The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
PREFERRED RESTAURANT BRANDS, INC. AND SUBSIDIARIES (FORMERLY DIXIE FOODS INTERNATIONAL, INC.)
Notes to Consolidated Financial Statements
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS
Preferred Restaurant Brands, Inc. (the “Company”; OTCQB:”PRBI”) was formed in May 2010 as Dixie Foods, International, Inc. to operate a specialty food business for salad dressing, sauces and condiments. The Company was organized and still operates under the laws of the State of Florida. In November, 2014, the Company changed its name to “Preferred Restaurant Brands” and recently effected that change with FINRA, the SEC and other regulatory authorities. The fiscal year end for the Company and all of its subsidiaries is August 31. The Company has aggregated its operations into one reportable segment.
On June 4, 2014, the Company completed the purchase (the “Reverse Acquisition”) of KCI Investments, LLC (“KCI”), a Nevada limited liability company headquartered in Las Vegas, Nevada. In connection with the Reverse Acquisition, the Company acquired 100% of the issued and outstanding membership interests of KCI from KCI Holding I, LLC ("KCI Holding"), and an entity that, until the consummation of the Reverse Acquisition, held 100% of the membership interests in KCI. Currently, all of the operations of the Company are conducted under KCI or one of KCI's subsidiaries.
KCI was formed on November 8, 2004, but did not engage in any business operations until November 2010. Currently, KCI is engaged in developing, owning and operating a multi-brand chain of restaurants, currently under two franchise brands: Capriotti’s Sandwich Shops and Papa John’s. KCI also operates and is developing various other restaurant concepts. KCI and its various subsidiaries, currently operate 17 restaurants:
| · | 9 franchised Capriotti's Sandwich Shops: |
| | |
| · | six franchised Papa John’s pizza restaurants (four of which it opened in late calendar 2014 and two of which it acquired in February 2014, and |
| | |
| · | two proprietary, fine casual restaurants: Elements Kitchen & Martini Bar and Social Bistro & Wine Bar. |
Additionally, the Company has in various stages of development and construction eight Papa John’s all of which it anticipates opening over the next 12 months subject to access to additional capital.
NOTE 2—GOING CONCERN
These financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of May 31, 2015, the Company has a working capital deficit of $14,894,867 and an accumulated deficit of $33,377,404. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to: identify future investment opportunities and obtain the necessary debt or equity financing and generate profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining debt and/or equity capital from existing and/or new investors and/or creditors sufficient to meet its ongoing operating expenses, pending transactions and growth plans. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at November 30, 2014 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's August 31, 2014 audited financial statements. The results of operations for the periods ended May 31, 2015 and 2014 are not necessarily indicative of the operating results for the full years.
Use of Estimates
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consists of receivables from undeposited funds from the Company’s credit card processor, third party gift card distributors, payroll-related tax receivables, vendor rebates and receivables arising from the normal course of business from catering sales. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable based on a specific review of account balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.
Inventory
Inventory (consisting principally of food, beverages and supplies), is valued at the lower of first-in, first-out cost or market. Certain key ingredients bread, meats, vegetables, cheeses and beverages are purchased from a small number of suppliers.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes ("Topic 740"), which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recognized to reduce the net deferred tax asset to an amount that is more likely than not to be realized.
Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company's financial statements. Topic 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.
At the adoption date of November 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate if recognized. The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision for income taxes. As of May 31, 2015 and August 31, 2014 the Company had no accrued interest or penalties related to uncertain tax positions. The Company files an income tax return in the U.S. federal jurisdiction and the state of California. With few exceptions, the Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years before 2008.
Basic and Diluted Loss per Common Share
Basic loss per common share is calculated by dividing the Company’s net loss applicable to shareholders by the weighted average number of shares during the period. Diluted loss per share is calculated by dividing the Company’s net loss available to shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is adjusted for any potentially dilutive debt or equity. There were 5,448,276 such shares outstanding as of May 31, 2015, which were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.
New Accounting Pronouncements
The Company’s management has considered all recent accounting pronouncements. Management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
NOTE 4—PROPERTY AND EQUIPMENT
As of May 31, 2015 and August 31, 2014 the Company’s property and equipment consisted of the following:
| | | May 31, 2015 | | | August 31, 2014 |
| Building and leasehold improvements | | $ | 3,428,387 | | | $ | 3,161,646 | |
| Machinery and equipment | | | 1,057,787 | | | | 1,022,299 | |
| Furniture and fixtures | | | 1,253,461 | | | | 358,390 | |
| Less: Accumulated depreciation | | | (1,709,796 | ) | | | (1,123,52 | ) |
| Property and equipment, net | | $ | 4,029,839 | | | $ | 3,418,743 | |
Depreciation expense included as a charge to income (including restaurant-related depreciation) recorded in “Other operating costs” was $620,449 and $440,139 for the nine months ended May 31, 2015 and 2014, respectively.
NOTE 5—ASSET SALES AND PURCHASES
Purchases
On February 18, 2015, the Company consummated the acquisition of two, franchised Papa John's locations in the Company's existing trade area in Northern California: one in Fresno and the other in Clovis. In total the Company paid the seller $320,000 in cash.
The total purchase price was allocated as follows:
| Consideration paid: | | | |
| Cash paid | | $ | 320,000 | |
| Total purchase price | | $ | 320,000 | |
| | | | | |
| Consideration received: | | | | |
| Property and equipment - Fresno | | $ | 35,000 | |
| Property and equipment - Clovis | | | 35,000 | |
| Territory and franchise rights – Fresno | | | 75,000 | |
| Territory and franchise rights – Clovis | | | 75,000 | |
| Leasehold Improvements - Fresno | | | 25,000 | |
| Leasehold Improvements - Clovis | | | 25,000 | |
| Covenant not to compete - Fresno | | | 25,000 | |
| Covenant not to compete - Clovis | | | 25,000 | |
| Total assets acquired | | $ | 320,000 | |
Sale
On February 19, 2015, the Company consummated the sale of its Green Valley Ranch Capriotti’s Sandwich Shop (“GVR”) to another franchisee of Capriotti’s Sandwich Shops. Pursuant to the asset purchase agreement, the purchase price of the assets consisted of a one-time payment of $25,000 in cash.
The total sale price was allocated as follows:
| Sale Consideration | | $ | 25,000 | |
| | | | | |
| Allocation Of Sale Consideration | | | | |
| Transaction-Related Expenses | | $ | 691 | |
| GVR-Related Payables | | | 21,081 | |
| Receivable For Net Cash Proceeds to Company | | | 3,228 | |
| Total | | $ | 25,000 | |
NOTE 6—INTANGIBLE ASSETS
Intangible assets represent capitalized prepaid territory rights and franchise fees paid. The costs are amortized over the remaining life of the contract executed with the franchisor.
