See notes to unaudited consolidated financial statements.
BOURBON BROTHERS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
| | | Nine months ended | |
| | | September 30, | |
| | | 2014 | | | 2013 | |
| Net cash used in operating activities | | $ | (1,928,188 | ) | | $ | (1,601,452 | ) |
| Cash flows from investing activities | | | | | | | | |
| Cash acquired in acquisition | | | 869,907 | | | | - | |
| Purchase of property and equipment | | | (303,962 | ) | | | (1,223,072 | ) |
| Net cash provided by (used in) investing activities | | | 565,945 | | | | (1,223,072 | ) |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from exercise of a stock options | | | 25 | | | | 4,976 | |
| Proceeds from exercise of warrants | | | 300 | | | | - | |
| Contribution to subsidiary by non-controlling interest | | | - | | | | 225,980 | |
| Sale of common stock | | | 1,042,300 | | | | 1,368,012 | |
| Proceeds from issuance of promissory notes and warrants | | | 300,000 | | | | 331,486 | |
| Proceeds from issuance of short-term promissory notes | | | 90,000 | | | | - | |
| Repurchase of shares for services from related party | | | - | | | | (25,000 | ) |
| Net cash provided by financing activities | | | 1,432,625 | | | | 1,905,454 | |
| Net increase (decrease) in cash and cash equivalents | | | 70,382 | | | | (919,070 | ) |
| Cash and cash equivalents, beginning | | | 13,611 | | | | 962,331 | |
| Cash and cash equivalents, ending | | $ | 83,993 | | | $ | 43,261 | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| Convertible notes and interest converted to common stock | | $ | - | | | $ | 830,984 | |
| Acquisition of BBHCLLC in exchange for preferred and common stock | | $ | 1,658,612 | | | $ | - | |
| Beneficial conversion feature | | $ | 123,000 | | | $ | - | |
See notes to unaudited consolidated financial statements.
BOURBON BROTHERS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2014
(Unaudited)
| | | | | | | | | | | | | | | 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 | | | 3,474,333 | | | | 1,042,300 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,042,300 | |
| Acquisition of BBHCLLC for common and preferred shares | | | 20,274,193 | | | | 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 | | | 91,214 | | | | 25 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 25 | |
| 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 | | | - | | | | - | | | | - | | | | - | | | | 234,781 | | | | - | | | | - | | | | 234,781 | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 274,552 | | | | - | | | | - | | | | 274,552 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,586,560 | ) | | | (274,346 | ) | | | (2,860,906 | ) |
| Balances, September 30, 2014 | | | 47,973,028 | | | $ | 7,704,301 | | | | 4,884,859 | | | $ | 248,994 | | | $ | 1,595,942 | | | $ | (7,884,302 | ) | | $ | 164,972 | | | $ | 1,829,907 | |
See notes to unaudited consolidated financial statements.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 1 – ORGANIZATION, RECENT EVENTS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS
Organization and Recent Events
Bourbon Brothers Holding Corporation (“BBHC” or the “Company”) is a Colorado corporation. The Company, on January 22, 2014, with approval of a majority of the Company’s shareholders, changed its name from Smokin Concepts Development Corporation to Bourbon Brothers Holding Corporation.
The Company’s subsidiary, Southern Hospitality Franchisee Holding Corporation (“SH”) entered into a franchise agreement and area development agreement with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor”) in November 2011. In May 2012, SH formed Southern Hospitality Denver Holdings, LLC (“SHDH”), a wholly-owned subsidiary, and Southern Hospitality Denver, LLC (“SHD”). SHD was formed for the purpose of owning and operating the Company’s first franchised restaurant in Denver, Colorado. As of September 30, 2014, and December 31, 2013, SHD is 51% owned by SHDH and 49% owned by non-controlling interest holders, of which related parties of the Company are 22% non-controlling interest holders.
On September 30, 2013, the Company entered into an Acquisition Agreement with Bourbon Brothers Holding Company, LLC (“BBHCLLC”) to acquire all of the equity interests in BBHCLLC and its subsidiaries (the “BB Transaction”). BBHCLLC is a Colorado limited liability company (“LLC”) formed in May 2013, for the purpose of developing and managing all aspects of operating units related to a recently developed “Bourbon Brothers” brand. The principals of BBHCLLC were also, at various times, on the board of directors of the Company, and therefore BBHCLLC is considered to be a related party. As of December 31, 2013, BBHCLLC was a development stage company. BBHCLLC’s subsidiaries (all LLCs formed in April 2013) include Bourbon Brothers Restaurant Group, LLC (“BBRG”), Bourbon Brothers Franchise, LLC (“BBF”) and Bourbon Brothers Brand, LLC (“BBB”). BBRG owns the stores to encompass several Bourbon Brothers brands, and owns Bourbon Brothers Southern Kitchen Colorado Springs, LLC (“BBSK”), which opened its first restaurant in January 2014, and for which BBSK is 51% owned by BBRG as of the date of the BB Transaction. BBRG also owns Bourbon Brothers Seafood and Chophouse Colorado Springs, LLC (“BBSF”). BBB manages all aspects of the Bourbon Brothers brand and anticipates establishing licensing and royalty agreements with producers of bourbon, spices, cigars and other products that fit the Company’s core brand. In July 2014, the Company announced that the board of directors approved a third restaurant concept, 53 Peaks Local Kitchen, a Colorado-themed, casual dining restaurant, with the first location to be in Lone Tree, Colorado. This location is anticipated to open in the first quarter of 2015.
On January 22, 2014, the Company and BBHCLLC closed on the BB Transaction. On that date, the Company issued 20,274,193 shares of common stock to BBHCLLC Class B Non-Voting members and 18,242,687 shares of Series A Convertible Preferred Stock to BBHCLLC Class A Voting members. All outstanding options and warrants to acquire BBHCLLC units were assumed by the Company, applying a 1.82427 conversion ratio. The acquisition of BBHCLLC was accounted for using the purchase method of accounting. The purchase price was allocated among the assets acquired and liabilities assumed at their estimated fair values, which management believes approximates the net book value of the assets and liabilities.
The purchase price allocation is preliminary and subject to change, as a final analysis and review of all underlying assumptions and calculations used in the determination of the purchase price and the allocation, especially in consideration of the related party nature of the underlying transaction, has not yet been completed. The following table summarizes the estimated fair values of BBHCLLC’s assets and liabilities acquired at the acquisition date (January 22, 2014):
Cash | | $ | 869,907 | |
Property and equipment | | | 957,705 | |
Other assets | | | 270,955 | |
Accounts payable and accrued expenses | | | (135,260 | ) |
Purchase price (estimated fair value of common and preferred shares issued) | | $ | 1,963,307 | |
| | | | |
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 1 – ORGANIZATION, RECENT EVENTS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)
The pro forma effects on the Company’s consolidated results of operations for the nine months ended September 30, 2014, as if the acquisition had occurred on January 1, 2014, are not material. The pro forma effects of the acquisition related to the nine months ended September 30, 2013, as if the acquisition occurred at the beginning of the year, would have had no affect on revenues of $1,553,052, increased loss from operations to $2,587,844, increased net loss to $3,073,408 and increased net loss per share to $0.11, after giving effect to the pro forma adjustment to increase the weighted average number of common shares.
