Convertible notes payable at June 30, 2014 and December 31, 2013 are as follows:

		June 30,			December 31,
		2014			2013
6% Convertible notes payable issued in August 2013		$	3,000,000		$	3,000,000
Discounts on above convertible note			(2,083,333)			(2,583,333)
15% Convertible notes payable issued in March 2014			500,000			-
Discounts on above convertible note			(210,083)			-
			1,206,584			416,667
Current portion of convertible notes payable			(241,134)			-
Convertible notes payable, less current portion		$	965,450		$	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 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.

made

 

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 and six months ended June 30, 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% if the offering price in 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.