As of May 31, 2015 and August 31, 2014 the Company’s territory and franchise rights consisted of the following:
| | | May 31, 2015 | | | August 31, 2014 | |
| Territory and franchise rights | | $ | 1,965,297 | | | $ | 1,926,194 | |
| Less: Accumulated amortization | | | (1,283,311 | ) | | | (1,028,348 | ) |
| Territory and franchise rights, net | | $ | 681,986 | | | $ | 897,846 | |
Amortization expense on intangible assets included as a charge to income was $254,963 and $286,588 for the nine months ended May 31, 2015 and 2014, respectively.
Estimated amortization expense to be recorded for the next five years is as follows:
| 2015 (remaining) | | $ | 214,937 | |
| 2016 | | | 112,929 | |
| 2017 | | | 110,108 | |
| 2018 | | | 110,108 | |
| 2019 | | | 110,108 | |
| Thereafter | | | 23,796 | |
| Total future amortization | | $ | 681,986 | |
NOTE 7—RELATED PARTY TRANSACTIONS
As of August 31, 2014, the Company owed $-0- to related parties. During the nine month period ended May 31, 2015, related parties made cash loans of $2,382,906 and paid for Company expenses of $89,407. The Company made cash repayments of $1,107,027, leaving an ending balance due of $1,365,287 due to related parties at May 31, 2015. All related party loans bear no interest, are unsecured and are due on demand.
The Company’s CEO, Kenneth Antos, has personally guaranteed virtually all the outstanding obligations due by the Company. This includes: virtually all of the outstanding notes payables on all loans; leases with the various landlords, and all of the Company's obligations to franchisors.
NOTE 8—DEBT
As of May 31, 2015 and August 31, 2014 the Company’s notes payable consisted of the following:
| | | May 31, | | | August 31, | |
| | | 2015 | | | 2014 | |
| Note payable bearing interest at 13.5% per annum, originated June 22, 2012, original maturity date of June 22, 2013. This note bears a default interest rate of 18.5%*. | | $ | 2,950,000 | | | $ | 2,700,000 | |
| | | | | | | | | |
Note payable bearing interest at 12.0% per annum, originated December 27, 2012, original maturity date of December 27, 2013. This note is in default and currently bears a default interest rate of 17.0% plus late fees1. | | | 1,000,000 | | | | 1,000,000 | |
| | | | | | | | | |
| Note payable bearing interest at 12.0% per annum, originated February 1, 2013, original maturity date of August 1, 2014. This note is in default and currently bears a default interest rate of 17.0% plus late fees¹. | | | 550,000 | | | | 550,000 | |
| | | | | | | | | |
| Note payable bearing interest at 12.0% per annum, originated February 1, 2013, original maturity date of August 1, 2014. This note is in default and currently bears a default interest rate of 17.0% plus late fees¹. | | | 650,000 | | | | 650,000 | |
| | | | | | | | | |
| Note payable bearing interest at 12.0% per annum, originated February 1, 2013, original maturity date of August 1, 2014. This note is in default and currently bears a default interest rate of 17.0% plus late fees¹. | | | 800,000 | | | | 800,000 | |
| | | | | | | | | |
| Note payable bearing interest at 12.0% per annum, originated October 30, 2013, original maturity date of November 30, 2013. This note is in default and currently bears a default interest rate of 17.0% plus late fees¹. | | | 99,166 | | | | 99,166 | |
| | | | | | | | | |
| Note payable bearing interest at 13.3% per annum, originated August 13, 2013, original maturity date of August 1, 2014. This note is in default and currently bears a default interest rate of 18.3% plus late fees¹. | | | 90,000 | | | | 90,000 | |
| | | | | | | | | |
| Note payable bearing interest at 12.0% per annum, originated June 7, 2013, original maturity date of June 7, 2016. This note is in default and currently bears a default interest rate of 17.0% plus late fees ¹. | | | 500,000 | | | | 500,000 | |
| | | | | | | | | |
| Note payable bearing interest at 12% per annum, originated August 24, 2013, original maturity date of October 24, 2014. This note is in default and currently bears a default interest rate of 18.3% plus late fees¹. | | | 8,858 | | | | 8,656 | |
| | | | | | | | | |
| Note payable originated October 2, 2014, original maturity date of October 16, 2014. | | | 100,000 | | | | - | |
| |
| Note payable bearing interest at 10.0% per annum, originated December 4, 2013, due on October 15, 2014. This note is currently in default and bears a default interest rate of 15.0%. | | | 560,000 | | | | 560,000 | |
| | | | | | | | | |
| Notes payable bearing interest at 5.0% per annum, originated August 31, 2014, payable upon demand. | | | 80,000 | | | | 80,000 | |
| | | | | | | | | |
| Notes payable bearing interest at 18.0% per annum originated May 8, 2014, payable upon demand. | | | 225,000 | | | | 250,000 | |
| | | | | | | | | |
| Notes payable bearing interest at 7.4% per annum, originated July 11, 2014 maturity date of April 13, 2015. | | | 25,860 | | | | 126,577 | |
| | | | | | | | | |
Notes payable bearing interest at 6.3% per annum, originated January 26, 2015, maturity date of February 2, 2019. | | | 67,211 | | | | - | |
| | | | | | | | | |
| Notes payable bearing interest at 8.0% per annum, originated April 22, 2015 maturity date of June 30, 2015 | | | 250,000 | | | | - | |
| | | | | | | | | |
| Secured borrowings | | | 39,143 | | | | 449,722 | |
| | | | | | | | | |
| Total notes payable | | $ | 7,995,237 | | | $ | 7,866,299 | |
| Less: current-term portion of notes payable | | | (7,428,027) | | | | (7,366,299) | |
| Long-term notes payable | | $ | 567,211 | | | $ | 500,000 | |
In addition to the notes payable noted in the table above, on September 25, 2014, the Company entered into a note payable with a principal balance of $100,000, bearing an interest obligation of $5,000 per annum and due on October 9, 2014. The note was repaid in full during the period ended May 31, 2015 through the payment of $100,000 in cash.
As of May 31, 2015, the Company has entered into various accounts receivable financing arrangements with third parties for a combined principal amount received in cash of $670,000. The terms of the arrangements require the Company to repay the principal balance plus an additional $252,650 for total remittance of $922,650. The terms of repayment require the Company to remit to the lender between 15 and 24 percent of all future receivables arising from credit card, debit card and prepaid transactions until such time as the total remittance is paid in full. These borrowing is secured by the assets of the Company.