Basis of Presentation
Since inception through February 20, 2013, the Company devoted substantially all of its efforts to establishing its business. The Company’s planned principal operations commenced on February 21, 2013, with the opening of the Southern Hospitality Denver restaurant. As a result, the Company was no longer considered to be a development stage enterprise as of February 21, 2013.
The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Amounts as of December 31, 2013, are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2014, and the results of operations and cash flows for the periods presented. All such adjustments include those that are of a normal recurring nature. The results of operations for the nine months ended September 30, 2014, are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.
Management’s Plans
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported a net loss of approximately $812,600, $2.86 million, $613,300 and $2.6 million for the three and nine month periods ended September 30, 2014 and 2013, respectively, and has an accumulated deficit of approximately $7.9 million at September 30, 2014. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has devoted substantially all of its efforts to developing its business plan, raising capital, and opening and operating its Denver and Colorado Springs restaurants, as well as its planned Lone Tree, Colorado restaurant.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)
Management’s Plans (Continued)
The Company began revenue generating activities in late February 2013, and in January 2014, BBHCLLC’s restaurant, located in Colorado Springs, Colorado, opened and began generating revenues. The Company does not have a revolving loan agreement with any financial institution, nor can the Company provide any assurance it will be able to enter into any such agreement in the future, or be able to raise funds through a future issuance of debt or equity. The Company’s continued implementation of its business plan is dependent on its future profitability and engaging in strategic transactions, or on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all. As a consequence, if the Company is unable to achieve and maintain profitability through current restaurant operations, enter into strategic transactions, or obtain additional financing in the near term, the Company may be required to delay its business plan implementation, which would have a material adverse impact on the Company.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions and profits are eliminated in 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 September 30, 2014. While the Company believes its evaluation is appropriate, future changes in estimates, judgments and assumptions in the case of an evaluation triggered by a reconsideration event as defined in the accounting standard may affect the determination of primary beneficiary status and the resulting consolidation, or deconsolidation, of the assets, liabilities and results of operations of a VIE on the Company’s consolidated financial statements.
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates. Changes in estimates are recorded in the period of change.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurements
The Company accounts for financial instruments pursuant to accounting guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair measurements. To increase consistency and comparability in fair value measurements, the accounting guidance established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 – quoted prices (unadjusted) in active markets of identical assets or liabilities;
Level 2 – observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 – assets and liabilities whose significant value drivers are unobservable.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgments or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment. There were no financial assets or liabilities measured at fair value, with the exception of cash and cash equivalents as of September 30, 2014.
The carrying amounts of accounts payable and notes payable approximate their fair values due to their interest rates and/or short-term maturities. The carrying amounts of related party payables are not practicable to estimate based on the related party nature of the underlying transaction.
Non-controlling Interest
The non-controlling interest represents capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities, and are reported in equity. From inception through September 30, 2014, in exchange for their interest in SHD, the non-controlling members contributed $897,465 in cash, of which nil and $225,980 was contributed during the nine month periods ended September 30, 2014 and September 30, 2013, respectively.
Pre-opening Costs
Pre-opening costs, such as travel and employee payroll and related training costs are expensed as incurred and include direct and incremental costs incurred in connection with the opening of each restaurant. Pre-opening costs also may include non-cash rental costs under operating leases incurred during a construction period.
Cash and Cash Equivalents
Cash equivalents include short-term highly liquid investments with an original a maturity of three months or less when purchased. In addition, the majority of payments due from financial institutions for the settlement of debit card and credit card transactions process within two business days, and therefore these payments due are classified as cash and cash equivalents.
Inventory
Inventory consists of food and beverages and is stated at the lower of cost (first-in, first-out) or market.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired. The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, 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 are stated at cost. Property and equipment costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.
Capitalized Interest
Interest on funds used to finance the acquisition and construction of a restaurant to the date the asset is placed in service is capitalized.
Leases and Deferred Rent
The Company intends to lease substantially all of its restaurant properties, and in April 2012, the Company entered into a ten-year lease for the restaurant in Denver, Colorado; the Company is also a party to a ten-year lease for its restaurant in Colorado Springs, Colorado, which commenced in January 2014. Additionally, the Company signed a ten-year lease in July 2014 for its restaurant in Lone Tree, Colorado, which is anticipated to open in late Fall 2014. For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period. Long-term deposits on the Denver, Colorado Springs and Lone Tree leases in the amount of $80,525 are recorded as of September 30, 2014. 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 began revenue-generating activities through the Denver restaurant on February 21, 2013. The Company began accounting for such revenues pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and applicable related guidance. Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is reported on the Company's consolidated statements of income (loss) net of sales taxes collected. The amount of sales tax collected is included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses were approximately $110,600 and $395,400 for the three and nine months ended September 30, 2014, and $200 and $19,100, for the three and nine months ended September 30, 2013, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation under Accounting Standards Codification (“ASC”) 718, Share-Based Payment. ASC 718 requires the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718 also requires the stock-based compensation expense to be recognized over the period of service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using an option pricing model, typically the Black-Scholes model.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.
The Company determines its income tax expense in each of the jurisdictions in which it operates. The income tax expense includes an estimate of the current income tax expense, as well as deferred income tax expense, which results from the determination of temporary differences arising from the different treatment of items for book and tax purposes.
The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions.
Many of the Company’s subsidiaries are limited liability companies (“LLC’s”) and are treated for tax purposes as pass-through entities. As a result, any taxes are the responsibility of the respective members.
The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying consolidated financial statements. The Company recognizes tax related interest and penalties, if any, as a component of income tax expense.
Net loss per share
Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if dilutive securities were exercised or 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 9,250,445 and 1,958,512 for the periods ended September 30, 2014 and 2013, respectively, have been excluded from the calculation of diluted net loss per common share.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts from Customers, which supercedes the revenue recognition in Revenue Recognition (Topic 05), 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. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early adoption not permitted. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
NOTE 3 – INTANGIBLE ASSETS
In 2011, the Company paid $300,000 for the non-exclusive rights and license to use the Southern Hospitality system and Southern Hospitality licensed marks in connection with the operation of ten restaurants to be owned and operated by the Company under franchise and related area development agreements. These costs were allocable to each planned restaurant.
