NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
NOTE 1 –BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
Basis of Presentation
Southern Concepts Restaurant Group, Inc. (“SCRG”), a Colorado corporation, together with its subsidiaries (collectively the “Company”) develops and operates full-service restaurants and a fast casual restaurant. SCRG was formed on January 29, 2008.
The Company, on March 9, 2015, with the approval of a majority of the Company’s shareholders, changed its name from Bourbon Brothers Holding Corporation to Southern Concepts Restaurant Group, Inc.
As of June 30, 2016, the Company operates three of its Southern Hospitality branded restaurants in Denver, Lone Tree and Colorado Springs, Colorado. The Company has developed a fast casual concept, in which the Company opened its first fast casual restaurant, Carve Barbecue in November 2015.
The Company operates and manages restaurants through its wholly-owned and majority-owned subsidiaries, including:
SH Franchisee & Licensing Corp. (“SH”)
Southern Hospitality Denver Holdings, LLC (“SHDH”)
Southern Hospitality Denver, LLC (“SHD”)
Southern Hospitality Lone Tree, LLC (“SHLT”)
Carve Restaurant Group, LLC (“CRG”)
Carve BBQ Glendale, LLC (“CARVEG”)
Southern Hospitality Southern Kitchen Colorado Springs, LLC (“SHSK”)
Bourbon Brothers Holding Company, LLC (“BBHCLLC”)
Bourbon Brothers Restaurant Group, LLC (“BBRG”)
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by U.S. generally accepted accounting principles for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
Management's Plans
During 2016, the Company is exploring options for growth for the Company’s two brands, Southern Hospitality and Carve Barbecue. Specifically, the Company is looking at building the Southern Hospitality growth model on the footprint and profitability similar to its Southern Hospitality Lone Tree location, with real estate between 4,000 to 5,000 square feet. In regards to the Carve model, the Company is identifying real estate partners and locations for its 2,500 square feet footprint. The Company's continued implementation of its business plan is dependent on its future profitability and on additional debt or equity financing. The Company believes that its focus on 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 remainder of 2016 at all restaurant locations while also curtailing expenses at the corporate level.
The accompanying interim unaudited condensed 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 $0.7 million, $1.7 million, $1.0 million and $1.9 million for the three and six month periods ended June 30, 2016 and 2015, respectively, and has an accumulated deficit of approximately $13.6 million at June 30, 2016. The interim unaudited condensed 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.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Recently Issued Accounting Standards
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accountin
g, which simplifies many aspects of accounting for share-based payment transactions under ASC Topic 718, Compensation - Stock Compensation, including income tax consequences, classification of awards as either equity or liability, forfeiture rate calculations and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards: (continued)
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330) Simplifying the Measurement of Inventory
, which changes the measurement from lower of cost or market to lower of cost and net realizable value. The guidance requires prospective application for reporting periods beginning after December 15, 2016 and permits adoption in an earlier period. The Company intends to adopt this ASU in the first quarter of 2016; the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements. The provisions of this ASU are to be applied using a modified retrospective approach. The Company is currently evaluating the effect that this ASU will have on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"),
Leases (Topic 842)
, which supersedes existing guidance on accounting for leases in
"Leases (Topic 840)"
and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted.
In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts from Customers
, which supersedes the revenue recognition in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB delayed the effective date by one year. This new standard is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively, with early adoption now permitted to the original effective date of December 15, 2016. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.
Management has not identified any other recently issued accounting standards that it believes may have a significant impact on the consolidated financial statements.
Inventory
Inventory consists of food and beverages and is stated at the lower of cost (first-in, first-out) or market.
NOTE 3 – INTANGIBLE ASSETS
Intangible assets at June 30, 2016, represent franchise license costs for the Denver restaurant (net of accumulated amortization of $16,875). Amortization expenses of $1,250 and $2,500 have been recorded for the three and six month periods ended June 30, 2016 and 2015. Amortization expense for the next five years and thereafter is estimated to be as follows:
Year ending
|
|
|
|
2016 (remainder of year)
|
|
$
|
2,500
|
|
2017
|
|
|
5,000
|
|
2018
|
|
|
5,000
|
|
2019
|
|
|
5,000
|
|
2020
|
|
|
5,000
|
|
Thereafter
|
|
|
10,625
|
|
|
|
$
|
33,125
|
|
The Company licenses the rights to the trademark “Bourbon Brothers” and certain intellectual property, as defined, from a related party, Hospitality Income & Asset, LLC (“HIA”) previously Bourbon Brothers LLC), for use in the Company’s business operations. HIA has granted an exclusive license to use and to sublicense the tradename and intellectual property for an initial ten-year term. The agreement shall automatically renew for additional terms of ten-years each without any action required by either party. This license agreement does not require the payment of royalties or any other consideration. The Company is not currently using this trademark in its operations, nor is it contemplated for use in the foreseeable future.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
NOTE 4 – RELATED PARTY NOTE PAYABLE
On December 31, 2014, the Company entered into a Loan Agreement and associated Promissory Note (the “Loan Agreement”) with Bourbon Brothers #14, LLC (“BB14”) which provides for an unsecured term loan in the aggregate original principal amount of $1,250,000 (the “Loan”). The Company received net proceeds of $1,197,714 after loan closing fees. BB14 is a related party entity, controlled by certain shareholders of the Company. The Company is to pay interest on the Loan at the greater of 9.5% or 6.25% per annum plus the prime rate announced by the Wall Street Journal. In addition, the Company is to pay a monthly loan servicing fee in the amount of 1% of the principal balance of the Loan. The entire principal balance of the Loan, plus any accrued and unpaid interest, is due on December 29, 2016.