The additional $252,650 will be recognized as interest expense over the estimated terms of the agreements. The terms are not fixed due to the variable repayment terms; however, management currently estimates such terms to be between approximately two (2) and eight (8) months. The ending principal balance of these borrowings at May 31, 2015 and August 31, 2014 was $39,142and $449,722, respectively (net of debt discounts of $8,895 and $161,899, respectively).
NOTE 9—CONVERTIBLE NOTES PAYABLE
As of May 31, 2015 and August 31, 2014 the Company’s convertible notes payable consisted of the following:
| | | May 31, | | | August 31, | |
| | | 2015 | | | 2014 | |
| Convertible note payable bearing interest at 10.0% per annum, originated April 23, 2012, original maturity date of April 23, 2017. The note is convertible into common shares of KCI at $1.00 per share. | | $ | 550,000 | | | $ | 550,000 | |
| | | | | | | | | |
| Convertible note payable bearing interest at 9.0% per annum, originated July 25, 2013, original maturity date of July 25, 2018. The note is convertible into common shares of the Company at $1.50 per share. | | | 50,000 | | | | 50,000 | |
| | | | | | | | | |
| Convertible note payable bearing interest at the market interest rate plus 6.4% per annum, originated May 1, 2012, original maturity date of May 1, 2015. The note is convertible into common shares of KCI at $0.30 per share. | | | 300,000 | | | | 300,000 | |
| | | | | | | | | |
Convertible note payable bearing interest at 12.0% per annum, originated February 17, 2015, maturity date of February 16, 2016. The note is convertible upon the occurrence and continuance of an event of default for a 15 day period at 85 percent of the lowest average daily volume weighted average price of the Company's common shares during the five trading days immediately prior to the date of conversion. | | | 682,484 | | | | - | |
| | | | | | | | | |
| Convertible note payable bearing interest at 0.0% per annum, originated April 21, 2013, original maturity date of May 29, 2015. The note is convertible into common shares of the Company at the lower of $0.0001 or 50% of the lowest market price for the 10 days prior to conversion date. | | | 190,000 | | | | - | |
| | | | | | | | | |
| Total notes payable | | $ | 1,722,484 | | | $ | 850,000 | |
| Less: current portion | | | (1,172,484) | | | | 300,000 | |
| | | | | | | | | |
| Long-term convertible notes payable | | $ | 550,000 | | | $ | 550,000 | |
In addition to the notes payable noted in the table above, on December 31, 2014, the Company entered into a convertible note payable with a principal balance of $100,000, bearing interest at 18.0% per annum and due on demand. The note was convertible into common shares of the Company at the 65% of the lowest average daily volume weighted average price of the Company's common shares during the fifteen trading days immediately prior to the date of conversion. The note was repaid in full during the period ended May 31, 2015 through the payment of $110,000 in cash, inclusive of $10,000 of interest.
The intrinsic value of the beneficial conversion feature and the debt discount associated with all convertible debts were recorded based on the relative fair value of the equity in relation to the debt in accordance with ASC 470. The total initial beneficial conversion feature recorded for the convertible notes equaled $182,190 of which $103,594 was amortized during the period, leaving an ending balance of debt discount of $78,596 as of June 30, 2015.
NOTE 10—DERIVATIVE LIABILITY
Effective July 31, 2009, the Company adopted ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The exercise price of certain warrants granted during the period ended February 15, 2015 are variable and subject to the fair value of the Company’s common stock on the date of exercise. As a result, the Company has determined that the exercise feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the exercise feature of the instruments to be recorded as a derivative liability.
ASC 815 requires Company management to assess the fair market value of derivatives at each reporting period and recognize any change in the fair market value as items of other income or expense. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with these warrants.
At origination and subsequent revaluations, the Company valued the derivative liability using the Black-Scholes options pricing model under the following assumptions:
| | | February 28 2015 | |
| | | | |
| Risk-free interest rate | | | 0.25% – 1.52 | % |
| Expected options life | | | 0.21 – 4.65 | |
| Expected dividend yield | | | - | |
| Expected price volatility | | | 185% – 407 | % |
During the period ended May 31, 2015, the Company’s derivative liability increased from $0 to $1,067,472 in conjunction with settlement of convertible notes payable, additions of new derivative liabilities and subsequent revaluations of existing derivative liabilities.
During the year ended August 31, 2014, the Company's derivative liability decreased from $604,553 to $0 and recognized a gain on derivative liability of $604,553 in conjunction with settlement of convertible notes payable, additions of new derivative liabilitites and subsequent revaluations of existing derivative liabilities.
NOTE 11—CLASS B MEMBERSHIP UNITS
The Company is authorized to issue up to eight (8) Class B membership units with no par value. As of May 31, 2015 and August 31, 2014, there were seven (7) and two (2) shares of Class B membership units issued and outstanding, respectively.
In all cases noted above, each Class B membership unit was sold for $500,000, plus for administrative costs payable to third parties. Each unit carries equal voting rights to the Class A membership units of each subsidiary. Each Class B unit is entitled to receive distributions equal to 0.5 percent to 3.0% of the value of the units held each year.
Adjudication and Redemption of Class B Membership Units
The Class B membership units are linked to approval of an EB-5 Visa, which requires a foreign investor to invest $1,000,000 (or at least $500,000 in a "Targeted Employment Area" - high unemployment or rural area), in projects that create at least 10 jobs for U.S. workers. The terms of the instrument state that the Class B membership units have an indefinite life; however, once adjudication is reached in the EB-5 Visa approval process, the managing member of the LLC may, in its sole discretion, elect to have the Company purchase, for fair market value, the unit holders Class B Units at any time following an offer by such member to sell his or her Class B Units. This election is optional on the part of the managing member and member has no rights to cause the managing member or the Company to repurchase or redeem such member’s Class B unit. As such, the units (1) are not mandatorily redeemable, (2) are redeemable at the sole discretion of the Company and (3) not redeemable at the sole option of the unit holder and the redemption must be agreed to by Company.
Denial of I-526 Petition
If the member’s I-526 Petition is denied with respect to that member’s investment in the company, and the member has not been previously expelled from the company, the member has the right, within fifteen days following the date of the I-526 Denial, to request that the company cancel that member’s entire interest in the Company and which time the Company will return the member’s capital contribution and administrative fee, without interest. As such and as the Class B units are not entitled to the distribution of profits and losses, the redeemable value of the membership interest are presented in the mezzanine section of the balance until such time as the I-526 petition is successfully approved after they value of the shares will be moved into permanent equity. No adjustments for noncontrolling interests have been made.