In September 2013, the Company terminated the Area Developer Agreement (“ADA”) with the Franchisor. As a result of the termination of the ADA, the Company determined this event impaired the intangible asset, and a resulting impairment expense was recorded in the year ended December 31, 2013, of $250,000. The intangible asset at September 30, 2014, represents franchise license costs for the Denver restaurant (net of accumulated amortization of $8,125).
Amortization began in February 2013 with the opening of the Company’s Denver-based restaurant, with amortization expense of $1,250 and $3,750 recorded for the three months and nine months ended September 30, 2014, respectively. Amortization expense for the next five years is estimated to be as follows:
| 2014 (remaining three months) | | $ | 1,250 | |
| 2015 | | | 5,000 | |
| 2016 | | | 5,000 | |
| 2017 | | | 5,000 | |
| 2018 | | | 5,000 | |
| Thereafter | | | 20,625 | |
| | | $ | 41,875 | |
The Company licenses the rights to the trademark “Bourbon Brothers” and certain intellectual property, as defined, from a related party, Bourbon Brothers LLC (“BBLLC), for use in the Company’s business operations. BBLLC has granted an exclusive license to use and to sublicense the tradename and intellectual property for an initial ten-year term. The agreement shall automatically renew for additional terms of ten-years each without any action required by either party. This license agreement does not require the payment of royalties or any other consideration.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 4 – PROPERTY AND EQUIPMENT
As of September 30, 2014 and December 31, 2013, property and equipment consists of the following:
| | | September 30, | | | December 31, | | |
| | | 2014 | | | 2013 | | Useful lives |
| | | (Unaudited) | | | | | |
| Leasehold improvements | | $ | 2,208,643 | | | $ | 2,146,322 | | 3-10 years |
| Website development | | | 21,500 | | | | 13,500 | | 3 years |
| Equipment | | | 1,255,660 | | | | 478,194 | | 3-7 years |
| Computers and hardware | | | 116,275 | | | | 52,742 | | 5 years |
| | | | 3,602,078 | | | | 2,690,758 | | |
| Less accumulated depreciation | | | (568,546 | ) | | | (247,183 | ) | |
| | | $ | 3,033,532 | | | $ | 2,443,575 | | |
The Company’s first Denver-based restaurant opened in late February 2013, for which the Company began depreciating such assets. The Company’s Colorado Springs-based restaurant opened in late January 2014, for which the Company began depreciating such assets. Depreciation expense was approximately $109,800, and $317,900 for the three and nine months ending September 30, 2014 and $72,000 and $173,400 for the three and nine months ending September 30, 2013, respectively.
NOTE 5 – NOTES PAYABLE
Convertible Notes:
Beginning in October 2011, the Company began selling 5% promissory notes (the “Notes”) along with shares of the Company’s common stock. Investors received one share of common stock for each one dollar of principal amount loaned to the Company. The Notes bear interest at 5% per annum, they are unsecured, and their maturity dates are seven years from their issue date. The Company sold $3,086,388 of notes from 2011 through November 2012. Quarterly payments are applied against accrued interest first, then principal. The minimum aggregate quarterly payment to Note holders is 2.5% of the Company’s portion of gross quarterly revenues from each restaurant. The first minimum quarterly payment of $7,297 was paid in May 2013 (45 days after the first calendar quarter in which the Denver restaurant opened which occurred on February 21, 2013).
By their original terms, the Notes and accrued interest became convertible, at the option of the holder, upon the Company’s common stock becoming publicly traded on November 13, 2012. The conversion price is 80% of the 20-day average closing sales price on the date conversion is elected, but not less than $0.50 per share. The Company determined that there was a beneficial conversion feature associated with the Notes 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 note and is amortizing the amount to interest over the term of the notes. Approximately $12,500 and $37,900 have been amortized for the three and nine months ended September 30, 2014 and $65,900 and $206,800 amortized for the three and nine months ended September 20, 2013. There were no notes or accrued interest converted into common shares during the three or nine months ended September 30, 2014.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 5 – NOTES PAYABLE (CONTINUED)
Convertible Notes: (continued)
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 $300,000 of notes from August 2014 through September 2014. 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.
The Company estimated the liability component of the convertible debt to be approximately $65,000 by discounting the convertible notes for the relative fair value of the warrants issued with the debt, of approximately $111,500. The warrants were issued with the convertible debt and their relative fair value was determined using the Black-Scholes options pricing model. Additionally, the convertible notes were further discounted as the Company determined that convertible debt contained a beneficial conversion feature and recorded an additional debt discount of approximately $123,000.
The assumptions used in the Black-Scholes model are as follows: (1) dividend yield of 0%, (2) expected volatility of 105%, (3) weighted average risk-free interest rate of 0.78%, (4) contractual life of 3.0 years, and fair value of the Company’s ordinate shares of $0.23 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 interim consolidated balance sheet. The discount related to the warrants will be amortized over the period from the issuance to the contractual life of the warrants of three years. The discount related to the beneficial conversion feature will be amortized over the life of the convertible notes of five years.
Promissory Notes:
The Company issued a promissory note with an aggregate face amount of $200,000, along with a warrant to purchase 50,000 shares of the Company’s common stock in 2013. This note bears interest at 5% per annum, is unsecured, and has a maturity date which is concurrent with the date that the current common stock offering closes in approximately early 2015. The holder of the note received additional consideration in the form of a fully vested stock warrant for the purchase of 50,000 common shares at an exercise price of $0.50 per share exercisable for three years from the date of execution of the note. The Company determined the relative fair value of the warrant to be approximately $44,000, which has been recorded as a discount to the note payable and was amortized over approximately three months (Note 7).
Related Party Promissory Notes:
On August 1, 2013, the Company entered into an unsecured promissory note with BBHCLLC. The note was for $249,301 (a balance of $204,877 at December 31, 2013) with a maturity date of February 1, 2014. The note included a 5% annual interest rate and terms in case of default in which the loan could have been converted into common stock of the Company by the note holder at no less than $0.10 a share. The note and unpaid interest was extinguished on the date the Company and BBHCLLC successfully closed the BB Transaction.
The Company issued short-term promissory notes totaling $90,000 in the third quarter 2014 to two of its current shareholders. These notes bear interest at 10% per annum, are unsecured, and have a maturity date of 180 days after the date of execution.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Commitments:
Franchise agreement
The Company operates its Denver restaurant property under a franchise agreement with the Franchisor under an initial ten-year term, renewable for two additional five-year terms. Pursuant to the franchise agreement, the Company was to pay royalty fees based on a percentage of gross revenues (generally between 3% and 5% of gross sales, as defined), plus additional fees and costs for marketing, training, inventory and other franchisor costs. Two officers of the Company have personally guaranteed royalty payments to the Franchisor.
