to the financial, operational and strategic goals established for the Company;
4.
The nature, scope and level of the executive’s responsibilities;
5.
Competitive market compensation paid by other companies for similar positions, experience and performance levels; and
6.
The executive’s current salary, the appropriate balance between incentives for long-term and short-term performance.
 
Company management is responsible for reviewing the base salary, annual bonus and long-term compensation levels for other Company employees, and the Company expects this practice to continue going forward.  The entire Board of Directors remains responsible for significant changes to, or adoption, of new employee benefit plans.  The Company believes that, as a relatively new company, its compensation structure is fair to its executive officers as it is intended to balance the Company’s need to minimize its overhead costs yet reward its executives for individual performance and company performance.
 
To date the Company has not entered into any employment agreements with any of the persons who serve (or served) as the Company’s executive officers.  Currently there are no contractual commitments in place that provide for severance payments to our executive officers or similar benefits upon a change of control transaction.
 
The Company believes that the compensation environment for qualified professionals in the industry in which we operate is competitive.  In order to compete in this environment, the compensation of our executive officers is primarily comprised of the following components:

Base salary;
Stock option awards and/or equity based compensation;
Discretionary cash bonuses; and
Other employment benefits.
 
Base Salary.  Base salary, paid in cash, is the first element of compensation to our officers.  In determining base salaries for our key executive officers, the Company aims to set base salaries at a level we believe enables us to hire and retain individuals in a competitive environment and to reward individual performance and contribution to our overall business goals.  The Board of Directors believes that base salary should be relatively stable over time, providing the executive a dependable, minimum level of compensation, which is approximately equivalent to compensation that may be paid by competitors for persons of similar abilities.  The Board of Directors believes that base salaries for our executive officers are appropriate for persons serving as executive officers of public companies similar in size and complexity to the Company.
 
 
24

 
During the Company’s 2015 and 2014 calendar years, it paid its executive officers the following base salaries:
   
Robert B. Mudd was paid a salary of $150,000 in 2014.
Mitchell Roth was paid a salary of $90,000 beginning in June 2014 and 2015.
Shawn Owen was paid a salary of $90,000 in 2014 and 2015.
Heather Atkinson was paid a salary of $90,000 in 2014 and 2015.

Stock Option Plan Benefits.  The Company believes that equity based compensation helps align management and executives’ interests with the interests of our shareholders.  Our equity incentives are also intended to reward the attainment of long-term corporate objectives by our executives.  We also believe that grants of equity-based compensation are necessary to enable us to be competitive from a total remuneration standpoint.   At the present time, we have one equity incentive plan for our management and employees, the 2012 Stock Option Plan.
 
We have no set formula for granting awards to our executives or employees.  In determining whether to grant awards and the amount of any awards, we take into consideration discretionary factors such as the individual’s current and expected future performance, level of responsibilities, retention considerations, and the total compensation package.  The Company has granted certain of its executive officers stock options under the Company’s 2012 Stock Option Plan, as described below.
 
Discretionary Annual Bonus.  Discretionary cash bonuses are another prong of our compensation plan.  The Board of Directors believes that it is appropriate that executive officers and other employees have the potential to receive a portion of their annual cash compensation as a cash bonus to encourage performance to achieve key corporate objectives and to be competitive from a total remuneration standpoint.
 
We have no set bonus formula for determining or awarding discretionary cash bonuses to our other executives or employees.  In determining whether to award bonuses and the amount of any bonuses, we have taken and expect to continue to take into consideration discretionary factors such as the individual’s current and expected future performance, level of responsibilities, retention considerations, and the total compensation package, as well as the Company’s overall performance including cash flow and other operational factors.

Other Compensation/Benefits.  Another element of the overall compensation is through providing our executive officers are various employment benefits, such as the payment of a monthly allowance for health care insurance and other benefits costs.

Option Grants to Our Named Executive Officers

In accordance with the Company’s 2012 Stock Option Plan, the Company granted certain of its executive officers stock options during the Company’s 2015 fiscal year. The following table sets forth the outstanding stock option equity awards for each named executive officer at December 31, 2015.    

Outstanding Equity Awards at Fiscal Year End
 
 
 
Number of Securities
   
 
  
 
 
Underlying Unexercised
   
 
  
 
 
Options (#)
   
Option
 
Option
 
 
   
   
Exercise
 
Expiration
Name and Principal Position
 
Exercisable
   
Un-exercisable
   
Price ($)
 
Date
 
 
   
   
 
     
Mitchell Roth, CEO (1)
   
150,000
     
150,000
   
 
$0.45
 
08/21/2019
     
100,000
     
--
   
 
$0.30
 
03/09/2020
                               
Heather Atkinson, CFO (2)
   
--
     
182,426
   
 
$0.000274
 
08/19/2019

(1) Upon his appointment as the Company’s President, Mr. Mitchell Roth was granted an option to acquire 300,000 shares of Common Stock at $0.45 per share with 75,000 shares vesting immediately and the remaining shares vesting evenly over three years.   In addition, Mr. Mitchell Roth was granted options for his time serving on the Company’s Board for 100,000 shares of Common Stock at $0.30 per share that vest in full on March 9, 2016.

(2) On August 19, 2013, the Company granted Ms. Atkinson options to purchase up to 364,854 shares of Common Stock which were scheduled to vest in substantially equal annual installments over four years beginning on August 19, 2014 with an exercise price approximately of $0.000274 per share.
 
25

 

 
Compensation of Directors

The Company has provided stock option compensation to the persons serving as its directors on the Board beginning in 2015. As such, the table below reflects compensation paid to the non-employee members of the board during the year ended December 31, 2015:
 
   
Fees
         
   
Earned or
   
Options
     
   
Paid in
   
Awards*
     
Director
 
Cash
       
Total
 
             
Richard Steward (1)
   
--
   
$
29,273
   
$
29,273
 
James J. Fenlason (1)
   
--
   
$
29,273
   
$
29,273
 
Robert Cohen (1)
   
--
   
$
29,273
   
$
29,273
 
Brent Wood (1)
   
--
   
$
29,273
   
$
29,273
 
Jane Norton (1)
   
--
   
$
29,273
   
$
29,273
 


(1) Includes options to acquire 100,000 shares of Common Stock at $0.30 per share which vest in full on March 9, 2016.  These awards represent the directors’ service for one year to serve on the board and, among other duties, attend quarterly board meetings.

(*)  Amounts represent the calculated fair value of stock options granted to the named executive officers based on provisions of ASC 718-10, Stock Compensation. See notes to the annual consolidated financial statements for the period ending December 31, 2015 for discussion regarding assumptions used to calculate fair value under the Black-Scholes valuation model.
 
 

26

 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.
 
Security Ownership of Directors and Management

The number of shares outstanding of the Company’s Common Stock at March 7, 2016 was 70,818,764, and the number of shares outstanding of the Company’s Series A Preferred Stock at March 10, 2016 was 456,068. The following table sets forth the beneficial ownership of the Common Stock and Series A Preferred Stock as of March 7, 2016, by each director and executive officer of the Company.  To the extent any of the named shareholders own derivative securities that are vested or otherwise exercisable into shares of our Common Stock these securities are included in the column regarding that shareholders’ Common Stock beneficial ownership (as required by Rule 13d-3(a)) and the material terms of such derivative securities are explained in the notes to the table.
 