During the nine months ended May 31, 2015, Company subsidiaries issued 5 Class B membership units in exchange for total cash proceeds of $2,500,000 (not inclusive of $300,000 received for administrative fees due and payable to third parties).
During the year ended August 31, 2014, Company subsidiaries issued two (2) Class B membership units in exchange for total cash proceeds of $1,120,000 (inclusive of $60,000 received for administrative fees due and payable to third parties).
NOTE 12—STOCKHOLDERS’ DEFICIT
The Company’s authorized capital stock consists of 150,000,000 shares of common stock, $0.001 par value per share, and 15,000,000 shares of preferred stock, par value $0.001 per share. As of May 31, 2015 and August 31, 2014, there were 46,339,366 and 42,570,975 shares of common stock issued and outstanding, respectively, and one share of preferred stock issued and outstanding, respectively.
Preferred Stock
Our board of directors has the authority, without stockholder approval, to issue up to 14,999,999 shares of preferred stock, $0.001 par value, of which 1 share is designated as Series B Convertible Preferred Stock. The authorized preferred stock may be issued by the Board of Directors in one or more series and with the rights, privileges and limitations of the preferred stock determined by the Board of Directors. The rights, preferences, powers and limitations on different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and other matters.
Series B Convertible Preferred Stock
The Company is authorized to issue one (1) share of Series B Convertible Preferred Stock with a stated value of $1.00 and a par value of $0.001. The terms of the Series B Preferred Stock are as follows:
| (i) | Dividends – At issuance, there are no dividends due or payable on the Series B Preferred Stock. Any future terms with respect to dividends shall be determined by Board, consistent with the Company’s certificate of incorporation. |
| (ii) | Liquidation and Redemption Rights - In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holder of Series B Preferred Stock is be entitled to receive assets of the Company, on parity with the holders Common Stock. The Series B Preferred shall not have any priority or preference with respect to any distribution of any Company assets. |
| (iii) | Rank – All shares of the Series B Preferred Stock rank: |
| a. | Senior to the Company’s common stock and any other class or series of capital stock of the Company subsequently created, |
| b. | Equal with any class or series of capital stock of the Company subsequently created, |
| c. | Junior to any class or series of capital stock of the Company subsequently created which are specifically designated to be ranked senior to the Series B Preferred Stock |
| (iv) | Upon an event of default in the convertible note payable executed in connection with the issuance of the share of Series B Preferred Stock, the share of Series B Preferred Stock has voting rights equal to the total issued and outstanding common stock eligible to vote at the time of the respective vote divided by forty nine one-hundredths (0.49) minus the total issued and outstanding shares of common stock eligible to vote at the time of the respective vote. |
There were no shares of Series B Convertible Preferred Shares outstanding at any time during the year ended August 31, 2014. During the nine month period ended May 31, 2015, the Company issued one (1) share of Series B convertible preferred stock to a creditor in connection with the execution of a convertible note payable. In accordance with ASC 815 and ASC 470, the proceeds from the issuance of the convertible note payable were allocated between the embedded conversion option of the convertible note payable deemed to require derivative accounting due to its variable nature (as discussed in Note 9), and the host debt instrument and the preferred stock. The derivative was recorded at its fair value of $5,975 with the remaining proceeds of $1,000,000 being allocated between the preferred stock and host debt instrument based upon their relative fair values. The fair value of the preferred stock was determined by valuing the voting interest to which it would control upon default and then probability adjusting such valuation for the risk of default. The resulting allocation of proceeds attributed $118,024 to this preferred stock issuance.
Common Stock
During the nine month period ended May 31, 2015; the Company issued the following shares of its Common Stock:
| · | In connection with the extension of certain agreements related to the reverse acquisition, the Company issued to certain shareholders of the Company, all of whom were shareholders prior to the reverse acquisition, 10,000 shares of common stock of the Company valued at $8,800. The value of the common stock was based on the market price of the stock on the date of issuance. |
| | |
| · | In connection with short-term loans made to the Company by two separate entities (one of which was repaid in full during the period ended May 31, 2015), the Company agreed that, for each two weeks that each such loan remains outstanding, the Company is required to issue 37,500 shares of its common stock - in addition to an initial grant of 37,500 shares to each lender. During the nine-month period ended May 31, 2015, the Company issued 1,074,844 shares valued at $965,017 in connection with these two loans. The value of the common stock was based on the market price of the stock on the date of issuance and has been recorded as interest expense in the Company’s statement of operations. |
| | |
| · | In connection with a short-term convertible loan made to the Company, the Company issued to the lenders 250,000 shares of the Company's common stock. On May 31, 2015, this note went into default due to non-payment and the Company issued an additional 150,000 shares of common stock to the lender to extend the maturity date. |
| | |
| · | The Company issued 2,283,547 shares of common stock to various entities and individuals for services valued at $983,023. The value of the common stock was based on the market price of the stock on the date of issuance. |
During the year ended August 31, 2014, the Company issued 26,959,829 shares of common stock as follows:
| Description | | Shares Issued | |
| Common stock issued for cash proceeds of $3,378,000 | | | 7,193,654 | |
| Common stock issued for services of $911,569 | | | 2,045,163 | |
| Cash received for exercise of options and warrants at $0.03 per share | | | 3,909,226 | |
| Common stock issued for debt issuance costs | | | 1,587,738 | |
| Common stock issued for debt modifications | | | 1,373,914 | |
| Cash received and services credited for exercise of options and warrants at $0.03 per share | | | 2,884,134 | |
| Common stock issued in reverse recapitalization | | | 8,006,000 | |
| Total | | | 26,959,829 | |
NOTE 13—STOCK OPTIONS AND WARRANTS
Stock Options
During the nine month period May 31, 2015, the Company issued no new options to acquire its common stock.
During the year ended August 31, 2014, the Company granted 9,573,604 options to purchase common stock at $0.50 per share to the Company employees and consultants. 1,477,687 options vested immediately and 8,095,917 options vested 1/3 on each grant anniversary date for the subsequent three years. All options issued in 2014 expire on August 30, 2019. Subsequent to August 31, 2014, 100,000 of the nonvested options granted have been rescinded, thus, leaving 9,473,604 stock options outstanding and 1,477,686 stock options exercisable.
Stock compensation expense is recognized on a pro-rata basis over the vesting period of the options. During the nine month period ended May 31, 2015 the Company recognized $2,491,149 in compensation expense arising from options issued, leaving $7,428,969 of compensation expense on stock options to be recognized subsequent to May 31, 2015.