In September 2013, the Company amended the Franchise Agreement with the Franchisor. The amendment resulted in a reduction in the royalty fees for the Company’s Denver restaurant to be paid to the Franchisor beginning January 1, 2014. The reduced rate is 2.5% of gross sales, subject to a monthly floor of $5,000.
For the three and nine months ended September 30, 2014 and 2013, the Company incurred franchise royalty expense of $13,600, $41,900, $27,700 and $71,200, respectively.
Leases:
In April 2012, the Company entered into a ten-year, non-cancellable lease for the restaurant in Denver, Colorado. This lease provides for two, five-year renewal options. Rent payments are approximately $16,000 per month plus certain common area maintenance charges, as defined, and are subject to escalation provisions. Lease expense was approximately $48,000 and $148,000 for the three and nine months ended September 30, 2014, respectively, and $47,000 and $189,000 for the three and nine months ended September 30, 2013, respectively. A long-term deposit on the lease in the amount of $18,034 is recorded as of September 30, 2014.
The Company has a 10-year lease with Bourbon Brothers, LLC (“BBLLC”), a related party, for the real property in connection with the restaurant location in Colorado Springs. The lease commenced upon taking possession of the premises, on January 11, 2014. Rent is approximately $33,341 per month for the first 60 months, and thereafter subject to adjustment every 60 months. A long-term deposit on the lease in the amount of $32,083 is recorded as of September 30, 2014. Related party lease expense was approximately $99,100 and $284,000 for the three and nine months ended September 30, 2014, respectively.
In July 2014, the Company entered into 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 $9,900 per month plus certain common area maintenance charges, and are subject to escalation provisions. This location is anticipated to open late fourth quarter 2014. A long-term deposit on the lease in the amount of $24,614 is recorded as of September 30, 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. A long-term deposit in the amount of $5,794 is recorded as of September 30, 2014.
The Company also paid rent and rent-related expenses to Accredited Members Acquisition Corporation (“AMAC”), a related party (Note 8), on a month-to-month basis for office space at the AMAC corporate headquarters in Colorado Springs, Colorado. This arrangement began in October 2011 and terminated July 31, 2013, as the Management Service Agreement terminated. Base rental payments were approximately $3,500 per month. Related party rent expense was approximately nil for the three and nine months ended September 30, 2014, and $4,800 and $33,400 for the three and nine months ended September 30, 2013, respectively.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 6 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingencies:
From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management provides for them if upon the advice of counsel, losses are determined to be both probable and estimable.
NOTE 7 – EQUITY
Preferred stock:
The Company authorized the issuance of up to 18,242,700 shares of Series A convertible preferred stock in January 2014, of which 18,242,687 shares were issued on January 22, 2014. As of March 1, 2014, the holders of 13,357,828 Series A preferred shares chose to convert their Series A preferred stock into shares of the Company’s common stock at a ratio of one to one. These Series A preferred shares were then subsequently cancelled. As of September 30, 2014, 4,884,859 Series A convertible preferred shares remain issued and outstanding.
Each share of Series A convertible preferred is entitled to 25 votes and is convertible into shares of common stock on a one-for-one basis. Other rights of the Series A convertible preferred are identical to the common stock rights.
Common stock:
The Company’s issued 3,474,333 common shares of stock at $0.30 per share for proceeds of $1,042,300 between March and September 30, 2014.
The Company issued 1,306,666 common shares at $0.30 per share for proceeds of $392,000 during the three months ended September 30, 2014.
In connection with services provided to the Company, the Company issued 30,000 common shares valued at $15,000 ($0.50 per share) during the nine months ended September 30, 2014. In addition, for services provided to the Company, the Company issued 21,678 common shares valued at $6,503 ($0.30 per share) during the three and nine months ended September 30, 2014.
Stock options:
Effective November 13, 2012, the Company adopted the 2012 Stock Option Plan (the “Plan”). Under the Plan, the Company may grant stock options, restricted and other equity awards to any employee, consultant, independent contractor, director or officer of the Company. A total of 3 million shares of common stock may be issued under the Plan (as amended on January 22, 2014).
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
Stock options (continued):
In 2012, the Company granted stock options to the Company’s CEO to purchase an aggregate of 660,368 shares of common stock. The Company’s CEO was granted a five-year term option to acquire 660,368 shares of Company common stock at approximately $0.015 per share with 66,035 options vesting immediately and the remaining options vesting upon the achievement of the performance objectives determined by management, as defined. During the three months ended March 31, 2013, the CEO exercised the vested options for $995. In March 2013, the board of directors modified the stock option agreement, revising the vesting conditions of the agreement from performance objectives to a service condition. Under the revised agreement, 264,149 options were to vest in March 2014, and the remaining 330,184 shares vest in March 2015. The Company valued the modified options at the modification date. Based on the Black Scholes option pricing model, the fair value of the modified share option is $1.44 per option. In June 2013, the Company’s CEO resigned his position. In connection with his resignation, the Company agreed to accelerate the vesting of a portion of his options for 264,149 shares from March 2014 to June 2013. The Company valued the modified options at the modification date which resulted in approximately $198,000 of stock option expense recorded during the nine months ended September 30, 2013. The CEO exercised these options in a cashless exercise, and the stock certificate was held by the Company per a lock-up provision until March 2014, at which time the certificate was released by the Company.
In March 2013, the Company granted certain members of the Denver-based restaurant management team stock options to purchase an aggregate of 90,000 shares of common stock. These options were granted with a five-year term exercisable at approximately $1.50 per share with 45,000 options vesting immediately and the remaining shares to vest one year later in March 2014. With the departure of two of these four employees in 2013, 40,000 stock options were forfeited and 50,000 stock options remained outstanding and vested as of March 31, 2014. None of these options were exercised by September 30, 2014.
In March 2014, the Company granted the COO options to purchase up to 300,000 shares of common stock of the Company, vesting in equal shares annually over four years, with the first tranche vested fully by March 1, 2015, with an exercise price of $0.50 per share with a five-year term. In addition, this person holds options for 18,243 common shares to vest evenly over two years with the first tranche vested fully by September 30, 2014, with an exercise price of $0.14 with a five-year term. In addition, this person holds options to purchase up to 30,000 shares of common stock vesting in equal parts annually over three years with the first tranche vested fully by February 5, 2015, with an exercise price of $0.45 with a five-year term.
In January 2014, the Company granted the Chairman of the Board options to purchase up to 729,707 shares of common stock of the Company vesting evenly over four years with the first tranche vested fully by January 9, 2015, with an exercise price of $0.0685 with a five-year term.
