10-Q 1 ribs_10q-093016.htm FORM 10-Q
  FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT

Commission file number: 000-538-53
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
 (Exact name of the registrant as specified in its charter)
 
 Colorado
 80-0182193
 (State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
2 N. Cascade Avenue, Suite 1400
Colorado Springs, CO 80903
(Address of principal executive offices)

719-265-5821
Telephone number, including
Area code

________________________________________________
(Former name or former address if changed since last report)


Securities registered under Section 12(b) of the Exchange Act: None

Title of Each Class
 
Name of Each Exchange on Which Registered
NONE
 
NONE

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer        Accelerated filer        Non-accelerated filer        Smaller reporting Company

There were 77,303,476 shares of the issuer's common stock, no par value, outstanding as of November 14, 2016.
 
 
 


 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2016
 
CONTENTS
 
PART I – Financial Information
 1
 
 
Item 1.  Financial Statements
 1
 
 
Condensed consolidated financial statements (unaudited)
 
 
 
     Balance sheets
 2
 
 
     Statements of loss
 3
 
 
     Statements of cash flows
 4
 
 
     Statement of changes in equity
 5
 
 
     Notes to unaudited consolidated financial statements 
 6
 
 
Item 2. Management's Discussion and Analysis
 11
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 14
 
 
Item 4. Controls and Procedures 
 14
 
 
PART II – Other information
 14
 
 
Item 1.  Legal Proceedings
 14
 
 
Item 1A. Risk Factors 
 14
 
 
Item 2.  Unregistered Sales of Securities and Use of Proceeds  
 15
 
 
Item 3. Defaults Upon Senior Securities  
 15
 
 
Item 4. Mine Safety Disclosures
 15
 
 
Item 5. Other Information
 16
 
 
Item 6. Exhibits 
 17
 
 
 
 
 
 

1


SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2016
   
2015
 
Assets
 
(Unaudited)
   
(Audited)
 
Current assets:
           
Cash and cash equivalents
 
$
65,822
   
$
1,107,330
 
Prepaid expenses and other
   
69,821
     
117,499
 
Inventory
   
81,995
     
91,358
 
Total current assets
   
217,638
     
1,316,187
 
                 
Deposits
   
120,555
     
120,555
 
Related party receivable
   
25,787
     
25,787
 
Intangible asset, net
   
31,875
     
35,625
 
Property and equipment, net
   
3,772,208
     
4,279,096
 
Total assets
 
$
4,168,063
   
$
5,777,250
 
                 
Liabilities and equity
               
Current liabilities:
               
Accounts payable
 
$
154,939
   
$
256,252
 
Accrued expenses
   
295,016
     
272,347
 
Notes payable and accrued interest, current portion
   
232,133
     
-
 
Convertible notes payable and accrued interest, current portion
   
232,792
     
129,489
 
Related party note payable (net of discount of $91,485 (2016) and $365,940 (2015))
   
1,116,015
     
784,059
 
Total current liabilities
   
2,030,895
     
1,442,147
 
                 
Deferred rent
   
289,710
     
309,895
 
Notes payable and accrued interest, net of current portion
   
193,335
     
482,934
 
Convertible notes payable and accrued interest, less current portion,
               
(net of discount of $418,778 (2016) and $514,515 (2015)
   
1,158,648
     
1,110,122
 
Total liabilities
   
3,672,588
     
3,345,098
 
                 
Commitments and contingencies
               
                 
Equity
               
Preferred stock - par value $0.001;
               
Authorized Series A shares - 456,068
               
Issued and outstanding Series A shares - 456,068 (2016) and 4,884,859 (2015)
   
23,348
     
248,994
 
Common stock - no par value;
               
Authorized shares - 125,000,000
               
Issued and outstanding shares - 77,078,476 (2016) and 62,398,303 (2015)
   
10,476,626
     
9,799,319
 
Additional paid-in capital
   
4,295,507
     
3,873,710
 
Accumulated deficit
   
(14,509,118
)
   
(12,092,077
)
Total Southern Concepts Restaurant Group, Inc ("SCRG") equity
   
286,363
     
1,829,946
 
Noncontrolling interest
   
209,112
     
602,206
 
Total equity
   
495,475
     
2,432,152
 
Total liabilities and equity
 
$
4,168,063
   
$
5,777,250
 
 
 
See notes to condensed unaudited consolidated financial statements.