Warrants
During the nine months ended May 31, 2015, the Company issued 2,200,000 warrants to creditors to acquire its common stock:
| · | 1,950,000 to the Company's lender that has a first lien on all of the Company's assets - in connection with: (i) its December 2014 additional advance (1,450,000 Warrants exercisable at $0.84 per share) and (ii) its January 2015 loan modification in connection with the TCA loan (500,000 Warrants exercisable at $0.50 per share), |
| | |
| · | 250,000 exercisable at $0.50 per share to a Director in connection with advances he made to the Company, |
| | |
| · | 250,000 exercisable at $0.50 per share to an employee in connection with services rendered, and |
| | |
| · | 692,521 exercisable at $0.72 per share to a debt holder for maturity date extensions. |
In applying the Black-Scholes options pricing model to the options and warrant grants, the fair value of our share-based awards granted were estimated using the following assumptions for the periods indicated below:
| | | May 31, 2015 | |
| | | | |
| Risk-free interest rate | | | 1.39 | % |
| Expected options life | | | 2.50 | |
| Expected dividend yield | | | - | |
| Expected price volatility | | | 173 | % |
A summary of the status of the Company’s stock options as of May 31, 2015 and changes during the period ended May 31, 2015 is presented below:
| | | Number of Options and Warrants | |
| | | | | |
| Outstanding at August 31, 2014 | | | 9,573,604 | |
| | | | | |
| Options and warrants granted | | | 3,142,512 | |
| Options and warrants exercised | | | - | |
| Options and warrants forfeited or expired | | | (100,000 | ) |
| Outstanding at May 31, 2015 | | | 12,616,125 | |
| Exercisable at May 31, 2015 | | | 4,620,207 | |
The following table summarizes information about options and warrants as of May 31, 2015:
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
| $0.00 - $0.40 | 500,000 | 4.65 | $0.40 | 500,000 | $0.40 |
| $0.41 - $0.60 | 9,723,604 | 4.23 | $0.50 | 1,727,686 | $0.50 |
| $0.61 and up | 2,142,521 | 4.49 | $0.80 | 2,142,521 | $0.80 |
| | 12,616,125 | 4.29 | $0.55 | 4,620,207 | $0.63 |
NOTE 14—SUBSEQUENT EVENTS
Store Closings
On March 13, 2015, the Company closed its Capriotti's Sandwich Shop in San Marcos, California. On April 8, 2015, the Company closed its Capriotti's Sandwich Shop in San Diego, California. Neither location was profitable. The Company currently is exploring alternative restaurant concepts for those locations.
Capriotti's Relationship
On June 29, 2015, the Company consummated an agreement with Capriotti's Sandwich Shops, Inc., the franchisor of the Company's Capriottti's Sandwich Shops, whereby:
| · | Capriotti's Sandwich Shops, Inc. and the Company have agreed to terminate the Franchise Agreements and Area Development Agreements between these two parties; |
| | |
| · | the Company will continue to operate its existing Capriotti's Sandwich Shops during a mutually-agreed transition period, and |
| | |
| · | the Company will have an agreed time-frame to either sell its existing Capriotti's Sandwich Shops (some of which Capriotti's Sandwich Shops, Inc. has expressed interest in acquiring) or convert some of them to restaurants not under the Capriotti’s brand but under a brand proprietary to the Company. |
Financing-Related Transactions
Subsequent to quarter end, the Company received $660,000 in EB-5 funding from two investors, $120,000 of which amounts to deposits for legal and other expenses to be remitted by the Company on behalf those investors. The Company also received a advance in the amount of $250,000 from a relative of another, pending EB5 investor. Such advance (to be treated as a bridge loan) is due to be repaid, along with interest @ 8.0%, on or before June 30, 2015.
Subsequent to May 31, 2015, the Company entered into a $190,000 short term loan, convertible under certain circumstances into shares of the Company's Common Stock. This loan was issued with a $40,000 original issue discount - to be charged as interest expense over the life of the loan. As additional consideration for this loan the Company issued to the lenders 250,000 shares of the Company's Common Stock. The Company subsequently issued an additional 150,000 shares of the Company's Common Stock to that lender in consideration of its extension of the maturity date. This loan was repaid out of proceeds of the loan noted immediately below.
On June 2, 2015, the Company entered into an agreement with an existing financing source pursuant to which the Company received $178,000 and agreed to repay that amount of principal balance plus an additional $78,320 (for total remittance of $256,320) by remitting to the lender 16% of all future receivables arising from credit card, debit card and prepaid transactions from some of its bank account until such time as the total remittance is paid in full. The additional $78,320 will be recognized as interest expense over the estimated term of the agreement. The term is not fixed due to the variable repayment terms; however, management currently estimates such term to be less than one year. Note that, out of the proceeds of this funding, as well as Company funds, the Company repaid the $190,000 short term loan noted immediately above.
On June 15, 2015, the Company entered into another $190,000 short term loan, convertible under certain circumstances into shares of the Company's Common Stock with the same lender as the loan noted two paragraphs above. Stock. This loan was issued with a $40,000 original issue discount - to be charged as interest expense over the life of the loan. As additional consideration for this loan the Company issued to the lenders 400,000 shares of the Company's Common Stock.
In March of 2015, the Company granted 361,759 shares of Common Stock to CEO Ken Antos in connection with both: investments he'd previously made to the Company and third-party loans guaranteed by Antos. This grant was on terms consistent with similar, prior transactions.
On June 29, 2015, On June 29, 2015, the Company entered into a short term loan agreement with the relative of a pending EB5 subscriber pursuant to which he advanced to the Company $235,000. The loan, plus interest @ 8.0%, is repayable August 1, 2015.
On June 30, 2015, the Company entered into an agreement with a new financing source pursuant to which the Company received $71,000 and agreed to repay that amount of principal balance plus an additional $26,980 (for total remittance of $97,980) by remitting to the lender 16% of all future receivables arising from credit card, debit card and prepaid transactions from one of its subsidiary bank account until such time as the total remittance is paid in full. The additional $26,980 will be recognized as interest expense over the estimated term of the agreement. The term is not fixed due to the variable repayment terms; however, management currently estimates such term to be less than six months.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING INFORMATION
The following discussion and analysis of the Company’s financial condition and results of operations should be read with the condensed financial statements and related notes contained in this quarterly report on Form 10-Q (“Form 10-Q”). All statements other than statements of historical fact included in this Form 10-Q are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, levels of activity, performance or achievements to be materially different than any expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include: 1. General economic factors including, but not limited to, changes in interest rates and trends in disposable income; 2. Information and technological advances; 3. Cost of products sold; 4. Competition; and 5. Success of marketing, advertising and promotional campaigns. The Company is subject to specific risks and uncertainties related to its business model, strategies, markets and legal and regulatory environment. You should carefully review the risks described in this Form 10-Q and in other documents the Company files from time to time with the SEC. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q. The Company undertakes no obligation to publicly release any revisions to the forward-looking statements to reflect events or circumstances after the date of this document.