In February and March 2014, the Company granted certain members of the Denver-based restaurant management team, Colorado Springs-based restaurant management team and the corporate staff stock options to purchase an aggregate of 210,000 shares of common stock. These options were granted with a five-year term exercisable at ranges of approximately $0.45 to $0.55 per share with options vesting evenly in tranches over three to four years with the first tranche vesting fully in February 2015. Four persons from this management team with the granted options have since terminated with their options forfeited. In September 2014, 91,214 options were exercised by a member of the corporate staff for 91,214 common shares at an exercise price of $0.000274 per share. In May and June 2014, the Company granted certain members of the Denver-based restaurant staff and the Colorado Springs-based restaurant staff options to purchase an aggregate of 27,000 shares of common stock. These options were granted with a five-year term exercisable at ranges of approximately $0.50 to $0.70 per share with options vesting in one year from the issuance date. In July and August 2014, the Company granted certain members of the Denver-based restaurant staff and the Colorado Springs-based restaurant staff options to purchase an aggregate of 17,000 shares of common stock. These options were granted with a five-year term exercisable at ranges of approximately $0.40 to $0.46 per share with options vesting in one year from the issuance date. In August 2014, the Company granted a certain member of the Colorado Springs based restaurant management team options to purchase 50,000 shares of common stock. There options were granted with a five-year term exercisable at $0.45 per share with shares vesting over the next two years.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
Stock options (continued):
In March 2014, the Company appointed certain officers and directors of the Company. At the same time, the CEO announced his resignation to be effective June 1, 2014. In connection with these changes, options were granted to two directors for 100,000 common shares each with a one year vesting term and an exercise price of $0.51 per share. The CEO’s options had also been amended to have 304,854 shares of common stock to vest evenly over a three year vesting period with the first tranche to vest in August 2014 at an exercise price of approximately $0.000274 per share. This person exercised a vested portion of these options for 101,618 common shares in October 2014 at $0.000274 per share.
In August 2014, the Company granted the President of the Company options to purchase up to 300,000 shares of common stock of the Company vesting evenly over three years with the first tranche vesting immediately, with an exercise price of $0.45 per share with a five-year term.
In May 2014, the Company appointed an additional director of the Company. In connection with the appointment, options were granted to the director for 100,000 common shares with a one-year vesting term and an exercise price of $0.65 per share. In July 2014, the Company granted additional options to a director of the Company. Options were granted to this director for 150,000 options that vested immediately with an exercise price of $0.40 per share.
The stock-based compensation cost related to options that have been included as a charge to general and administrative expense in the statements of operations was approximately $118,900 and $227,600 for the three and nine months ended September 30, 2014, respectively, and $5,900 and $257,600 for the three and nine months ended September 30, 2013, respectively. As of September 30, 2014, there was approximately $431,100 of unrecognized compensation cost related to non-vested stock options. The cost is expected to be recognized over a weighted-average period of less than five years.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The weighted-average fair value of options granted during the nine months ended September 30, 2014 and 2013 was $0.57 and $0.96 per share. The assumptions utilized to determine the fair value of options granted during the nine months ended September 30, 2014 and 2013, are as follows:
| | 2014 | | | 2013 | |
| Risk free interest rate | | | 0.79 | % | | | 0.79 | % |
| Expected volatility | | | 105 | % | | | 105 | % |
| Expected term | | 5 years | | | 2-5 years | |
| Expected dividend yield | | | 0 | | | | 0 | |
The expected term of stock options represents the period of time that the stock options granted are expected to be outstanding. The expected volatility is based on the historical price volatility of the common stock of similar companies. The risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend yield represents the anticipated cash dividend over the expected term of the stock options.
On January 22, 2014, in connection with the BB transaction, all BBHCLLC options were assumed applying a conversion rate of 1.82427, resulting in a total of 879,164 options granted.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
Stock options (continued):
The following tables set forth the activity in the Company's Plan for the nine months ended September 30, 2014:
| | | | | | | | | Weighted | | | | |
| | | | | | Weighted | | | average | | | | |
| | | Shares | | | average | | | remaining | | | Aggregate | |
| | | under | | | exercise | | | contractual | | | intrinsic | |
| | | option | | | price | | | life | | | value | |
| Outstanding at January 1, 2014 | | | 50,000 | | | $ | 1.50 | | | | | | $ | - | |
| Granted | | | 2,992,871 | | | | 0.26 | | | | - | | | | - | |
| Exercised | | | (91,214 | ) | | | * | | | | - | | | | - | |
| Forfeited/cancelled | | | (233,000 | ) | | | 0.32 | | | | - | | | | - | |
| Outstanding at September 30, 2014 | | | 2,718,657 | | | | 0.29 | | | | 4.20 | | | $ | 647,666 | |
| Exercisable at September 30, 2014 | | | 401,617 | | | $ | 0.67 | | | | 3.67 | | | $ | 59,339 | |
| * less than $0.01 | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s common stock on September 30, 2014, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they exercised their options on September 30, 2014.
The following table summarizes the activity and value of non-vested options as of and for the nine months ended September 30, 2014:
| | | | Weighted | |
| | | | average | |
| | Number of | | grant date | |
| | options | | fair value | |
| Non-vested options outstanding at January 1, 2014 | | | 25,000 | | | $ | 0.96 | |
| Granted | | | 2,992,871 | | | | 0.17 | |
| Vested | | | (467,831 | ) | | | 0.52 | |
| Forfeited/cancelled | | | (233,000 | ) | | | 0.34 | |
| Non-vested options outstanding at September 30, 2014 | | | 2,317,040 | | | $ | 0.09 | |
Warrants:
In December 2012, the Company entered into an indemnification agreement with JW Roth and Gary Tedder, both directors of the Company, for their personal risk regarding personal guarantees in favor of the Franchisor, which were the subject of an Area Development Agreement between the Franchisor and SH. The personal guarantees are still in effect for the royalty payments due to the Franchisor. In addition to the indemnification agreements, the Company compensated Messrs. Roth and Tedder for their personal guarantees in the form of a warrant to purchase up to 200,000 shares, per director, exercisable for ten years at $1.00 per share with the warrant vested immediately with a cashless exercise feature. The Company used the contractual term of the warrant, a risk free interest rate of 0.62% and a volatility of 105%. There are no unrecognized expenses related to the warrants.