2



SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
 (Unaudited)

 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,  
 
   
2016
   
2015
   
2016
   
2015
 
                         
Revenue
 
$
1,708,971
   
$
1,736,930
   
$
5,570,369
   
$
4,792,725
 
Operating expenses:
                               
Restaurant operating costs (related party $100,300, $300,900, $100,300 and $300,900 for the three
                         
and nine months ended September 30, 2016 and 2015), exclusive of depreciation and amortization below
   
1,839,011
     
1,770,622
     
5,794,278
     
4,857,207
 
General and administrative
   
310,480
     
495,420
     
1,209,179
     
1,589,855
 
Selling and marketing
   
72,637
     
98,067
     
213,459
     
244,253
 
Depreciation and amortization
   
187,530
     
152,897
     
566,308
     
405,119
 
Total operating expenses
   
2,409,658
     
2,517,006
     
7,783,224
     
7,096,434
 
                                 
Loss from operations
   
(700,687
)
   
(780,076
)
   
(2,212,855
)
   
(2,303,709
)
                                 
Other expense:
                               
Interest expense (related party $33,400, $100,100, $32,500 and $97,497 for the three and nine months ended September 30, 2016 and 2015)
   
(188,089
)
   
(177,962
)
   
(556,968
)
   
(554,020
)
                                 
Net loss
 
$
(888,776
)
 
$
(958,038
)
 
$
(2,769,823
)
 
$
(2,857,729
)
                                 
Net loss attributable to noncontrolling interest
 
$
(137,805
)
 
$
(126,582
)
 
$
(352,782
)
 
$
(330,805
)
                                 
Net loss attributable to SCRG
   
(750,971
)
   
(831,456
)
   
(2,417,041
)
   
(2,526,925
)
                                 
Net loss
 
$
(888,776
)
 
$
(958,038
)
 
$
(2,769,823
)
 
$
(2,857,729
)
                                 
Basic and diluted net loss per share attributable to SCRG common shareholders
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
)
 
$
(0.05
)
                                 
Weighted average number of common shares outstanding - basic and diluted
   
72,612,584
     
54,008,923
     
70,376,956
     
51,164,319
 
 
 
 

See notes to condensed unaudited consolidated financial statements.
 
 
3

 



SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine months ended
 
   
September 30,  
 
   
2016
   
2015
 
Net cash used in operating activities
 
$
(1,576,790
)
 
$
(1,944,093
)
Cash flows from investing activities
               
Purchase of property and equipment
   
(55,669
)
   
(1,604,167
)
Net cash used in investing activities
   
(55,669
)
   
(1,604,167
)
Cash flows from financing activities
               
Contribution to subsidiary by non-controlling interest
   
75,000
     
1,084,023
 
Distribution to non-controlling interest holders
   
(115,312
)
   
(26,684
)
Proceeds from issuance of a promissory note and a related party note
   
482,500
     
-
 
Payment of long-term debt
   
(438,400
)
   
-
 
Payment of notes
   
(50,000
)
   
-
 
Payment on promissory notes
   
-
     
(25,000
)
Proceeds from sale of common stock and warrants
   
637,113
     
1,302,166
 
Proceeds from stock option exercise
   
50
     
25
 
Proceeds from issuance of long-term debt, net
   
-
     
300,771
 
Proceeds from issuance of promissory notes and warrants
   
-
     
280,000
 
Net cash (used in) provided by financing activities
   
590,951
     
2,915,301
 
Net decrease in cash and cash equivalents
   
(1,041,508
)
   
(632,959
)
Cash and cash equivalents, beginning
   
1,107,330
     
1,182,099
 
Cash and cash equivalents, ending
 
$
65,822
   
$
549,140
 
 

See notes to condensed unaudited consolidated financial statements.
 