The related party interest expense on this loan for the three and six months ended June 30, 2016 and 2015 was $33,300, $66,650, $32,500 and $65,000, respectively. The Company paid $100,000 towards prepayment of this Loan to BB14 at December 31, 2015. During the six months ended June 30, 2016, the Company prepaid an additional $400,000 towards this Loan then recaptured $100,000 for this repayment for a net prepayment during the period of $300,000.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Commitments:
Franchise agreement
The Company operates its Denver restaurant property under a franchise agreement with the Franchisor under an initial ten-year term, renewable for two additional five-year terms. Pursuant to the franchise agreement, as amended, the Company is to pay royalty fees based on a percentage of gross revenues (2.5%, subject to a monthly floor of $5,000) , plus additional fees and costs for marketing, training, inventory and other franchisor costs. Two shareholders of the Company have personally guaranteed royalty payments to the Franchisor. For the three and six months ended June 30, 2016 and 2015, the Company incurred royalty expense of $43,300, $85,400, $41,000 and $57,700, respectively.
Related Party
In January 2014, the Company entered into a 120 month lease with a related party for its Colorado Springs-based restaurant. The Company pays $33,424 per month escalating by approximately 10% every 60 months.
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 6 – EQUITY
Common stock:
The Company issued 956,775 common shares of stock for proceeds of $191,355 between April 1, 2016 and June 30, 2016. For the period from January 1, 2016 through June 30, 2016, the Company issued 2,120,558 common shares of stock for proceeds of $424,110.
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
NOTE 6 – EQUITY (CONTINUED)
Stock options:
The stock-based compensation cost related to options that have been included as a charge to general and administrative expense in the statements of loss was approximately $35,100, $117,400, $57,000 and $131,200 for the three and six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016 there was approximately $132,800 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. In March 2015, the Company granted options to buy 300,000 shares of common stock to certain members of the Board of Directors. These options required that the Directors be on the Board at the date of exercise. These Directors are no longer on the Board since March 2016. In March 2016, the Company determined that this performance condition would no longer be required and that the Company would permit exercise of the options. This did not have a material impact on the Company's results of operations.
The following tables set forth the activity in the Company's Plan for the six months ended June 30, 2016:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
Shares
|
|
|
average
|
|
remaining
|
|
|
Aggregate
|
|
|
under
|
|
|
exercise
|
|
contractual
|
|
|
intrinsic
|
|
|
option
|
|
|
price
|
|
life
|
|
|
value
|
Outstanding at January 1, 2016
|
|
|
2,867,876
|
|
|
$
|
0.30
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(729,707
|
)
|
|
|
0.07
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
2,138,169
|
|
|
|
0.38
|
|
3.03
|
|
$
|
-
|
Exercisable at June 30, 2016
|
|
|
1,497,243
|
|
|
$
|
0.42
|
|
3.10
|
|
$
|
-
|
The following table summarizes the activity and value of non-vested options as of and for the six months ended June 30, 2016:
|
|
|
|
Weighted
|
|
|
|
|
|
average
|
|
|
|
Number of
|
|
grant date
|
|
|
|
options
|
|
fair value
|
|
Non-vested options outstanding at January 1, 2016
|
|
|
1,365,926
|
|
|
$
|
0.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(725,000
|
)
|
|
|
0.48
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
Non-vested options outstanding at June 30, 2016
|
|
|
640,926
|
|
|
$
|
0.10
|
|
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
NOTE 6 – EQUITY (CONTINUED)
Warrants:
The following table sets forth the activity regarding warrants for the six months ended June 30, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
Shares
|
|
Average
|
|
Remaining
|
|
|
Aggregate
|
|
Underlying
|
|
Exercise
|
|
Contractual
|
|
|
Intrinsic
|
|
Warrants
|
|
Price
|
|
Life
|
|
|
Value
|
Outstanding at January 1, 2016
|
|
|
27,717,614
|
|
$
|
|
0.25
|
|
|
|
2.96
|
|
|
|
Granted
|
|
|
2,178,554
|
|
|
|
0.40
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
24,646,168
|
|
|
|
0.29
|
|
|
|
2.10
|
|
$
|
-
|
Exercisable at June 30, 2016
|
|
|
24,505,168
|
|
$
|
|
0.29
|
|
|
|
2.10
|
|
$
|
-
|
The following table sets for the activity regarding non-vested warrants for the six months ended June 30, 2016:
|
|
Non-vested
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Fair Value
|
|
Non-vested at January 1, 2016
|
|
|
173,000
|
|
|
$
|
0.18
|
|
|
$
|
0.24
|
|
Granted
|
|
|
2,178,554
|
|
|
|
0.40
|
|
|
$
|
-
|
|
Vested
|
|
|
(2,160,554
|
)
|
|
|
0.40
|
|
|
|
0.00
|
|
Forfeited/cancelled
|
|
|
(50,000
|
)
|
|
|
0.50
|
|
|
$
|
0.50
|
|
Non-vested at June 30, 2016
|
|
|
141,000
|
|
|
$
|
0.29
|
|
|
$
|
0.35
|
|
NOTE 7 – SUBSEQUENT EVENTS
On August 3, 2016, the Company granted options to four members of its Board of Directors to purchase up to 100,000 common shares that vest on March 9, 2017, with an exercise price of $0.05 per share. The Company also amended stock options originally dated January 22, 2014, to accelerate the vesting schedule for 91,214 shares of common stock from August 19, 2017 to August 19, 2016.
T
he Company also granted options for 5,000,000 shares of common stock, with 1,000,000 options vesting immediately followed by 1,000,000 per year for the next four years, with an exercise price of $0.05 per share.