As of December 31, 2013, the Company had a promissory note with an aggregate face amount of $200,000 outstanding. By the original terms, the holder of the note received additional consideration in the form of an immediately vested stock warrant of 50,000 common shares at an exercise price of $0.50 per share exercisable for the three years from the date of execution of the note. The Company used the Black Scholes pricing model to determine the fair value of the warrants. The Company used the contractual term of the warrant, a risk free interest rate of 0.39% and a volatility of 105%. A relative fair value of approximately $44,000 was calculated based on the fair value of the warrant and note payable.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 7 – EQUITY (CONTINUED)
Warrants (continued):
On September 1, 2013, BBHCLLC retained an individual to advertise and promote the Company. This individual was granted an aggregate of 600,000 Class B non-voting warrants that vested immediately. These warrants were granted with a three-year term exercisable at approximately $0.0005 per unit. These units converted into 1,094,562 warrants for common shares at the date of the BB Transaction. The Company used the contractual term of the warrant, a risk free interest rate of 0.79% and a volatility of 105%. Approximately $25,000 and $99,900 has been recognized as equity-based compensation for the three and nine months ended September 30, 2014. Approximately $25,000 was expensed by September 30, 2014. This individual exercised these warrants in September 2014 for 1,094,562 common shares.
In May 2014, in connection with services provided to the Company, the Company issued a warrant for 30,000 common shares to exercise at $0.30 per share cancellable by the Company at any time. The Company used the contractual term of the warrant, a risk-free interest rate of 0.39% and a volatility of 105% with a value of $12,247. In September 2014, in connection with appointments to the Board of Directors, the Company issued warrants for 200,000 common shares to exercise at $0.30 per share. The warrants vest on September 15, 2015, a risk-free interest rate of 0.79% and a volatility of 105% with values of $34,473.
NOTE 8 – RELATED PARTY TRANSACTIONS
Related Party Management Agreement with AMHC Managed Services
Effective September 1, 2011, the Company entered into a management agreement (the “Management Agreement”) with AMHC Managed Services, Inc. (“AMMS”), a subsidiary of AMAC. The Company’s Chairman of the Board of Directors and officers of the Company are also officers/board members of AMAC. The significant terms of the Management Agreement provide for monthly payments to AMMS in exchange for the ability of the Company to fully utilize the management expertise, financial and accounting expertise, support staff and location of AMMS, including the expertise of the position of AMMS’ Chief Financial Officer and necessary support for compliance under the securities laws with respect to any private or public reports or registration statements the Company may file. The Management Agreement term was 12 months, and required the Company to pay AMMS a monthly fee equal to $35,000 per month. Additionally, under the Management Agreement, the Company granted AMMS a warrant to purchase 330,184 shares of Company’s common stock exercisable at $0.0007 per share, exercisable for a three-year term. The value of the warrant was determined to be approximately $49,700. The amount was recorded as a prepaid asset and was amortized over the one-year term of the Management Agreement as services are performed. AMMS exercised the warrant in full in July 2012.
The Management Agreement was renewed in October 2012 for an additional one-year period with terms similar to those of the 2011 Management Agreement. In connection with the renewed Management Agreement, the Company issued an additional warrant in October 2012 to AMMS to purchase 330,184 shares of the Company’s common stock at $0.0007 per share for a three-year term. The value of the warrant was determined to be approximately $49,700. The amount was recorded as a prepaid asset and is being amortized over the one-year term of the Management Agreement as services are performed, of which approximately $39,400 and $10,300 was expensed in the years ended December 31, 2013 and 2012. AMMS exercised the warrant in full in October 2012. On May 17, 2013, the Company amended its terms with AMMS so that AMMS would no longer be the “Acting CFO” nor provide senior financial management services for the Company effective the same date. Further, on June 26, 2013, the Company notified AMMS that it would terminate the Management Agreement effective July 31, 2013. These functions were handled by the interim CEO and interim CFO for the remainder of 2013.
BOURBON BROTHERS HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 8 – RELATED PARTY TRANSACTIONS (CONTINUED
Related Party Management Agreement with AMHC Managed Services (continued)
The Company also paid rent and rent-related expenses to Accredited Members Acquisition Corporation (“AMAC”), a related party, on a month-to-month basis for office space at the AMAC corporate headquarters in Colorado Springs, Colorado. This arrangement began in October 2011 and terminated July 31, 2013, as the Management Service Agreement terminated. Base rental payments were approximately $3,500 per month. Related party rent expense was approximately nil for the three and nine months ended September 30, 2014 and $14,300 and $28,600 for the three and nine months ended September 30, 2013.
In addition to the management fee and the rent discussed above, the Company paid AMMS for reimbursable expenses and payments made to third parties on behalf of the Company. During the three and nine months ended September 30, 2014, the Company paid reimbursable expenses of nil with $16,300 and $40,000 paid for the three and nine months ended September 30, 2013, respectively.
In July 2013, the Company repurchased 33,334 common shares owned by AMMS for $1.50 per share for a total price of $50,000. These shares were cancelled by the Company in July 2013. The difference between the $1.50 per share and the fair value of the shares at the transaction date of $0.75 per share ($25,000) was recorded as an expense to related party management fees.
Item 2. 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 three and nine months ended September 30, 2014 and 2013; |
| · | 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.
Overview
Bourbon Brothers Holding Corporation (“BBHC” or the “Company”) is a Colorado corporation. The Company, on January 22, 2014, with approval of a majority of the Company’s shareholders, changed its name from Smokin Concepts Development Corporation to Bourbon Brothers Holding Corporation.
The Company’s subsidiary, Southern Hospitality Franchisee Holding Corporation (“SH”) entered into a franchise agreement and area development agreement with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor”) in November 2011. In May 2012, SH formed Southern Hospitality Denver Holdings, LLC (“SHDH”), a wholly-owned subsidiary, and Southern Hospitality Denver, LLC (“SHD”). SHD was formed for the purpose of owning and operating the Company’s first franchised restaurant in Denver, Colorado. As of December 31, 2013, SHD is 51% owned by SHDH and 49% owned by non-controlling interest holders, of which related parties of the Company are 22% non-controlling interest holders.
On September 30, 2013, the Company entered into an Acquisition Agreement with Bourbon Brothers Holding Company, LLC (“BBHCLLC”) to acquire all of the equity interests in BBHCLLC (the “BB Transaction”) and its subsidiaries. BBHCLLC is a Colorado limited liability company (“LLC”) formed in May 2013, for the purpose of developing and managing all aspects of operating units related to a recently developed “Bourbon Brothers” brand. The principles of BBHCLLC were also, at various times, on the board of directors of the Company, and therefore BBHCLLC is considered to be a related party. As of December 31, 2013, BBHCLLC was a development stage company. BBHCLLC’s subsidiaries (all LLCs formed in April 2013) include Bourbon Brothers Restaurant Group, LLC (“BBRG”), Bourbon Brothers Franchise, LLC (“BBF”) and Bourbon Brothers Brand, LLC (“BBB”). BBRG owns the stores to encompass several Bourbon Brothers brands, and owns Bourbon Brothers Southern Kitchen Colorado Springs, LLC (“BBSK”), which opened its first restaurant in January 2014. BBRG also owns Bourbon Brothers Seafood and Chophouse Colorado Springs, LLC (“BBSF”). BBB manages all aspects of the Bourbon Brothers brand and anticipates establishing licensing and royalty agreements with producers of bourbon, spices, cigars and other products that fit the Company’s core brand.