Name and Address of Beneficial Owner
Position
Common
Stock -
Amount and Nature of Beneficial Ownership
 
Percent of Common Stock
 
Series A Preferred Stock-Amount and Nature of Beneficial Ownership
 
Percent of Series A Preferred Stock
 
All Stock-Amount of Beneficial Ownership(5)
Voting Power (6)
Mitchell Roth
2 North Cascade Ave, Suite1400
Colorado Springs, CO 80903
CEO, Director and
Co-Chairman of the Board
 
1,250,000
(1)
 
1.77
%
 
228,034
 
 
50.00
%
1,478,034
8.45%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
James J. Fenlason
Director and
 
 
 
 
 
 
 
 
 
 
 
 
   
2 North Cascade Ave, Suite 1400
Co-Chairman of the
 
 
 
 
 
 
 
 
 
 
 
 
   
Colorado Springs, CO 80903
Board
 
200,000
(2)
 
*
 
 
 
 
*
 
200,000
*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Robert L. Cohen
 
 
 
 
 
 
 
 
 
 
 
 
 
   
2 North Cascade Ave, Suite 1400
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Colorado Springs, CO 80903
Director
 
700,000
(3)
 
*
 
 
 
 
*
 
700,000
*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Heather Atkinson
 
 
 
 
 
 
 
 
 
 
 
 
 
   
2 North Cascade Ave, Suite 1400
CFO, Secretary,
 
 
 
 
 
 
 
 
 
 
 
 
   
Colorado Springs, CO 80903
Treasurer and Director
 
   1,047,282
(4)
 
1.55%
 
 
 
 
*
 
1,047,282
1.27%
                               
Kenneth Cutshaw
 
 
 
 
 
 
 
 
 
 
 
 
 
   
2 North Cascade Ave, Suite 1400
 
 
 
 
 
 
 
 
 
 
 
 
 
   
Colorado Springs, CO 80903
Director
 
 
 
*
 
 
 
 
*
 
*
                               
All current directors and executive officers as a group
 
 
3,197,282
 
 
4.72
%
 
228,034
 
 
50.00
%
3,425,316
10.82%
 

(1)
Includes options for Mr. Mitchell Roth’s service as an officer to acquire 150,000 shares of Common Stock at $0.45 per share. Also, includes options for Mr. Mitchell Roth’s service as a Director to acquire 100,000 shares of Common Stock at $0.30 per share.  In addition, includes 1,000,000 shares in the form of a warrant exercisable at $0.10 per share.
 
(2)
Includes warrants to acquire 100,000 shares of Common Stock at $0.30 per share and options to acquire 100,000 shares of Common Stock at $0.30 per share which will vest in full on March 9, 2016.
 
 
(3)
Includes 500,000 shares owned by Dakotah Investments, LLC, an entity controlled by Mr. Cohen.  In addition, includes warrants to acquire 100,000 shares of Common Stock at $0.30 per share and options to acquire 100,000 shares of Common Stock at $0.30 per share which will vest in full on March 9, 2016.
 
 
(4)
Includes 500,000 shares in the form of a warrant exercisable at $0.10 per share for Ms. Atkinson’s service as manager of Bourbon Brothers #14, LLC.
 
 
(5)
Common Stock and Series A Preferred Stock (on a 1:1 converted basis to Common Stock).
 
 
(6)
Calculated based on one vote per common share and 25 votes per share of Series A Preferred Stock.
 
 


27

 

 Security Ownership of Certain Beneficial Owners
 
The following table sets forth the persons who beneficially own of record, or was known to own beneficially, more than 5% of the Company’s Common Stock and/or Series A Preferred Stock as of March 16, 2016.  To the extent any of the named shareholders own derivative securities that are vested or otherwise exercisable into shares of our Common Stock these securities are included in the column regarding that shareholder’s Common Stock beneficial ownership (as required by Rule 13d-3(a)) and the material terms of such derivative securities are explained in the notes to the table.
 
 
Name and Address of Beneficial Owner
 
Amount and Nature of
Beneficial Ownership of Common Stock
   
Percent of
Common Stock
   
Amount and Nature of Beneficial Ownership of Series A Preferred Stock
   
Percent of Series A Preferred Stock
   
All Stock-Amount of Beneficial Ownership
   
Voting Power(5)
 
 
 
   
   
   
   
   
 
JW Roth
   
6,659,669
(1)
   
9.40
%
   
--
     
--
     
6,659,669
     
8.10
%
2 North Cascade Ave
Suite 1400
                                               
Colorado Springs, CO 80903
                                               
 
                                               
David Lavigne
   
3,789,753
(2)
   
5.35
%
   
--
     
--
     
3,789,753
     
4.61
%
2 North Cascade Ave
Suite 1400
                                               
Colorado Springs, CO 80903
                                               
 
(1)
Includes 1,932,427 common shares, 4,499,208 common shares owned by his spouse as trustee for the KMR Living Trust Dated Nov. 19, 2012 and 228,034 shares owned by his minor daughter.
 
(2)
Includes fully vested options to acquire 100,000 shares at $0.51 per share and 1,056,800 common shares. Also, includes 1,046,541 shares owned by Skywriter MD, Inc., an entity controlled by Mr. Lavigne and 1,586,412 shares owned by his spouse.
 
 
Changes in Control
 
There are no arrangements known to the Company which may result in a change in control of the Company.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
See Item 5, above, for information regarding securities authorized for issuance under equity compensation plan in the form required by Item 201(d) of Regulation S-K.
 
 
28

 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Related Party Transactions
 
The Company’s Board of Directors as a whole is charged with reviewing and approving all related party transactions.  There have not been any transactions, or proposed transactions, to which the Company was or is to be a party, in which any Company director, officer, 5% beneficial owner or any member of the immediate family of the aforementioned persons had or is to have a direct or indirect material interest, except those outlined below.  The following disclosure is with respect to material transactions between the Company and related parties and with respect to material transactions.

Richard Steward, served as a member of the Board of Directors from 2014 through March 9, 2016, has nominal equity interests in several related party entities including Hospitality Income & Asset, LLC and Bourbon Brothers #14, LLC. The Company has a ten year lease with Hospitality Income & Asset, LLC for real property in connection with a restaurant location in Colorado Springs. Additionally, Bourbon Brothers #14, LLC, in December of 2014, loaned the Company $1,250,000. In November 2014, Mr. Steward (along with Mr. JW Roth) personally guaranteed a loan between Southern Hospitality Lone Tree LLC, a majority owned subsidiary of the Company and Rocky Mountain Bank & Trust to purchase kitchen equipment for the restaurant location and in exchange Mr. Steward’s options for 100,000 shares of Common Stock granted on March 5, 2014 became immediately exercisable.  This personal guarantee has since been released. Mr. Steward holds a proportionate share of a Bourbon Brothers #14, LLC 7,000,000 share warrant to acquire 373,134 shares of Common Stock at $0.10 per share.

Robert Cohen, a current member of the Board of Directors, is currently the Chairman and CEO of IMA Financial Group, Inc., a diversified financial services company specializing in retail insurance brokerage, wholesale insurance brokerage, and discretionary money management.  The Company has in the past and may continue to do so in the future, purchase insurance products from IMA Financial Group, Inc.  To the Company’s knowledge, Mr. Cohen has not been compensated by IMA Financial Group, Inc. in connection with any products or services provided to the Company.

James J. Fenlason, a current member and co-chairman of the Board of Directors of the Company, is a Member of the Board of Directors of Rocky Mountain Bank & Trust, a privately owned Colorado bank.  In November of 2014, SHLT and Rocky Mountain Bank & Trust entered into a bank financing agreement to purchase kitchen equipment for the restaurant.  Beginning in September 2015, monthly principal and interest payments of approximately $5,800 are due through maturity in August 2020.The Company has in the past and may continue to do so in the future, obtain financing from Rocky Mountain Bank & Trust.  To the Company’s knowledge, Mr. Fenlason has not been compensated by Rocky Mountain Bank & Trust in connection with any financing or services provided to the Company.

Heather Atkinson¸ the Company’s Chief Financial Officer, is currently the manager of Bourbon Brothers #14, LLC (“BB14”). In December 2014, BB14 received a warrant from the Company as partial consideration the loan from BB14 to the Company in the aggregate principal amount of 7,500,000.  Mr. Atkinson was assigned 500,000 of this warrant for her service as manager of BB14 which became exercisable on December 31, 2015. Ms. Atkinson also has voting and dispositive control of BB14 as manager.  Ms. Atkinson has a nominal equity interest in Hospitality Income & Asset, LLC. The Company has a real property lease with Hospitality Income & Asset, LLC, as described above.