4


 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(Unaudited)
 
 
                           
Additional
         
Non-
       
   
Common Stock
   
Preferred Stock
   
paid-in
   
Accumulated
   
Controlling
       
   
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
Deficit
   
Interest
   
Total
 
Balances, December 31, 2015
   
62,398,303
   
$
9,799,319
     
4,884,859
   
$
248,994
   
$
3,873,710
   
$
(12,092,077
)
 
$
602,206
   
$
2,432,152
 
Issuance of common stock and warrants for cash
   
7,152,288
     
451,611
     
-
     
-
     
185,502
     
-
     
-
     
637,113
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
236,295
     
-
     
-
     
236,295
 
Cashless exercise of a warrant
   
2,916,666
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Conversion of Series A preferred shares to common
   
4,428,791
     
225,646
     
(4,428,791
)
   
(225,646
)
   
-
     
-
     
-
     
-
 
Exercise of stock options
   
182,428
     
50
     
-
     
-
     
-
     
-
     
-
     
50
 
Contribution by non-controlling interest holder
   
-
     
-
     
-
     
-
     
-
     
-
     
75,000
     
75,000
 
Distribution to non-controlling interest holder
                                             
(115,312
)
   
(115,312
)
Net loss
   
-
     
-
     
-
     
-
     
-
     
(2,417,041
)
   
(352,782
)
   
(2,769,823
)
Balances, September 30, 2016
   
77,078,476
   
$
10,476,626
     
456,068
   
$
23,348
   
$
4,295,507
   
$
(14,509,118
)
 
$
209,112
   
$
495,475
 
 
 
See notes to condensed unaudited consolidated financial statements.
 
 
5




SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
  
NOTE 1 –BASIS OF PRESENTATION
 
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 September 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 unaudited condensed consolidated 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 continues to explore options for growth for the Company's two brands, Southern Hospitality and Carve Barbecue, and scouting locations for the kitchen-less concept it is looking to open in Q1 2017.  The Company is looking for opportunities for the Southern Hospitality concept with a footprint of 4,000 to 5,000 square feet.  The Company is identifying real estate partners and locations for Carve Barbecue's approximately 2,500 square feet footprint. The Company is in the process of identifying 500 to 1,000 square ft. locations for the kitchen-less concept development in the first and second quarters of 2017.  As of September 30, 2016, the Company had incurred losses in the first three quarters of 2016. 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 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 $0.9 million, $2.8 million, $1.0 million and $2.9 million for the three and nine month periods ended September 30, 2016 and 2015, respectively, and has an accumulated deficit of approximately $14.5 million at September 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.                                         
 
 
6

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Recently Issued Accounting Standards

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, 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.

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. The Company is currently evaluating the effect that this ASU will have on the consolidated financial statements.

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 2017; 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 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 September 30, 2016, represent franchise license costs for the Denver restaurant (net of accumulated amortization of $18,125). Amortization expenses of $1,250 and $3,750 have been recorded for the three and nine month periods ended September 30, 2016 and 2015. Amortization expense for the next five years and thereafter is estimated to be as follows:
 
7

 




SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

NOTE 3 – INTANGIBLE ASSETS (CONTINUED)
 
Year ending
     
2016 (remainder of year)
 
$
1,250
 
2017
   
5,000
 
2018
   
5,000
 
2019
   
5,000
 
2020
   
5,000
 
Thereafter
   
10,625
 
   
$
31,875
 
 
 
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.

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 nine months ended September 30, 2016 and 2015 was $33,400, $100,100, $32,500 and $97,500. The Company paid $100,000 towards prepayment of this Loan to BB14 at December 31, 2015. During the nine months ended September 30, 2016, the Company prepaid an additional $400,000 towards this Loan then recaptured $417,500 of this repayment.

