| 10. | cONVERTIBLE NOTEs PAYABLE |
On August 2, 2013, the Company entered into an agreement with seven individual accredited investors, whereby the Company issued separate 6% Secured Subordinate Convertible Notes for a total of $3,000,000 in a private offering and is collateralized by the assets of the Hooters Nottingham restaurant. The funding from the private offering was used exclusively for the acquisition of the Nottingham, England Hooters restaurant location (acquisition described in Note 3). The Notes have the following principal terms:
| · | the principal amount of the Note shall be repaid within 36 months of the issuance date at a non-compounded 6% interest rate per annum; |
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the Note holders shall receive 10%, pro rata, of the net profit of the Nottingham, EnglandHooters restaurant, paid quarterly for the life of the location, and 10% of the net proceeds should the location be sold; |
| · | the consortium of investors received a total of 300,000) three-year warrants, exercisable at $3.00 per share; |
| · | the Note holder may convert his or her Note into shares of the Company’s common stock (at 90% of the average closing price ten days prior to conversion, unless a public offering is pending at the time of the conversion notice, which would result in the conversion price being the same price as the offering). The conversion price is subject to a floor of $1.00 per share; |
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the Note holder has the right to redeem the Note for a period of sixty days following the eighteen month anniversary of the issuance of the Note, unless a capital raise is conducted within eighteen months after the issuance of the Note. In connection with the issuance of the Note, the Company also issued warrants for the purchase of 300,000 shares of the Company’s common stock at an exercise price of $3.00 per share through August 2, 2016. |
The Company completed the purchase of Hooters Nottingham on November 6, 2013 and began operating the restaurant on November 7, 2013.
The fair value of the embedded conversion feature and the warrants, $2,265,600 and $884,600, respectively, aggregated $3,150,200. Consequently, upon issuance of the Note, a debt discount of $3,000,000 was recorded and the original difference of $150,200, representing the fair value of the conversion feature and the warrants in excess of the debt discount, was immediately charged to interest expense. The debt discount will be amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
The fair value of the embedded conversion feature and the warrants was estimated using the Black-Scholes option-pricing model. Key assumptions used to apply this pricing model during the three months ended December 31, 2013 were as follows:
| Risk-free interest rate | | 0.006 | % |
| Expected life of warrants | | 2.6 years | |
| Expected volatility of underlying stock | | 104.06 | % |
The expected stock price volatility for the Company’s stock options was determined by the historical volatilities for the Company’s stock. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.