OVERVIEW
Business
The Company was formed in May 2010 as Dixie Foods International, Inc. to operate a specialty food business for salad dressing, sauces and condiments. The Company was organized and still operates under the laws of the State of Florida. In November of 2014, the Company changed its name to “Preferred Restaurant Brands” and recently completed the necessary documents with the FINRA, the SEC and other relevant regulatory authorities to effect this change. The Company's common stock now trades under the stock symbol "PRBI". The Company’s fiscal year-end is August 31. The Company operates from offices at 4033 South Dean Martin Drive; Las Vegas, NV 89013; and, its phone number is (702) 834-7101.
On January 6, 2012, the Company formed Dixie Sauce Co, Inc. (“Dixie Sauce”) as a wholly-owned subsidiary of the Company and transferred all assets and liabilities related to its specialty foods business to this subsidiary. Dixie Sauce currently conducts no operations.
Acquisition
On June 4, 2014, the Company completed the purchase (the “Reverse Acquisition”) of KCI Investments, LLC (“KCI”). In connection with the Reverse Acquisition, the Company acquired 100% of the issued and outstanding membership interests of KCI from KCI Holding I, LLC ("KCI Holding"), an entity that, until the consummation of the Reverse Acquisition, held 100% of the membership interests in KCI.
In exchange for the purchase of KCI by the Company, the Company issued to KCI Holding an aggregate of 34,508,976 shares of the Company's common stock. In addition, KCI Holding purchased and acquired from certain shareholders of the Company an aggregate of 6,305,400 shares of the Company's issued and outstanding common stock. As a result of the Reverse Acquisition, KCI became a wholly-owned subsidiary of the Company, and KCI Holding became a stockholder of the Company owning an aggregate of 40,814,376 shares of the Company's common stock, representing 96% of our issued and outstanding shares of common stock as of that date.
KCI’s Co-Manager and Chief Executive Officer, Ken Antos, now also serves as Chief Executive Officer and as Chairman of the Board of Directors of the Company. KCI’s Chief Financial Officer, Richard Groberg, now serves as the Company's Vice President, Chief Financial Officer and Board Secretary.
KCI Investments, LLC
KCI Investments, LLC, a Nevada limited liability company headquartered in Las Vegas, Nevada, was formed on November 8, 2004, but did not engage in any business operations until November 2010. Currently, KCI is engaged in developing, owning and operating a multi-brand chain of restaurants, currently under two franchise brands: Capriotti’s Sandwich Shops and Papa John’s. KCI also owns, operates and/or is developing various other restaurant concepts. KCI and its various subsidiaries, currently operate 17 restaurants:
| · | 9, franchised Capriotti's Sandwich Shops; |
| | |
| · | six (6) franchised Papa John's pizza shops: two of which it opened during the first quarter of fiscal 2015; two of which it opened December 27, 2014 and two of which it acquired on February 17, 2015), and |
| | |
| · | two proprietary, fine casual restaurants: Elements Kitchen & Martini Bar and Social Bistro & Wine Bar. |
Additionally, the Company has in various stages of development and construction eight Papa John’s - all of which it anticipates opening over the next 12 months – subject to access to additional financing.
Location
| Fixed Year (August 31, FYE) | | | 2011 | | | 2012 | | | 2013 | | 2014 | | | Q1 2015 | | | | Q2 2015 | | | | Q3 2015 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Opened in Period | | | 0 | | | 3 | | | 5 | | 4 | | | 2 | | | | 2 | | | | 1 | |
| Acquired in Period | | | 0 | | | 1 | | | 1 | | 0 | | | 0 | | | | 2 | | | | 0 | |
| Total Added In Year | | | 0 | | | 4 | | | 6 | | 4 | | | 2 | | | | 4 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Added | | | 0 | | | 4 | | | 10 | | 14 | | | 16 | | | | 20 | | | | 21 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Closed in Period | | | 0 | | | 0 | | | 0 | | 0 | | | 1 | | | | 1 | | | | 2 | |
| Cumulative Closed | | | 0 | | | 0 | | | 0 | | 0 | | | 1 | | | | 2 | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total Open | | | 0 | | | 4 | | | 10 | | 14 | | | 15 | | | | 18 | | | | 17 | |
Results of Operations
Three months ended May 31, 2015 vs. May 31, 2014
Income from Restaurant Operations
Largely resulting from Revenue growth and Management’s continues to focus on tightening cost controls and selling higher margin item, the Company recognized Income from restaurant operations of $225,780 Q3-15 compared with a net loss from restaurant operations of $32,656 during Q3-14.
Revenue
During the three months ended May 31, 2015 (“Q3-15”), the Company reported Revenues of $2,185,433, up 18.1% from Revenues of $1,851,020 during the three months ended May 31, 2014 (“Q3-14”) and up 12.7% from Revenues of $1,939,412 in Q2-15, This growth resulted mainly from the impact of the PJ's Additions and two additional Capriotti's opened in 1st9-15 - more than offsetting: (i) the loss of Revenues from the four Capriotti's locations not operating during the Q3-15 but operating during the Q3-14 and (ii) lower same store sales ("SSS") growth. With regard to lower SSS, note that in the Q3-14 period, the Company utilized Groupon and other promotional efforts to gain brand awareness. These programs did generate additional sales; however, they were not profitable. Thus, the Company did not repeat these programs during Q3-15.
Food, Beverage and Packaging
Food, beverage and packaging expenses decreased to $689,944 (31.6% of Revenues) in Q3-15 from $960,394 (51.9% of Revenues) in Q3-14. This improvement, in absolute dollars and as a percentage of Revenues resulted from Management’s continued to focus on tightening cost controls and selling higher margin items.