J.W. Roth served as the Company’s Chairman of the Board from January 22, 2014 through March 9, 2015 and beneficially owns more than 5% of the Company’s Common Stock and/or Series A Preferred Stock as of December 31, 2015. Mr. Roth has substantial business interests in the restaurant space and real estate property related to restaurants.  Mr. Roth may continue to buy real estate, engage in real estate transactions with third parties, and then lease the space to the Company.  He is the founder of, and owned a substantial interest in, Bourbon Brothers Holding Company, LLC (which the Company acquired in January 2014) and holds a substantial equity interest in several other related party entities including Hospitality Income & Asset, LLC and Bourbon Brothers #14, LLC.  In December 2012, Mr. Roth entered into an indemnification agreement with the Company for his personal risk regarding personal guarantees in favor of Southern Hospitality Franchising & Licensing, LLC, which is the subject of a Franchise Agreement between Southern Hospitality Franchising & Licensing, LLC and Southern Hospitality Franchising and Licensing Corporation, a wholly owned subsidiary of the Company and received compensation in the form of a warrant for 200,000 of common shares.  In November 2014, Mr. Roth (along with Richard Steward) personally guaranteed a loan between Southern Hospitality Lone Tree, LLC, a majority owned subsidiary of the Company and Rocky Mountain Bank & Trust to purchase kitchen equipment for the restaurant location and in exchange Mr. Roth’s options for 729,707 shares of Common Stock granted on January 22, 2014 became immediately exercisable.  This personal guarantee has since been released.  In December 2014, Mr. Roth personally guaranteed a loan on behalf of Bourbon Brothers #14, LLC allowing Bourbon Brothers #14, LLC the ability to subsequently loan to the Company $1,250,000. In exchange for the personal guarantee, Mr. Roth received a warrant for the purchase of 7,500,000 shares of Common Stock exercisable on December 31, 2015. Mr. Roth has since gifted a portion of this warrant for 2,500,000 shares of Common Stock to others, resulting in Mr. Roth having a warrant of 5,000,000 shares of Common Stock. Mr. Roth holds a proportionate share of a Bourbon Brothers #14, LLC 7,000,000 share warrant to acquire 477,612 shares of Common Stock at $0.10 per share. In February 2016, Mr. Roth gifted his warrant for 5,000,000 shares of Common Stock to an unrelated party and forfeited his proportionate share of the Bourbon Brothers #14, LLC warrant.  Effective April 1, 2015, Mr. JW Roth signed a Founder Emeritus Agreement with the Company for a term of 10 years or until he is no longer liable on any Company obligations, to remain responsible to provide a personal guarantee on the royalty payments of Southern Hospitality restaurants and provide a personal guarantee on the Company’s Carve BBQ Glendale lease. As part of this Founder Emeritus Agreement, Mr. JW Roth is to receive an annual wage of $90,000 increasing by 3% each year and be entitled to participate in all of the Company’s benefit plans.
 
29

 
 
David Lavigne, served as the Company's Secretary and Treasurer from its inception in August 2011 until May 17, 2013 and as a Director of the Company from January 22, 2014, through the March 6, 2015.  During such time, Mr. Lavigne, held a substantial equity interest in Bourbon Brothers Holding Company, LLC (which the Company acquired in January 2014) and holds a substantial equity interest in several other related party entities including Hospitality Income & Asset, LLC and Bourbon Brothers #14, LLC.  Mr. Lavigne holds a proportionate share of a Bourbon Brothers #14, LLC 7,000,000 share warrant to acquire 388,060 shares of Common Stock at $0.10 per share.
 
Independence of the Board of Directors
 
Our Board of Directors currently consists of Messrs. Roth, Fenlason, Cohen and Cutshaw and Mrs. Atkinson.  Messrs. Fenlason, Cohen and Cutshaw are the only directors considered “independent” as that term defined by Section 803A of the NYSE MKT LLC Company Guide inasmuch as each of the other directors has had material relationships with the Company.  The Board considers all relevant facts and circumstances in its determination of independence of all members of the Board.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
Audit Fees.
Our independent registered public accounting firm, GHP Horwath, P.C., (“GHP Horwath”) billed us aggregate fees in the amount of approximately $56,420 for the calendar year ended December 31, 2015 and $53,000 for the calendar year ended December 31, 2014.  These amounts were billed for professional services that GHP Horwath provided for the audit of our annual consolidated financial statements, as well as for reviews of our quarterly interim financial statements.

Audit-Related Fees.
None.

Tax Fees.
GHP Horwath did not bill us for any tax fees for the fiscal years ended December 31, 2015 and 2014.

All Other Fees.
GHP Horwath did not bill us for any other fees for the fiscal years ended December 31, 2015 and 2014.
 
 
30

 
Audit Committee’s Pre-Approval Practice
 
Inasmuch as the Company does not have an audit committee, the Company’s board of directors performs the functions of its audit committee.  Section 10A(i) of the 1934 Act prohibits our auditors from performing audit services for us as well as any services not considered to be “audit services” unless such services are pre-approved by the board of directors (in lieu of the audit committee) or unless the services meet certain de minimis standards.
 
The board of directors has adopted resolutions that provide that the board must:
 
Pre-approve all audit services that the auditor may provide to us or any subsidiary (including, without limitation, providing comfort letters in connection with securities underwritings or statutory audits) as required by §10A(i)(1)(A) of the 1934 Act.
 
Pre-approve all non-audit services (other than certain de minimis services described in §10A(i)(1)(B) of the 1934 Act that the auditors propose to provide to us or any of our subsidiaries.
 
The board of directors considers at each of its meetings whether to approve any audit services or non-audit services.  In some cases, management may present the request; in other cases, the auditors may present the request.  The board of directors approved GHP Horwath performing our audit for the 2015 fiscal year.
 
 
 
31

 
PART IV
 
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
Exhibit
 Number
   Description
3.1
 
Articles of Incorporation, as amended through March 16, 2016. Filed Herewith.
3.2.
 
Bylaws, as amended through January 6, 2015. (1)
10.1.1
 
Franchise Agreement by and between SH Franchising & Licensing LLC and Southern Hospitality Franchisee Holding Corporation, dated November 4, 2011, as amended by the First Amendment dated November 4, 2011, as amended by the Second Amendment dated November 9, 2012, and as amended by the Third Amendment dated January 9, 2013.(2)
10.1.2
 
Amendment and Release Agreement by and between SH Franchising & Licensing LLC, Southern Hospitality Franchisee Holding Corporation, and Southern Hospitality Denver, LLC, dated September 23, 2013.(3)
10.1.3
 
Fifth Amendment to the Franchise Agreement dated December 30, 2014, and Sixth Amendment to the Franchise Agreement dated February 8, 2015. (4)
10.2
 
2012 Stock Option Plan, as amended on January 22, 2014.(5)
10.3
 
Lease Agreement by and between Southern Hospitality Southern Kitchen Colorado Springs, LLC f/k/a Bourbon Brothers Smokehouse and Tavern Colorado Springs, LLC and Bourbon Brothers, LLC, dated May 29, 2013.(6)
10.4  
Standard Building Lease by and between Southern Hospitality Franchise Holding Corporation and ELMO, LLC dated April 15, 2012.(7)
10.5  
Lease Agreement by and between Carve BBQ Glendale, LLC and The Robford Company, LLC. Filed herewith.
10.5.1  
Second Lease Assignment, Assumption and Amendment between Carve BBQ Glendale, LLC and The Robford Company, LLC dated April 24, 2015. Filed herewith.
10.5.2  
Third Lease Assignment, Assumption and Amendment between Carve BBQ Glendale, LLC and The Robford Company, LLC dated July 27, 2015. Filed herewith.
10.6.1
 
Lease Agreement by and between Bourbon Brothers Holding Company, LLC and Stradivarius Highlands, LLC, dated July 9, 2014.(8)
10.6.2
 
First Amendment to the Lease Agreement by and between Bourbon Brothers Holding Company, LLC and Stradivarius Highlands, LLC, dated September 17, 2014.(9)
10.6.3
 
Guaranty of Lease by and between Bourbon Brothers Holding Company, LLC and Stradivarius Highlands, LLC, dated September 17, 2014.(10)  
10.7
 
Master License Agreement by and between SH Franchising & Licensing, LLC and SH Franchising & Licensee Corp. dated February 8, 2015.(11)
14.1
 
Code of Ethics as adopted by the Board of Directors on January 22, 2014.(12)
21.1
 
List of subsidiaries and organization chart. Filed herewith.
31.1
 
Rule 13a-14(a)/15d-14(a) - Certification of Principal Executive Officer.  Filed herewith.
31.2
 
Rule 13a-14(a)/15d-14(a) - Certification of Principal Financial Officer.  Filed herewith.
32.1
 
Section 1350 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the SARBANES-OXLEY ACT of 2002. Filed herewith.
32.2
101
 
Section 1350 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the SARBANES-OXLEY ACT of 2002. Filed herewith.
Interactive data files. Filed herewith.
 