On January 22, 2014, the parties entered into a Second Amendment to the Acquisition Agreement, identifying the final conversion ratio of 1.82427. The Second Amendment identified the number of shares to be issued by the Company in the BB Transaction as 20,274,193 shares of common stock to BBHCLLC Class B Non-Voting members and 18,242,687 shares of Series A Convertible Preferred Stock to BBHCLLC Class A Voting members. These shares were issued at the closing of the BB Transaction. All outstanding options and warrants to acquire BBHCLLC units were assumed by the Company, applying the conversion ratio to the number of units and strike price.
On July 15, 2014, the Company announced that a third restaurant concept was approved by the Board of Directors. The third concept being added to the Bourbon Brothers collection is 53 Peaks Local Kitchen, a Colorado-themed, casual-dining restaurant with a mission to serve many locally sourced products. The lease for the Lone Tree, Colorado 53 Peaks location was signed in July 2014, and plans to start the remodel of the existing building are underway. 53 Peaks is expected to open its doors to the public in the first quarter of 2015.
Results of Operations – Three and Nine Months Ended September 30, 2014 and 2013
Revenues
During the three and nine months ended September 30, 2014, the Company generated approximately $1,408,800 and $3,953,800 in net revenue as the Company opened its first restaurant in Denver, Colorado, on February 21, 2013, followed by its second restaurant located in Colorado Springs, Colorado, on January 27, 2014. These revenue figures compare to the three and nine months ended September 30, 2013 of revenues of approximately $596,800 and $1,553,000 when the Company’s first restaurant in Denver, Colorado, opened on February 21, 2013.
Cost of Revenue – Restaurant Operating Expenses
For the three and nine months ended September 30, 2014 and 2013, the Company’s cost of revenue was approximately $1,458,800, and $4,200,000 for the three and nine months ended September 30, 2014, and $611,200 and $1,713,300 for the three and nine months ended September 30, 2013. The cost of revenue was attributable to the two restaurants, including the cost of food, alcohol, labor and other costs of the restaurant.
Cost of revenue, comprised of operating expenses at the SH Denver and BBSK Colorado Springs restaurants, includes variable expenses and fluctuates with sales volumes for expenses such as food and beverage costs, payroll and franchise fees. Fixed expenses, such as lease expenses at both restaurant locations, are also included.
Operating Expenses – General and Administrative, Related Party Management Services and Selling and Marketing
For the three and nine months ended September 30, 2014, the Company’s operating expenses were approximately $2,183,600 and $6,724,000 compared to $1,184,800 and $3,630,000 for the same periods a year ago. The operating expenses in 2014 and 2013 were primarily related to expenses for preopening and ongoing operations. The Company’s largest operating expense, excluding restaurant operating expenses, during the three and nine months ended September 30, 2014 and 2013, were its general and administrative expenses totaling approximately $503,200, $1,806,100, $134,700 and $1,121,700. The increase in general and administrative costs is due to preopening and ongoing expenses for three restaurant locations primarily, including recurring corporate costs (such as payroll and related expenses). General and administrative expenses for the three and nine months ended September 30, 2014 and 2013, also included approximately $118,900 and $227,600 for the three and nine months ended September 30, 2014, and $5,900 and $257,600 for the three and nine months ended September 30, 2013, of (non-cash) stock-based compensation. Additionally, the Company incurred approximately $110,600, $395,400, $200 and $19,000 in selling and marketing expenses during the three and nine months ended September 30, 2014 and 2013. The Company expects to incur general and administrative expenses going forward as it continues to grow its operations. The Company anticipates that its consolidated net loss will continue for the foreseeable future due to the overall expansion of the store locations and its subsidiaries and parent company overhead.
Depreciation and Amortization
For the three and nine months ended September 30, 2014 and 2013, the Company’s depreciation and amortization was approximately $111,000, $322,500, $74,200 and $176,500. Depreciation on fixed assets and amortization of the intangible asset for franchise fees began in February 2013 with the opening of the SH Denver restaurant.
Other income (expense)
For the three and nine months ended September 30, 2014 and 2013, the Company recognized other expense of approximately $37,800, $90,700, $25,200 and $485,600. The decrease in interest expense comparing nine months year over year was primarily due to the decrease in the amount of promissory notes in 2014 compared to 2013 in regards to recognition of interest expense over the nine months from the discount on the promissory notes being converted to common stock.
Liquidity and Capital Resources
As of September 30, 2014, the Company had working capital deficiency of approximately $383,900 and had approximately $84,000 of cash, which represents a $70,400 increase in cash from December 31, 2013. The Company’s total assets increased as of September 30, 2014, when compared to December 31, 2013, due to the acquisition with BBHCLLC and BBSK’s fixed asset additions.
As noted above, the Company incurred a net loss during the three and nine months ended September 30, 2014, and 2013. Further, as of September 30, 2014, the Company had an accumulated deficit of approximately $7,884,300. The Company believes its Denver restaurant revenues (which began in February 2013) and its Colorado Springs restaurant revenues (which began in January 2014) which both are 51% owned by the Company, offset by the overhead of the public company administration, coupled with the high cost of build out required for each restaurant under the Company, requires the Company 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. 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. The Company’s continued implementation of its business plan is dependent on its future profitability and on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all. The Company believes the individual store performances reflect an ongoing effort to curb costs within food and labor, while also pursuing marketing activities to increase revenues during the fourth quarter of 2014.
The Company’s consolidated financial statements for the three and nine months ended September 30, 2014, 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 Report of our Independent Registered Public Accounting Firm on the Company’s consolidated financial statements as of and for the year ended December 31, 2013, includes a “going concern” explanatory paragraph which means that the auditors stated that conditions exist that raise doubt about the Company’s ability to continue as a going concern.
Liabilities
The Company’s liabilities for notes payable and accrued interest as of September 30, 2014, is approximately $1,031,540 compared to approximately $1,009,300 as of December 31, 2013. Accounts payable as of September 30, 2014, is approximately $144,700 compared to approximately $81,000 as of December 31, 2013. This increase is due to the acquisition of BBHC and its subsidiaries, and the issuance of additional debt.