Labor and Related
Labor and related expenses increased to $829,004 (37.9% of Revenues) in Q3-15, up from $514,259 (27.8% of Revenues) in Q3-14, largely because of the impact of labor for new locations, which must maintain minimum staffing levels during their ramp-up period, as well overall management for the Papa John’s brand. Note though that Labor and related expenses were improved from Q2-15 levels (38.8% of Revenues) due to significant reductions in payroll at the Company’s Capriotti’s locations and post-grand opening stabilization of the labor at the Company’s Papa John’s locations
Occupancy
Occupancy expenses decreased to $169,607 (7.8% of Revenues) in Q3-15, from $164,579 (8.9% of Revenues) in Q3-14, due largely to the improving performances of operating locations (all of which had high occupancy costs relative to Revenues).
Other Restaurant Expenses
Other restaurant expenses increased to $271,098 (12.4% of Revenues) in Q3-15, from $179,132 (9.7% of Revenues) in Q3-14, resulting largely from fixed costs associated with the Papa John’s locations.
General and Administrative,
The Company recorded general and administrative expenses of $2,401,136 in Q3-15 compared to $131,088 in Q3-14,. The increase from resulted largely from: (i) nonrecurring and/or noncash expenses related to fees paid in equity for professional services rendered; and (ii) the value of the vesting of options previously granted.
Depreciation
Depreciation and amortization decreased to $135,416 in Q3-15, from $239,112 in Q3-14, due to the impact on depreciation from write offs related to locations closed more than offsetting new depreciation related to new and pending restaurant openings.
Pre-opening Expenses
Pre-opening expenses equaled $35,573 in Q3-15, up from $8,512 in Q3-14, but down significantly from prior quarters of fiscal 2015 as the Company did not open any new locations other than its Social Bistro in April and, thus, didn’t incur significant Pre-opening Expenses.
Other Income and Expense
Total other expenses were $143,600 in Q3-15, compared to other expense of $80,679 in Q3-14, as Interest Expenses of $874,664 were partially offset by $688,197 of Derivative Gains.
Net Loss
As a result, the Company incurred a net loss of $2,489,945 during the three months ended May 31, 2015 compared to a net loss of $426,735 during the three months ended May 31, 2014.
Nine months ended May 31, 2015 vs May 31, 2014
Revenue
During the nine months ended May 31, 2015 (“1st9-15”), the Company reported Revenues of $6,110,079, up 36.7% from Revenues of $4,468,839 for the nine months ended May 31, 2014 (“1st9-14). This growth resulted mainly from the impact of the six additional Papa John's locations opened and acquired between October 2014 and February 2015 and two additional Capriotti's open during all of 1st9-15 but only partially during 1st9-14 - more than offsetting: (i) the loss of Revenues from the four Capriotti's locations not operating during the 1st9-15 but operating during the 1st9-14 and (ii) lower Same Store Sales growth ("SSS": growth of Revenues for restaurants open during the comparable periods). With regard to lower same store sales, note that in the 1st9-14 period, the Company utilized Groupon and other promotional efforts to gain brand awareness. These programs did generate additional sales; however, they were not profitable. Thus, the Company did not repeat these programs during the 1st9-15.
Food, Beverage and Packaging
Food, beverage and packaging expenses increased to $2,238,728 (36.5% of Revenues) in 1st9-15, up from $1,915,101 (42.9% of Revenues) in 1st9-14. While the total increased, it decreased as a percentage of Revenues as Management continues to focus on tightening cost controls and selling higher margin items.
Labor and Related
Labor and related expenses increased to $2,227,821 (36.5% of Revenues) in 1st9-15, up from $1,204,159 (26.9% of Revenues) in 1st9-14, largely because of the impact of labor for new locations, which must maintain minimum staffing levels during their ramp-up period, especially during grand opening promotions.
Occupancy
Occupancy expenses increased to $964,921 (15.8% of Revenues) in 1st9-15, up from $461,053 (10.3% of Revenues) in 1st9-14, also largely because of the burden of fixed rent and related overhead related to the new locations.
Other Restaurant Expenses
Other restaurant expenses increased to $1,435,933 (23.5% of Revenues) in 1st9-15, up from $710,601 (15.9% of Revenues) in 1st9-14, resulting largely from: significantly increased depreciation expenses and from largely nonrecurring marketing expenses related to the new locations.
Net Loss from Restaurant Operations
As a result, the Company incurred a Net loss from restaurant operations of $757,324 during the nine months ended May 31, 2015 compared to income from restaurant operations of $177,925 during the nine months ended May 31, 2014.
General and Administrative
The Company recorded general and administrative expenses of $7,022,470 in 1st9-15 compared to $1,193,936 in 1st9-14, resulting largely from: (i) nonrecurring and/or noncash expenses related to fees paid in equity for professional services rendered; and (ii) the value of the vesting of options previously granted.
Depreciation
Depreciation and amortization decreased to $341,435 in 1st9-15, down from $359,079 in 1st9-14, due to the impact on depreciation from write offs related to locations closed more than offsetting new depreciation related to new and pending restaurant openings.
Pre-opening Expenses
Pre-opening expenses increased to $508,977 in 1st9-15, up from $318,072 in 1st9-14 as a result of new restaurant openings.
Other Income and Expense
Total other income and expenses were $4,283,231 in 1st9-15, up from $84,981 in 1st9-14, due to an increase in interest expenses stemming from: (i) increases in interest bearing notes to fund operations and (ii) significant noncash charges related to the value of warrants and equity granted in connection with loans and extensions and modifications thereto. This increase was offset in part by a gain on changes in derivative liabilities of $1,496,437.
Net Loss
As a result, the Company incurred a net loss of $12,913,437 during the nine months ended May 31, 2015 compared to a net loss of $1,878,143 during the nine months ended May 31, 2014.
Liquidity and Capital Resources
During the nine months ended May 31, 2015, the Company's working capital deficit increased $6,518,801 to $14,894,867, from a deficit of $8,376,066 at August 31, 2014. The primary reasons for the increase in the working capital deficit were: (i) increased short term debt and payables resulting from delays in receiving subscribed financings and the cost of opening new locations, and (ii) the recognition of derivative liabilities related to certain equity issuances.
Cash Flows
Net cash used in operating activities was $3,129,673 during the nine months ended May 31, 2015, largely due to the reported net loss of $12,913,437, which was partially offset by various noncash items including: Depreciation and amortization; Loss on sale of assets; Amortization of debt discounts and debt issuance costs; Change in derivative liability, Stock issued in connection with execution of notes payable, Vesting of stock options granted and Common stock issued for services. During this period, net cash used in investing activities was $1,479,563, mostly related to the construction and acquisition of new restaurants, offset by the sale of one store for cash. Cash used in operating and investing activities was offset by $4,619,444 in Net Cash Provided by Financing Activities, which included approximately $2.1 million net proceeds from new debt (after debt repayments) and $2.5million of proceeds from the sale of Class B membership units in the Company’s EB-5-financed subsidiaries.