(1) Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and filed on March 6, 2015.
(2) Incorporated by reference from the Company’s Annual Report on Form 10-K for the period ending December 31, 2013, and filed on March 19, 2014.
(3) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2013, and filed on November 14, 2013.
(4) Incorporated by reference from the Company’s Annual Report on Form 10-K for the period ending December 31, 2014, and filed on March 6, 2015.
(5) Incorporated by reference from the Company’s Annual Report on Form 10-K for the period ending December 31, 2013, and filed on March 19, 2014.
(6) Incorporated by reference from the Company’s Annual Report on Form 10-K for the period ending December 31, 2013, and filed on March 19, 2014.
(7) Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and filed on March 6, 2015
(8) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2014, and filed on October 31, 2014.
(9) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2014, and filed on October 31, 2014.
(10) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2014, and filed on October 31, 2014.
(11) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2015, and filed on May 15, 2015.
(12) Incorporated by reference from the Company’s Annual Report on Form 10-K for the period ending December 31, 2013, and filed on March 19, 2014.
 
 
 
32

 
 
In accordance with the requirements of Section 13 or 15(d) Exchange Act, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
 
 
 
 
 
Date:  March 16, 2016
By:
/s/  Mitchell Roth
 
 
Mitchell Roth, CEO, Co-Chairman and Principal Executive Officer
  
 
Date:  March 16, 2016
By:
/s/ Heather Atkinson
 
 
Heather Atkinson, CFO, Secretary, Treasurer and Principal Accounting Officer
   
 
 
Date:  March 16, 2016
By:
/s/ Robert Cohen
   
Robert Cohen, Director 
     
     
Date:  March 16, 2016
By:
/s/ Kenneth Cutshaw
   
Kenneth Cutshaw, Director
     
     
Date:  March 16, 2016
By:
/s/ James J. Fenlason
   
James J. Fenlason, Director and Co-Chairman
     
     
     
     
     
     
 
 
 
 
 
33

 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
YEARS ENDED DECEMBER 31, 2015 AND 2014
CONTENTS


 
 
 
PAGE
Report of Independent Registered Public Accounting Firm
 
F-2
Consolidated Financial Statements:
 
 
Balance sheets as of December 31, 2015 and 2014
 
F-3
Statements of loss for the years ended December 31, 2015 and 2014
 
F-4
Statements of changes in equity for the years ended December 31, 2015 and 2014
 
F-5
Statements of cash flows for the years ended December 31, 2015 and 2014
 
F-6
Notes to financial statements
 
F-7 – F-23
 
 
 
 
 
 
 
 
F-1

  
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 

The Board of Directors and Shareholders of Southern Concepts Restaurant Group, Inc.:

We have audited the accompanying consolidated balance sheets of Southern Concepts Restaurant Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of loss, changes in equity, and cash flows for the years ended December 31, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a limited operating history, it has suffered recurring losses from operations, and has an accumulated deficit at December 31, 2015. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ GHP Horwath, P.C.
Denver, Colorado
March 16, 2016
 
 
 
 

 

F-2

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
  CONSOLIDATED BALANCE SHEETS
 
 
       
 
       
         
   
December 31,
   
December 31,
 
   
2015
   
2014
 
         
Assets
       
Current assets:
       
Cash and cash equivalents
 
$
1,107,330
   
$
1,182,099
 
Prepaid expenses and other
   
117,499
     
66,023
 
Inventory
   
91,358
     
64,091
 
Total current assets
   
1,316,187
     
1,312,213
 
                 
Deposits
   
120,555
     
80,525
 
Deferred financing costs, net
   
-
     
28,369
 
Related party receivable
   
25,787
     
25,787
 
Intangible asset, net
   
35,625
     
40,625
 
Property and equipment, net
   
4,279,096
     
2,986,050
 
Total assets
 
$
5,777,250
   
$
4,473,569
 
                 
Liabilities and equity
               
Current liabilities:
               
Accounts payable
 
$
256,252
   
$
91,792
 
Accrued expenses
   
272,347
     
229,539
 
Related party notes payable and accrued interest
   
-
     
117,318
 
Notes payable and accrued interest
   
-
     
218,970
 
Convertible notes payable and accrued interest, current portion
   
129,489
     
129,589
 
Related party note payable (net of $365,940 (2015))
   
784,059
     
-
 
Total current liabilities
   
1,442,147
     
787,208
 
                 
Deferred rent
   
309,895
     
303,070
 
Notes payable and accrued interest
   
482,934
     
-
 
Related party note payable (net of $731,880 discount)
    -      
520,184
 
Convertible notes payable and accrued interest, less current portion,
               
(net of $514,545 (2015) and $528,019 (2014) discount)
   
1,110,122
     
722,439
 
Total liabilities
   
3,345,098
     
2,332,901
 
                 
Commitments and contingencies
               
                 
Equity
               
Preferred stock - par value $0.001;
               
Authorized Series A shares - 4,884,859
               
Issued and outstanding Series A shares - 4,884,859 (2015 and 2014)
   
248,994
     
248,994
 
Common stock - no par value;
               
Authorized shares - 120,000,000
               
Issued and outstanding shares - 62,398,303 (2015) and 48,783,363 (2014)
   
9,799,319
     
7,916,942
 
Additional paid-in capital
   
3,873,710
     
2,602,171
 
Accumulated deficit
   
(12,092,077
)
   
(8,692,743
)
Total Southern Concepts Restaurant Group, Inc ("SCRG") equity
   
1,829,946
     
2,075,364
 
Noncontrolling interest
   
602,206
     
65,304
 
Total equity
   
2,432,152
     
2,140,668
 
Total liabilities and equity
 
$
5,777,250
   
$
4,473,569
 
 
 
See notes to consolidated financial statements
 
 
 
F-3

 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
 
 
 
       
 
       
   
Years ended  
 
   
December 31, 
 
   
2015
   
2014
 
         
Revenue
 
$
6,579,106
   
$
5,144,491
 
Operating expenses:
               
Restaurant operating costs (related party $401,092 and $383,400 for the years ended
               
December 31, 2015 and 2014), exclusive of depreciation and amortization below
   
6,754,065
     
5,490,495
 
General and administrative
   
2,054,924
     
2,405,191
 
Selling and marketing
   
350,187
     
444,216
 
Depreciation and amortization
   
579,327
     
436,228
 
Total operating expenses
   
9,738,503
     
8,776,130
 
                 
Loss from operations
   
(3,159,397
)
   
(3,631,639
)
                 
Other expense:
               
Interest expense (related party $130,000 and nil for the years ended December 31, 2015 and 2014)
   
(729,748
)
   
(137,376
)
                 
Net loss
 
$
(3,889,145
)
 
$
(3,769,015
)
                 
Net loss attributable to noncontrolling interest
 
$
(489,811
)
 
$
(374,014
)
                 
Net loss attributable to SCRG
   
(3,399,334
)
   
(3,395,001
)
                 
Net loss
 
$
(3,889,145
)
 
$
(3,769,015
)
                 
Basic and diluted net loss per share attributable to SCRG common shareholders
 
$
(0.06
)
 
$
(0.08
)
                 
