Quarterly report pursuant to Section 13 or 15(d)

CONVERTIBLE NOTES PAYABLE

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CONVERTIBLE NOTES PAYABLE
 3 Months Ended
Mar. 31, 2014
Convertible Notes Payable [Abstract]  
Convertible Notes Payable Disclosure Text block [Text Block]
8.
cONVERTIBLE NOTEs PAYABLE
 
Convertible notes payable at March 31, 2014 and December 31, 2013 are as follows:
 
 
 
March 31,
 
December 31,
 
 
 
2014
 
2013
 
 
 
 
 
 
 
 
 
6% Convertible notes payable issued in August 2013
 
$
3,000,000
 
$
3,000,000
 
Discounts on above convertible note
 
 
(2,333,333)
 
 
(2,583,333)
 
15% Convertible notes payable issued in March 2014
 
 
500,000
 
 
-
 
Discounts on above convertible note
 
 
(283,258)
 
 
-
 
 
 
 
883,409
 
 
416,667
 
Current portion of convertible notes payable
 
 
(216,742)
 
 
-
 
Convertible notes payable, less current portion
 
$
666,667
 
$
416,667
 
 
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  (“Notes”) for a total of $3,000,000 in a private offering collateralized by the assets of the Hooters Nottingham restaurant. The funding from the private offering was used exclusively for the acquisition of the Hooters Nottingham restaurant location (acquisition described in Note 3). The Notes have the following principal terms:
 
 
⋅
the principal amount of each Note shall be repaid within 36 months of the issuance date at a non-compounded 6% interest rate per annum payable quarterly beginning on the original issue date and continuing thereafter until the maturity date;
 
⋅
the Note holders shall receive 10%, pro rata, of the net profit of the Hooters Nottingham 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;
 
⋅
Beginning six months after the original issue date and until this debenture is no longer outstanding, each 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;
 
⋅
each 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 is $2,265,600 and $884,600, respectively, and the aggregated total equal $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 each was estimated using the Black-Scholes option-pricing model which approximated the Binomial Lattice model. Key assumptions used to apply this pricing model during the three months ended March 31, 2014 were as follows:
 
Risk-free interest rate
 
0.15%-0.79%
 
Expected life
 
1-5 years
 
Expected volatility
 
62%-89%
 
 
The expected stock price volatility for the Company’s stock options was determined by the historical volatilities of comparable companies. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.
 
In March 2014, the Company entered into an agreement whereby the Company issued a convertible promissory note for a total of 500,000. The note accrues monthly interest of 1.25% until the date the note is converted. The note is convertible into the Company’s common stock (at 85% of the offering price in a future offering or 85% of the VWAP). The conversion price is subject to a floor of $3.00 per share. If not converted, the note matures one year from the issuance date.
 
In connection with the issuance of the March 2014 convertible promissory note, the Company also issued to the investors warrants to purchase up to 30% of the number of shares of Common Stock issued upon conversion of the 2014 note, exercisable at $5.25 per share for a period of up to 5 years from the Note's original issuance date.
    
The Company accounted for the issuance of the convertible promissory note and the warrants attached to the note in accordance with ASC 815 “Derivatives and Hedging.” Accordingly, the warrants and the embedded conversion option of the convertible notes are recorded as derivative liabilities at their fair market value and are marked to market through earnings at the end of each reporting period. The gross proceeds from the sale of the note are recorded net of a discount of $9,442. The debt discount relates to the beneficial conversion feature embedded in the conversion option and the fair value of the warrants attached to the notes. The debt discount is charged back to interest expense ratably over the term of the convertible note.