Recent Financing Transactions
During the three months ended May 31, 2015, the Company secured additional debt funds to support ongoing operations. On February 17, 2015, the Company borrowed $1,000,000 from TCA Global Credit Master Fund LLC 1 ("TCA"). The "TCA Loan" bears interest @ 12% per annum and has and original maturity date of February 17, 2016. The TCA Loan is scheduled to amortize monthly over one year. The Company utilized the proceeds of the TCA Loan, net of related transaction fees, to: fund the acquisition of two Papa John's locations; repay some obligations, and provide additional working capital.
Also, as noted above in Section 10: Subsequent Events, subsequent to quarter-end:
| · | The Company received $660,000 in EB-5 funding from two investors, $120,000 of which amounts to deposits for legal and other expenses to be remitted by the Company on behalf those investors. The Company also received a advance in the amount of $250,000 from a relative of another, pending EB5 investor. Such advance (to be treated as a bridge loan) is due to be repaid, along with interest @ 8.0%, on or before June 30, 2015. |
| | |
| · | The Company entered into a $190,000 short term loan, convertible under certain circumstances into shares of the Company's Common Stock. This loan was issued with a $40,000 original issue discount - to be charged as interest expense over the life of the loan. As additional consideration for this loan the Company issued to the lenders 250,000 shares of the Company's Common Stock. The Company subsequently issued an additional 150,000 shares of the Company's Common Stock to that lender in consideration of its extension of the maturity date. |
| | |
| · | The Company entered into an agreement with an existing financing source pursuant to which the Company received $178,000 and agreed to repay that amount of principal balance plus an additional $78,320 (for total remittance of $256,320) by remitting to the lender 16% of all future receivables arising from credit card, debit card and prepaid transactions from some of its bank account until such time as the total remittance is paid in full. The additional $78,320 will be recognized as interest expense over the estimated term of the agreement. The term is not fixed due to the variable repayment terms; however, management currently estimates such term to be less than one year. Note that, out of the proceeds of this funding, as well as Company funds, the Company repaid the $190,000 short term loan noted immediately above. |
| | |
| · | The Company entered into another $190,000 short term loan, convertible under certain circumstances into shares of the Company's Common Stock with the same lender as the loan noted two paragraphs above. Stock. This loan was issued with a $40,000 original issue discount - to be charged as interest expense over the life of the loan. As additional consideration for this loan the Company issued to the lenders 400,000 shares of the Company's Common Stock. |
| | |
| · | The Company entered into a short term loan agreement with the relative of a pending EB5 subscriber pursuant to which he advanced to the Company $235,000. The loan, plus interest @ 8.0%, is repayable August 1, 2015. |
| | |
| · | The Company entered into an agreement with a new financing source pursuant to which the Company received $71,000 and agreed to repay that amount of principal balance plus an additional $26,980 (for total remittance of $97,980) by remitting to the lender 16% of all future receivables arising from credit card, debit card and prepaid transactions from one of its subsidiary bank account until such time as the total remittance is paid in full. The additional $26,980 will be recognized as interest expense over the estimated term of the agreement. The term is not fixed due to the variable repayment terms; however, management currently estimates such term to be less than six months. |
Recent Acquisitions
On February 18, 2015, the Company consummated the acquisition of two, franchised Papa John's locations in the Company's existing trade area in Northern California: one in Fresno and the other in Clovis. In total the Company paid the seller $320,000 in cash. The Company also acquired those locations inventory as of the closing date.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of its financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses and the valuation of our assets and contingencies. We believe our estimates and assumptions to be reasonable under the circumstances. However, actual results could differ from those estimates under different assumptions or conditions. Our financial statements are based on the assumption that we will continue as a going concern. If we are unable to continue as a going concern we would experience additional losses from the write-down of assets.
Going Concern
The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to: identify future investment opportunities and obtain the necessary debt or equity financing and generate profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
New Accounting Pronouncements
The company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a "smaller reporting company" defined in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of November 30, 2014. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded such controls and procedures were not effective as of November 30, 2014 to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There were no changes in our internal controls over financial reporting that occurred during the quarter ended November 30, 2014 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
We are currently not a party to any pending legal proceeding. From time to time, we may receive claims of and become subject to routine litigation that is incidental to the business.
As a "smaller reporting company" defined in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
During the nine month period ended May 31, 2015; the Company issued the following shares of its Common Stock:
| · | In connection with the extension of certain agreements related to the reverse acquisition, the Company issued to certain shareholders of the Company, all of whom were shareholders prior to the reverse acquisition, 10,000 shares of common stock of the Company valued at $8,800. The value of the common stock was based on the market price of the stock on the date of issuance. |
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| · | In connection with short-term loans made to the Company by two separate entities (one of which was repaid in full during the period ended May 31, 2015), the Company agreed that, for each two weeks that each such loan remains outstanding, the Company is required to issue 37,500 shares of its common stock - in addition to an initial grant of 37,500 shares to each lender. During the nine-month period ended May 31, 2015, the Company issued 1,074,844 shares valued at $965,017 in connection with these two loans. The value of the common stock was based on the market price of the stock on the date of issuance and has been recorded as interest expense in the Company’s statement of operations. |
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| · | In connection with a short-term convertible loan made to the Company, the Company issued to the lenders 250,000 shares of the Company's common stock. On May 31, 2015, this note went into default due to non-payment and the Company issued an additional 150,000 shares of common stock to the lender to extend the maturity date. |
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| · | The Company issued 2,283,547 shares of common stock to various entities and individuals for services valued at $983,023. The value of the common stock was based on the market price of the stock on the date of issuance. |
The sales were exempt from registration under Section 4(A)(2) of the Securities Act of 1933. The securities were not offered publicly.
Item 3. Defaults upon Senior Securities
None other than as disclosed herein.
Item 4. Mine Safety Disclosures
Item 5. Other Information
| 4.25 | RBB Note and Securities Purchase Agreement |
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| 4.26 | |
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| 4.27 | 2nd Convertible Promissory Note |
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| 4.28 | Xiao Bridge Loans (includes most recent and April Loan documents) |
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| 4.35 | Rapid Advance Loan |
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| 10.354 | Capriotti’s Corp Termination Agreement |
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| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | XBRL Instance Document. |
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| 101.SCH | XBRL Taxonomy Extension Schema Document. |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: August 19, 2015 | PREFERRED RESTAURANT BRANDS, INC. |
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| | /s/ KENNETH ANTOS |
| | Kenneth Antos, |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
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