Weighted average number of common shares outstanding - basic and diluted
   
52,685,296
     
42,302,121
 
 
 
 
 
See notes to consolidated financial statements
 
 
 
F-4

 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
 
                                 
                   
Additional
       
Non-
     
   
Common Stock
   
Preferred Stock
   
paid-in
   
Accumulated
   
Controlling
     
   
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
Deficit
   
Interest
   
Total
 
Balances, January 1, 2014
   
9,629,220
   
$
4,925,860
     
-
   
$
-
   
$
1,086,609
   
$
(5,297,742
)
 
$
439,318
   
$
1,154,045
 
Issuance of common stock for cash
   
4,183,042
     
1,254,913
     
-
     
-
     
-
     
-
     
-
     
1,254,913
 
Acquisition of BBHCLLC for common and preferred shares
   
20,274,201
     
1,033,429
     
18,242,687
     
929,878
     
-
     
-
     
-
     
1,963,307
 
Stock issued for services
   
51,678
     
21,503
     
-
     
-
     
-
     
-
     
-
     
21,503
 
Exercise of stock options
   
192,832
     
53
     
-
     
-
     
-
     
-
     
-
     
53
 
Exercise of warrants
   
1,094,562
     
300
     
-
     
-
     
-
     
-
     
-
     
300
 
Conversion of preferred shares to common
   
13,357,828
     
680,884
     
(13,357,828
)
   
(680,884
)
   
-
     
-
     
-
     
-
 
Debt discount on convertible debt allocated to warrants and beneficial conversion feature
   
-
     
-
     
-
     
-
     
308,626
     
-
     
-
     
308,626
 
Debt discount on long-term debt allocated to warrants
                                   
731,880
                     
731,880
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
475,056
     
-
     
-
     
475,056
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(3,395,001
)
   
(374,014
)
   
(3,769,015
)
Balances, December 31, 2014
   
48,783,363
     
7,916,942
     
4,884,859
     
248,994
     
2,602,171
     
(8,692,743
)
   
65,304
     
2,140,668
 
Issuance of common stock and warrants for cash
   
13,386,852
     
1,849,019
     
-
     
-
     
837,480
     
-
     
-
     
2,686,499
 
Debt discount on convertible debt allocated to warrants and beneficial conversion feature
   
-
     
-
     
-
     
-
     
109,130
     
-
     
-
     
109,130
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
324,929
     
-
     
-
     
324,929
 
Issuance of common stock for services
   
136,874
     
33,333
     
-
     
-
     
-
     
-
     
-
     
33,333
 
Exercise of stock options
   
91,214
     
25
     
-
     
-
     
-
     
-
     
-
     
25
 
Contribution by non-controlling interest holder
   
-
     
-
     
-
     
-
     
-
     
-
     
1,084,023
     
1,084,023
 
Distribution to non-controlling interest holder
                                                   
(57,310
)
   
(57,310
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(3,399,334
)
   
(489,811
)
   
(3,889,145
)
Balances, December 31, 2015
   
62,398,303
   
$
9,799,319
     
4,884,859
   
$
248,994
   
$
3,873,710
   
$
(12,092,077
)
 
$
602,206
   
$
2,432,152
 

 
See notes to consolidated financial statements
 
 
 
 
F-5

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended
 
   
December 31
 
   
2015
   
2014
 
Net loss
 
$
(3,889,145
)
 
$
(3,769,015
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Amortization of debt discount
   
516,995
     
76,469
 
Stock-based compensation
   
324,929
     
475,056
 
Depreciation and amortization
   
579,327
     
436,228
 
Amortization of prepaid management services and guarantees
   
-
     
99,820
 
Stock issues for services
   
33,333
     
21,503
 
Interest attributed to converted debt
   
-
     
47,556
 
Changes in operating assets and liabilities,net of 2014 business acquisition:
               
Prepaid expenses
   
(51,476
)
   
226,054
 
Deposit
   
(40,030
)
   
(24,614
)
Inventory
   
(27,267
)
   
(32,532
)
Accounts payable
   
164,460
     
10,777
 
Accrued expenses and interest
   
123,494
     
9,179
 
Deferred rent
   
6,825
     
68,170
 
Net cash used in operating activities
   
(2,258,555
)
   
(2,355,349
)
Cash flows from investing activities
               
Cash acquired in acquisition
   
-
     
869,907
 
Note receivable advance
   
-
     
(25,334
)
Purchase of property and equipment
   
(1,867,372
)
   
(350,771
)
Net cash (used in) provided by investing activities
   
(1,867,372
)
   
493,802
 
Cash flows from financing activities
               
Contribution to subsidiary by non-controlling interest
   
984,022
     
-
 
Distribution to non-controlling interest holders
   
(57,310
)
   
-
 
Payment of related party promissory notes
   
(125,000
)
   
-
 
Payment of long-term debt
   
(17,066
)
   
-
 
Proceeds from sale of common stock and warrants
   
2,686,499
     
1,254,913
 
Proceeds from issuance of promissory notes and warrants
   
280,000
     
460,000
 
Proceeds from issuance of long-term debt, net
   
-
     
1,197,714
 
Proceeds from issuance of related party promissory note
   
-
     
115,000
 
Proceeds from bank loan
   
299,988
     
2,055
 
Proceeds from exercise of a stock options and warrants
   
25
     
353
 
Net cash provided by financing activities
   
4,051,158
     
3,030,035
 
Net (decrease) increase in cash and cash equivalents
   
(74,769
)
   
1,168,488
 
Cash and cash equivalents, beginning
   
1,182,099
     
13,611
 
Cash and cash equivalents, ending
 
$
1,107,330
   
$
1,182,099
 
Supplemental disclosure of non-cash operating, investing and financing activities:
               
Preferred stock converted to common stock
 
$
-
   
$
680,884
 
Acquisition of BBHCLLC in exchange for preferred and common stock
 
$
-
   
$
1,963,307
 
Note payable exchanged for subsidiary equity
 
$
100,000
   
$
-
 
Debt discount related to beneficial conversion features and warrants
 
$
109,130
   
$
1,040,506
 
Cash paid for interest
 
$
130,481
   
$
16,215
 

 
See notes to consolidated financial statements
 
 
F-6

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014


NOTE 1 – ORGANIZATION, RECENT EVENTS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS
 
Organization and Recent Events

Southern Concepts Restaurant Group, Inc. (“SCRG” or the “Company”) is a Colorado corporation that was formed on January 29, 2008. The Company, on March 9, 2015, with approval of a majority of the Company’s shareholders, changed its name from Bourbon Brothers Holding Corporation to Southern Concepts Restaurant Group, Inc.

The Company operates and manages restaurants through its wholly-owned and majority-owned subsidiaries, including:

SH Franchisee & Licensing Corp. (“SH”)
Southern Hospitality Denver Holdings, LLC (“SHDH”)
Southern Hospitality Denver, LLC (“SHD”)
Southern Hospitality Lone Tree, LLC (“SHLT”)
Carve Restaurant Group, LLC (“CRG”)
Carve BBQ Glendale, LLC (“CARVEG”)
Southern Hospitality Southern Kitchen Colorado Springs, LLC (“SHSK”)
Bourbon Brothers Holding Company, LLC (“BBHCLLC”)
Bourbon Brothers Restaurant Group, LLC (“BBRG”)

The Company began revenue generating activities in late February 2013, with the opening of its first Denver-based restaurant. In January 2014, the Company opened its second restaurant in Colorado Springs, Colorado, and in April 2015, the Company opened its third restaurant in Lone Tree, Colorado (the “SHLT” restaurant). The Company developed a fast casual concept, called Carve Barbecue, in which the Company entered into a lease in Glendale, Colorado in April 2015 through a newly-formed 66.075% owned subsidiary (the “CARVEG” restaurant). The Company opened this location on November 5, 2015.