Operating Activities
Net cash used in operating activities was approximately $1,928,200 in the nine months ended September 30, 2014, as compared to net cash used in operating activities of approximately $1,601,500 in the same period of 2013. The increase in net cash used in operating activities in 2014 (compared to 2013) was primarily due to the expansion of the business, as compared to the 2013 period.
Investing Activities
Net cash provided by investing activities in the nine months ended September 30, 2014, was approximately $566,000, as compared to net cash used in investing activities of approximately $1,223,100 for the nine months ended September 30, 2013. Net cash provided by investing activities for the nine months ended September 30, 2014, was primarily the result of cash acquired in the BB Transaction offset by cash used for purchases of property and equipment while cash used in investing activities for the nine months ended September 30, 2013, was primarily the result of cash used for purchases of property and equipment.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2014, was $1,432,600, compared to approximately $1,905,500 in the nine months ended September 30, 2013. Cash provided by financing activities in 2014 and 2013 was primarily due from the sale of common stock while also issuing promissory notes.
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.
Contractual Cash Obligations
In April 2012, the Company entered into a lease that expires in August 2022, with the option to extend for two, five year periods, and requires lease payments of approximately $15,550 per month for the first year, escalating up to approximately $20,289 per month in the tenth year.
In January 2014, the Company entered into a 78 month lease with an unrelated party for its corporate office. The Company will pay approximately $5,800 per month escalating up to $6,000 per month in year 6. |
In January 2014, the Company entered into a 120 month lease with a related party for its Colorado Springs-based restaurant. The Company will pay $32,083 per month escalating by approximately 10% every 60 months. In July 2014, the Company entered into a ten-year, non-cancellable lease for the restaurant in Lone Tree, Colorado. The lease provides for an initial lease term of ten years for two, five-year renewal options. Rent payments are approximately $9,900 per month plus certain common area maintenance charges, and are subject to escalation provisions. This location is anticipated to open late Fall of 2014. |
Critical Accounting Policies
The preparation of 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 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-Q. Our critical accounting policies are outlined below.
Fair Value Measurements
The carrying value of cash and non-related party payables approximates fair value due to their short maturities. The carrying value of non-related party notes payable approximates fair value based on effective interest rates estimated to approximate market. The carrying amount of payables to related parties are not practicable to estimate based on the related party nature of the underlying transactions.
Intangible assets
Intangible assets at September 30, 2014, represent franchise license costs for the Denver restaurant. These costs are amortized beginning with the restaurant opening 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
The Company began capitalizing certain leasehold improvements, as well as equipment the Company purchased in 2013 and 2014 and began depreciating the assets when the Denver-based restaurant opened in February 2013 and when the Colorado Springs-based restaurant opened in January 2014. 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 intends to lease substantially all of its restaurant properties, and in April 2012, the Company entered into a ten-year lease for its planned restaurant in Denver, Colorado. 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.
Revenue Recognition
The Company began revenue generating activities through the Denver restaurant as of February 21, 2013. The Company began accounting for such revenue activities 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 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.
Recently issued and adopted accounting pronouncements
The Company reviews new accounting standards as issued. In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition in Revenue Recognition (Topic 05), 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. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early adoption no permitted. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption. Management has not identified any other standards that it believes will have a significant impact on the Company’s consolidated financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”), as of September 30, 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 and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that because of the material weaknesses in our internal control over financial reporting, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, that our disclosure controls and procedures were not effective as of September 30, 2014. 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 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’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 1934 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.
Internal Control Over Financial Reporting.
During the most recent fiscal quarter covered by this Quarterly Report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2014, the Company granted options to a director for 150,000 common shares each which immediately vested with an exercise price of $0.40. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
In August 2014, the Company granted options to the Company’s President for 300,000 common shares each with a three year vesting term and an exercise price of $0.45. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
In July and August 2014, the Company granted certain members of the Denver-based restaurant staff and the Colorado Springs-based restaurant staff options to purchase an aggregate of 17,000 shares of common stock. These options were granted with a five-year term exercisable at ranges approximately $0.40 to $0.46 per share with options vesting in one year from the issuance date. None of these options were vested by September 30, 2014. In addition, a member of the Colorado Springs-based restaurant staff was granted options to purchase an aggregate of 50,000 shares of common stock with a five-year term exercisable at $0.45 per shares with options vesting evenly over the next two years. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
In September 2014, in connection with appointments to the Board of Directors, the Company issued warrants for 200,000 common shares to exercise at $0.30 per share. The warrants vest on September 15, 2015, a risk-free interest rate of 0.79% and a volatility of 105% with values of $34,473. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
Share Issuances
In connection with services provided to the Company in August 2014, the Company issued 21,678 common shares valued at $6,504 during the nine months ended September 30, 2014. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act. No commissions or other remuneration were paid in connection with these share issuances.
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 to accredited investors. 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 $300,000 of notes from August 2014 through September 2014. 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. These securities were issued in reliance on the exemptions from registration under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated under the Securities Act. A Form D was filed with the SEC on August 13, 2014 for this offer and sale of securities.
In August 2014, there were 91,214 options were exercised by an officer for 91,214 common shares at an exercise price of $0.000274 per share. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
In September 2014, an individual holding warrants for 1,094,562 of common shares, exercised these warrants in September 2014 for 1,094,562 common shares. These securities were issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
Exhibit Number | Description |
| | |
| 3.1.1 | Amended and Restated Articles of Incorporation effective May 3, 2013.(1) |
| 3.1.2 | Amendment to Articles of Incorporation dated January 22, 2014.(2) |
| 3.2 | Bylaws, as amended May 1, 2013.(1) |
| 10.1 | Lease Agreement by and between Bourbon Brothers Holding Company, LLC and Stradivarius Highlands, LLC, dated July 9, 2014. Filed herewith. |
| 10.2 | First Amendment to the Lease Agreement by and between Bourbon Brothers Holding Company, LLC and Stradivarius Highlands, LLC, dated September 17, 2014. Filed herewith. |
| 10.3 | Guaranty of Lease by and between Bourbon Brothers Holding Company, LLC and Stradivarius Highlands, LLC, dated September 17, 2014. 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 | 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. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| | |
| (1) | Incorporated by reference from the Company’s Current Report on Form 8-K dated April 30, 2013, and filed on May 3, 2013. |
| (2) | Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and filed on March 19, 2014. |
In accordance with the requirements of Section 13 or 15(d) Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
| | BOURBON BROTHERS HOLDING CORPORATION | |
| | | | |
| Date: October 31, 2014 | By: | /s/ Mitchell Roth | |
| | | Mitchell Roth, President | |
| | | | |
| Date: October 31, 2014 | By: | /s/ Heather Atkinson | |
| | | Heather Atkinson, CFO | |