In February 2015, the Company also executed a sixth amendment to the Franchise Agreement which specifically granted SCRG the right to develop two new full service Southern Hospitality restaurants during 2015, the locations of which were named in the document to be Lone Tree, Colorado and downtown Colorado Springs, Colorado. Additionally, the sixth amendment granted the Company the right to rebrand its Bourbon Brothers Southern Kitchen restaurant in northern Colorado Springs into a Southern Hospitality-branded full service franchised restaurant operating under the trade name Southern Hospitality Southern Kitchen, a differentiated and slightly more upscale concept to that of the original concept.

The Company is a party to a franchise agreement (the “FA” or the “Franchise Agreement”) with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor” or “SHFL”). In addition, in February 2015, the Company entered into a Master License Agreement (“MLA”) with SHFL which grants the Company the right to license up to five Southern Hospitality-branded fast casual restaurants (SHQ) in the Denver and Colorado Springs markets through August 2016. SHFL and SCRG have agreed to a royalty of 2.5% of gross sales on each of the new SHQ locations. The agreement pertains exclusively to the Company’s right to develop the SHQ locations and does not restrict the Company from developing a similar, competitive brand in the future. Finally, in developing the SHQ concept, SCRG will retain joint ownership of this concept, which pertains to the functionality of the restaurant.  The Company does not anticipate to open a SHQ in the near future.

During 2016, the Company is exploring options for growth for the Company’s two brands, Southern Hospitality and Carve Barbecue.  Specifically, the Company is looking at building the Southern Hospitality growth model on the footprint and profitability similar to its Southern Hospitality Lone Tree location, with real estate between 4,000 to 5,000 square feet.  In regards to the Carve model, the Company is identifying real estate partners and locations for its 2,500 square feet footprint.

Management’s Plans

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  The Company reported a net loss of approximately $3.9 million and $3.8 million for the years ended December 31, 2015 and 2014, respectively, and has an accumulated deficit of approximately $12.1 million at December 31, 2015. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company has devoted substantially all of its efforts to developing its business plan, raising capital, and opening and operating its four restaurants in Denver, Colorado Springs, Glendale and Lone Tree.

The Company’s continued implementation of its business plan is dependent on its future profitability and engaging in strategic transactions, or on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all. As a consequence, if the Company is unable to achieve and maintain profitability through current restaurant operations, enter into strategic transactions, or obtain additional financing in the near term, the Company may be required to delay its business plan implementation, which would have a material adverse impact on the Company.
 
 
F-7

 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All material intercompany accounts, transactions and profits are eliminated in consolidation.

Accounting guidance provides a framework for determining whether an entity should be considered a variable interest entity (VIE), and if so, whether the Company’s involvement with the entity results in a variable interest in the entity. If the Company determines that it does have a variable interest in the entity, it must perform an analysis to determine whether it represents the primary beneficiary of the VIE. If the Company determines it is the primary beneficiary of the VIE, it is required to consolidate the assets, liabilities and results of operations and cash flows of the VIE into the consolidated financial statements of the Company.

A company is the primary beneficiary of a VIE if it has a controlling financial interest in the VIE. A company is deemed to have a controlling financial interest in a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company has concluded that there are no VIE’s subject to consolidation at December 31, 2015 and December 31, 2014. While the Company believes its evaluation is appropriate, future changes in estimates, judgments and assumptions in the case of an evaluation triggered by a reconsideration event as defined in the accounting standard may affect the determination of primary beneficiary status and the resulting consolidation, or deconsolidation, of the assets, liabilities and results of operations of a VIE on the Company’s consolidated financial statements.

Use of Estimates

The process of preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. The areas that require management’s most significant estimates are impairment of long-lived assets, allocation of purchase price for business combinations, estimating fair value of debt and equity instruments, assessment of going conern, and share-based compensation. Actual results could differ from the estimates. Changes in estimates are recorded in the period of change.

Fair Value Measurements

The Company accounts for financial instruments pursuant to accounting guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair measurements.  To increase consistency and comparability in fair value measurements, the accounting guidance established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 – quoted prices (unadjusted) in active markets of identical assets or liabilities;

Level 2 – observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and

Level 3 – assets and liabilities whose significant value drivers are unobservable.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions.  Unobservable inputs require significant management judgments or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy.  In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.  Such determination requires significant management judgment.  There were no financial assets or liabilities measured at fair value, with the exception of cash and cash equivalents as of December 31, 2015 and 2014.
 
The carrying amounts of accounts payable and notes payable approximate their fair values due to their short-term maturities.  The carrying amounts of related party receivables and payables are not practicable to estimate based on the related party nature of the underlying transaction.


 
F-8

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Non-controlling Interest

The non-controlling interest represents capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities (SHD, SHSK, SHLT and CARVEG), and are reported in equity. From inception through December 31, 2015, in exchange for their interest in SHD, the non-controlling members contributed $897,465 in cash (no contributions in 2015 or 2014). The non-controlling members of SHSK contributed $109,022 for the year ended December 31, 2015.  The non-controlling members of SHLT contributed $500,000 in cash for the year ended December 31, 2015.  In April 2015, related party notes and accrued interest were converted into non-controlling CARVEG equity of $100,000 (Note 5), and $375,000 was contributed in cash in the year ended December 31, 2015.  During 2015, the Company distributed cash of $57,310 to the non-controlling members of SHLT and CARVEG.

Pre-opening Costs

Pre-opening costs, such as travel and employee payroll and related training costs are expensed as incurred and include direct and incremental costs incurred in connection with the opening of each restaurant. Pre-opening costs also may include non-cash rental costs under operating leases incurred during a construction period.

Cash and Cash Equivalents

From time to time, the Company maintains cash equivalents that include short-term highly liquid investments with an original a maturity of three months or less when purchased. The Company has no cash equivalents at December 31, 2015 and 2014.  In addition, the majority of payments due from financial institutions for the settlement of debit card and credit card transactions process within two business days, and therefore these payments due are classified as cash and cash equivalents.

Inventory

Inventory consists of food and beverages and is stated at the lower of cost (first-in, first-out) or market.

Deferred Financing Costs

Deferred financing costs are amortized over the term of the related debt using the straight-line method, which is not materially different than the effective-interest method.

Property and Equipment

Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired. The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired. Management bases this assessment upon the carrying value versus the fair value of the asset and whether or not that difference is recoverable. Such assessment is performed on a restaurant-by-restaurant basis and includes relevant facts and circumstances including the physical condition of the asset. If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value. Management determined that no impairment existed at December 31, 2015 and 2014.

Leasehold improvements are stated at cost. Property and equipment costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.

 
F-9

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Capitalized Interest

Interest on funds used to finance the acquisition and construction of a restaurant to the date the asset is placed in service is capitalized.

Leases and Deferred Rent

The Company leases and intends to lease substantially all of its restaurant properties.  For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period.  Long-term deposits on leases in the amount of $120,555 and $80,525 are recorded as of December 31, 2015 and 2014, respectively.  Deferred rent also includes a tenant improvement allowance the Company received in 2012 for $150,000, which is amortized as a reduction of rent expense, also on a straight-line basis over the initial term of the lease. 
 
Revenue Recognition

The Company recognizes revenues pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and applicable related guidance. Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is reported on the Company's consolidated statements of income (loss) net of sales taxes collected. The amount of sales tax collected is included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.

The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage), and the Company determines that there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The Company did not recognize any revenue related to unredeemed gift card breakage in 2015 or 2014. Unearned gift card revenue (presented within accrued expenses) at December 31, 2015 and 2014, was approximately $18,530 and $22,880, respectively.

Advertising Expenses

Advertising costs are expensed as incurred. Total advertising expenses were approximately $350,200 and $444,200, for the years ended December 31, 2015 and 2014, respectively.

 
F-10

 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 

Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Standards Codification (“ASC”) 718, Share-Based Payment. ASC 718 requires the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718 also requires the stock-based compensation expense to be recognized over the period of service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using an option pricing model, typically the Black-Scholes model.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.

The Company determines its income tax expense (benefit) in each of the jurisdictions in which it operates. Income tax includes an estimate of the current income tax expense (benefit), as well as deferred income tax expense, which results from the determination of temporary differences arising from the different treatment of items for book and tax purposes.

The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions.  Periods subject to examination for the Company’s federal and state income tax returns are 2012 through the 2014 tax year.

Certain of the Company’s subsidiaries are limited liability companies (“LLC’s”), which are treated for tax purposes as pass-through entities. As a result, any taxes are the responsibility of the respective members.

The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying consolidated financial statements. The Company recognizes tax related interest and penalties, if any, as a component of income tax expense.
 
 
F-11

SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Net loss per share
 
Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. The Series A convertible preferred shares are not included in the computation of basic loss per share, as the Series A convertible preferred shares do not have a contractual obligation to share in the losses of the Company. Diluted net loss per share reflects the potential dilution that could occur if dilutive securities were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, unless the effect of such inclusion would reduce a loss or increase earnings per share. For each of the periods presented in the accompanying consolidated financial statements, the effect of the inclusion of dilutive shares would have resulted in a decrease in loss per share. Common stock options, warrants and shares underlying convertible debt aggregating 35,652,529 and 9,591,056 for the years ended December 31, 2015 and 2014, respectively, have been excluded from the calculation of diluted net loss per common share.
 
Recently Issued Accounting Standards

In August 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.  The guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early application permitted.  The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. Once effective, ASU No. 2015-02 will apply to the consolidation assessment of all entities. This standard is effective for public reporting entities in fiscal periods beginning after December 15, 2015. The Company does not anticipate any material impact upon adoption of this new standard.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Simplifying the Measurement of Inventory, which changes the measurement from lower of cost or market to lower of cost and net realizable value. The guidance requires prospective application for reporting periods beginning after December 15, 2016 and permits adoption in an earlier period. The Company intends to adopt this ASU in the first quarter of 2016; the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company intends to adopt this ASU in the first quarter of 2016, at which time the Company will reclassify debt issuance costs (if any) associated with the Company's debt from other noncurrent assets to debt. A reclassification will also be applied retrospectively to each prior period presented.

In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"), Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. The Company is currently evaluating the effect that this ASU will have on our consolidated financial statements.

Management has not identified any other recently issued accounting standards that it believes may have a significant impact on the Company’s consolidated financial statements. 

 
F-12

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
NOTE 3 – INTANGIBLE ASSET

Franchise Agreements

The intangible asset at December 31, 2015 and 2014, represents franchise license costs for the Denver restaurant (net of accumulated amortization of $14,375 and $9,375, respectively).

Amortization expense of $5,000 was recorded for each of the years ended December 31, 2015 and 2014. Amortization expense for the next five years is estimated to be as follows:

 
2016
 
$
5,000
 
2017
   
5,000
 
2018
   
5,000
 
2019
   
5,000
 
2020
   
5,000
 
Thereafter
   
10,625
 
   
$
35,625
 

The Company licenses the rights to the trademark “Bourbon Brothers” and certain intellectual property, as defined, from a related party, Hospitality Income & Asset, LLC, f/k/a Bourbon Brothers LLC (“HIA”), for use in the Company’s business operations. HIA has granted an exclusive license to use and to sublicense the tradename and intellectual property for an initial ten-year term. The agreement shall automatically renew for additional terms of ten-years each without any action required by either party. This license agreement does not require the payment of royalties or any other consideration. The Company is not currently using this trademark in its operations, nor is it contemplated for use in the foreseeable future.
 
 
F-13

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014

NOTE 4 – PROPERTY AND EQUIPMENT
 

As of December 31, 2015 and 2014, property and equipment consists of the following:
 
   
December 31,
   
December 31,
   
   
2015
   
2014
 
Useful lives
              
Leasehold improvements
 
$
3,237,345
   
$
2,227,438
 
10 years
Website development
   
45,750
     
21,500
 
3 years
Equipment
   
2,077,889
     
1,299,220
 
3-7 years
Computers and hardware
   
170,822
     
116,275
 
5 years
     
5,531,806
     
3,664,433
   
Less accumulated depreciation
   
(1,252,710
)
   
(678,383
)
 
   
$
4,279,096
   
$
2,986,050
   
 
 
Depreciation expense for the years ended December 31, 2015 and 2014 was approximately $574,300 and $431,200, respectively.

NOTE 5 – NOTES PAYABLE
 
Convertible Notes:

The Company has outstanding 5% promissory notes (the “Notes”) that bear interest at 5% per annum, they are unsecured, and their maturity dates are seven years from their issue date (October 2018 through November 2019). Quarterly payments are applied against accrued interest first, then principal. The minimum aggregate quarterly payment to Note holders is 2.5% of the Company’s portion of gross quarterly revenues from each Southern Hospitality BBQ restaurant.  Payments made in the year ended December 31, 2014 were $2,409; no payments were made in 2015. At December 31, 2015, the Company has not made all required payments of interest on the Notes.  At December 31, 2015 and 2014, quarterly payments in arrears total $108,000 and $64,870.  Accrued interest at December 31, 2015 and 2014 is $119,490 and $77,620, respectively. The Company may cure this deferral in quarterly payments within a defined period of time, as provided for in the note agreements, thus preventing the Notes from becoming callable.

The Notes and accrued interest are convertible, at the option of the holder. The conversion price is 80% of the 20-day average closing sales price on the date conversion is elected, but not less than $0.50 per share. The Company determined that there was a beneficial conversion feature associated with the Notes in the amount of $283,500 related to the intrinsic value of the conversion feature before the Company’s stock became public.  The Company recorded the beneficial conversion feature as a discount to the Notes and is amortizing the amount to interest over the term of the Notes.  Approximately $53,900 and $49,100 was amortized for the years ended December 31, 2015 and 2014, respectively.  No Notes were converted in 2015 or in 2014.  At December 31, 2015 and 2014, the balance of the Notes and accrued interest, net of discount, was approximately $764,100 and $665,900, respectively.

Beginning in August 2014, the Company began selling 6.5% promissory notes (the “2014 Notes”) along with warrants to purchase the Company’s common stock. Investors received a warrant to purchase four shares of common stock for each one dollar of principal amount loaned to the Company. The 2014 Notes bear interest at 6.5% per annum, they are unsecured, and their maturity dates are five years from their issue date. The Company sold $460,000 of 2014 Notes from August through December 2014 and $280,000 of 2014 Notes in 2015.  By their original terms, the 2014 Notes and accrued interest become convertible, at the option of the holder, after two years from the issue date. The conversion price is the lower of 80% of the 20-day average closing sales price on the date conversion is elected or $0.25 per share.
 
 
F-14

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
 
NOTE 5 – NOTES PAYABLE (CONTINUED)
 
Convertible Notes:
 
The 2014 Notes were recorded at $322,200 after discounting the convertible notes based on the relative fair value of the warrants issued with the debt, of approximately $274,700.  The warrants were issued with the convertible debt and their relative fair value was determined using the Black-Scholes option pricing model.  Additionally, the convertible notes were further discounted, as the Company determined that the convertible debt contained a beneficial conversion feature and recorded an additional debt discount of approximately $143,100.  The net carrying value of the 2014 Notes and accrued interest at December 31, 2015 and 2014 was $467,700 and $159,200, respectively.

The assumptions used in the Black-Scholes model to determine the fair value of warrants are as follows: (1) dividend yield of 0%, (2) expected volatility of 205%, (3) weighted average risk-free interest rate of 0.79%, (4) contractual life of 3.0 years, and fair value of the Company’s shares of $0.14 to $0.30 per share.  The relative fair value attributable to the warrants and the beneficial conversion feature have been recorded as a discount and deducted from the face value of the convertible debt in the accompanying consolidated balance sheet.  The discount applied to the 2014 Notes is being amortized over the five-year term of the convertible notes.

Promissory Note:

During the year ended December 31, 2013, the Company issued a promissory note with an aggregate face value of $200,000, along with a warrant to purchase 50,000 shares of the Company’s common stock. This note bears interest at 5% per annum, it is unsecured and due on demand. The holder of the note received additional consideration in the form of a fully vested warrant to purchase 50,000 common shares at an exercise price of $0.50 per share exercisable for three years from the date of execution of the note.  The Company determined the relative fair value of the warrant to be approximately $44,000, which was recorded as a discount to the note payable, which was amortized over approximately three months.  In February 2016, the Company paid $50,000 in principal and issued a new promissory note for $150,000 which bears interest at 5% per annum, is unsecured and is due on February 3, 2017.

Bank Financing:

In November 2014, SHLT and Rocky Mountain Bank & Trust entered into a bank financing agreement to purchase kitchen equipment for the Lone Tree restaurant location.  A board member of the Company is also a board member of Rocky Mountain Bank & Trust. The agreement provides for financing up to $300,000, of which the Company had drawn $282,900 by December 31, 2015 and $2,055 by December 31, 2014. This loan bears interest at 6%.  Monthly interest-only payments began in December 2014 and continued through August 2015.  Beginning in September 2015, monthly principal and interest payments of approximately $5,800 are due through maturity in August 2020.   This agreement is collateralized by the kitchen equipment at the SHLT and SHD restaurants.

Related Party Promissory Notes:

The Company issued short-term promissory notes totaling $90,000 in the third quarter of 2014 to two shareholders.  These notes bear interest at 10% per annum, are unsecured, and had a maturity date of 180 days after the date of execution. These notes with accrued interest were subsequently converted to equity in CARVEG in April 2015 at a conversion rate of $1.05 per membership unit. In addition, the Company issued a short-term, unsecured promissory note for $25,000 on November 13, 2014, to a third shareholder.  This note was subsequently paid off in full in January 2015.

 
F-15


SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
NOTE 5 – NOTES PAYABLE (CONTINUED)

Related Party Loan Agreement:

On December 31, 2014, the Company entered into a Loan Agreement and associated Promissory Note (the “Loan Agreement”) with Bourbon Brothers #14, LLC (“BB14”) which provides for an unsecured term loan in the aggregate original principal amount of $1,250,000 (the “Loan”). The Company received net proceeds of $1,197,714 after loan closing fees.  BB14 is a related party entity, controlled by certain shareholders of the Company. The Company is to pay interest on the Loan at the greater of 9.5% or 6.25% per annum plus the prime rate announced by the Wall Street Journal. In addition, the Company is to pay a monthly loan servicing fee in the amount of 1% of the principal balance of the Loan. The entire principal balance of the Loan, plus any accrued and unpaid interest, is due on December 29, 2016. The related party interest expense on this loan for the year ended December 31, 2015 was $130,300.  The Company paid $100,000 towards prepayment of this Loan to BB14 at December 31, 2015.  Subsequently, the Company prepaid an additional $400,000 towards this Loan to BB14 in January 2016.

In connection with the Loan, the Company issued a warrant to BB14 for the purchase of 7,500,000 shares of common stock exercisable for a period of five years at $0.10 per share with the warrant vesting in one year. BB14 funded the Loan with financing BB14 received from a third-party lender.  JW Roth, a director of the Company, personally guaranteed the BB14 Loan to obtain financing to facilitate the Loan. To compensate JW Roth, the Company issued a warrant to Mr. Roth for the purchase of 7,500,000 shares of common stock exercisable for a period of five years at $0.10 per share with the warrant vesting in one year.  The Company determined the relative fair value of the 15,000,000 warrants to be approximately $731,800, which has been recorded as a discount to the Loan principal balance, and which is being amortized over the term of the Loan.  The balance of the discount at December 31, 2015 and December 31, 2014 was $365,940 and $731,800, respectively.

Scheduled maturities of notes payable for the next five years and thereafter as of December 31, 2015, are as follows:
 
Year ending December 31,
   
2016
 
$
1,150,000
 
2017
   
200,000
 
2018
   
837,425
 
2019
   
740,000
 
2020
   
282,934
 
Thereafter
   
-
 
     
3,210,359
 
Less total discount on notes payable
   
(880,485
)
Add accrued interest at December 31, 2015
   
176,730
 
     
2,506,604
 
Less current portion
   
(913,548
)
Non-current portion
 
$
1,593,056
 
 
 
 
F-16

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 
 
NOTE 6 – COMMITMENTS AND CONTINGENCIES

Commitments:

Franchise agreement

The Company operates its Denver restaurant property under a franchise agreement with the Franchisor under an initial ten-year term, renewable for two additional five-year terms. Pursuant to the franchise agreement, as amended, the Company is to pay royalty fees based on a percentage of gross revenues (2.5%, subject to a monthly floor of $5,000) , plus additional fees and costs for marketing, training, inventory and other franchisor costs. Two officers of the Company have personally guaranteed royalty payments to the Franchisor.

On December 30, 2014, SHD entered into a Fifth Amendment to its FA with the Franchisor in connection with the opening of a new Southern Hospitality restaurant in Lone Tree, Colorado. Under the FA, SHD partially assigned its rights to SHLT to use the Franchisor’s marks, business methods, proprietary products, confidential information and intellectual property to operate a Southern Hospitality restaurant. In addition, pursuant to the FA, the Franchisor waived certain initial fees in connection with SHLT opening a restaurant in Lone Tree, Colorado.

On February 13, 2015, SHD entered into a Sixth Amendment to its FA with the Franchisor in connection with the potential for opening two Southern Hospitality restaurants in Colorado Springs, Colorado.  Under the FA, SHD partially assigned its rights to SHSK, a 51%-owned subsidiary of the Company, and Southern Hospitality Tejon, LLC, a wholly-owned subsidiary of the Company, to use the Franchisor's marks, business methods, proprietary products, confidential information and intellectual property to operate a Southern Hospitality restaurant.

For the years ended December 31, 2015 and 2014, the Company incurred franchise royalty expense of approximately $139,300 and $59,000, respectively.
 
Leases:
 
In April 2012, the Company entered into a ten-year, non-cancellable lease for the restaurant in Denver, Colorado. This lease provides for two, five-year renewal options. Rent payments are approximately $16,000 per month plus certain common area maintenance charges, as defined, and are subject to escalation provisions.  Lease expense was approximately $188,800 and $194,120 for the years ended December 31, 2015 and 2014, respectively.  

The Company has a ten-year lease with HIA, a related party, for the real property in connection with the restaurant location in Colorado Springs.  The lease commenced upon taking possession of the premises in January 2014.  Rent is approximately $33,340 per month for the first 60 months, and thereafter is subject to adjustment every 60 months. This lease provides for one, ten-year renewal option.  Related party lease expense was approximately $401,000 and $383,000 for each of the years ended December 31, 2015 and 2014, respectively.

The Company has a ten-year, non-cancellable lease for the restaurant in Lone Tree, Colorado. The lease provides for an initial lease term of ten years and for two, five-year renewal options.  Rent payments are approximately $8,900 per month plus certain common area maintenance charges, and are subject to escalation provisions.  In addition to base rent, this lease requires contingent rent payments equal to 5% of gross sales above predetermined thresholds, as defined. This location opened April 27, 2015, at which time the lease commenced.  Lease expense was approximately $74,400 for the year ended December 31, 2015 (none in 2014).
 
In April 2015, CARVEG entered into a non-cancellable lease for the Company’s first fast casual restaurant in Glendale, Colorado. The initial term of this lease provides for expiration on July 31, 2020. This lease includes three, five-year extension options. Rent payments are approximately $11,100 per month, which includes certain common area maintenance charges, and are subject to escalation provisions.  This location opened November 5, 2015. Lease expense was approximately $84,960 for the year ended December 31, 2015 (none in 2014).

On January 1, 2014, the Company assumed a lease from a related party for the corporate office in Colorado Springs.  The lease is for 78 months with an unaffiliated party.  Monthly rent is $5,800 per month escalating up to $6,000 per month in year six.  The initial term of the lease provides for expiration on December 31, 2016. Lease expense for the years ended December 31, 2015 and 2014 was $71,200 and $69,600, respectively.
 
 
 
F-17

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2015 AND 2014
 

The future minimum lease payments are as follows:
 
 
 
Third
Party
   
Related
Party
   
Total
 
2016
 
$
492,089