The company entered into a convertible promissory note with HIA for $40,000.  The note is convertible into common shares of the Company at $0.04 per share. The note bears interest at 3% per annum and has principal and interest due by June 30, 2017.

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 nine months ended September 30, 2016 and 2015, the Company incurred royalty expense of $37,690, $123,100, $41,900 and $99,600 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.                
 
 
 
8

 
 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

NOTE 5 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 5,031,730 common shares of stock for proceeds of $210,346 between July 1, 2016 and September 30, 2016.  For the period from January 1, 2016 through September 30, 2016, the Company issued 7,152,288 common shares of stock for proceeds of $637,113.  The Company sold 225,000 shares of common stock subsequent to September 30, 2016 for proceeds or $9,000.

Stock options:

The stock-based compensation cost related to options that have been included as a charge to general and administrative expense in the condensed consolidated statements of loss was approximately $121,500, $236,300, $109,100 and $263,900 for the three and nine months ended September 30, 2016 and 2015, respectively.  As of September 30, 2016 there was approximately $494,600 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 four years.
 
The following tables set forth the activity in the Company's Plan for the nine months ended September 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
   
5,400,000
     
0.05
          
Exercised
   
(182,426
   
0.00
          
Forfeited/cancelled
   
(1,468,950
)
   
0.25
          
Outstanding at September 30, 2016
   
6,616,500
     
0.11
 
                           4.48
  $
                            -
Exercisable at September 30, 2016
   
2,104,000
   
$
0.23
 
4.40
  $
-
 
 

The following table summarizes the activity and value of non-vested options as of and for the nine months ended September 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
   
5,400,000
     
0.05
 
Vested
   
(1,907,426
)
   
0.15
 
Forfeited/cancelled
   
(346,000
)    
0.46
 
Non-vested options outstanding at September 30, 2016
   
4,512,500
   
$
0.05
 


 
9

 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

NOTE 6 – EQUITY (CONTINUED)

Warrants:

The following table sets forth the activity regarding warrants for the nine months ended September 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
   
3,010,554
     
0.30
                 
Exercised
   
(5,000,000
)
                          
Forfeited/cancelled
   
(250,000
)
    0.90                     
Outstanding at September 30, 2016
   
25,478,168
     
0.28
     
1.85
  $
                           -
Exercisable at September 30, 2016
   
24,623,168
 
 
0.29
     
1.85
  $
                           -
 

 
The following table sets for the activity regarding non-vested warrants for the nine months ended September 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
   
3,010,554
     
0.30
   
$
-
 
Vested
   
(2,328,554
)
   
0.39
     
-
 
Forfeited/cancelled
   
-
 
   
-
   
$
-
 
Non-vested at September
   
855,000
   
$
0.06
   
$
0.07
 
 


 
10


 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
In this Management's Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including:
 
Key events and recent developments within our Company;
Our results of operations for the three and nine months ended September 30, 2016 and 2015;
Our liquidity and capital resources; and
Any contractual obligations to which we are committed;
 
The review of Management's Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this quarterly report.
 
Overview

During 2016, the Company continues to explore options for growth for the Company's two brands, Southern Hospitality and Carve Barbecue, and scouting locations for the kitchen-less concept it is looking to open in Q1 2017.  The Company is looking for opportunities for the Southern Hospitality concept with a footprint of 4,000 to 5,000 square feet.  The Company is identifying real estate partners and locations for Carve Barbecue's approximately 2,500 square feet footprint. The Company is in the process of identifying 500 to 1,000 square ft. locations for the kitchen-less concept development in the first and second quarters of 2017.  As of September 30, 2016, the Company had incurred losses in the first three quarters of 2016. 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 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.

Results of Operations – Three and Nine Months Ended September 30, 2016 and 2015

Revenues
 
During the three and nine months ended September 30, 2016 and 2015, the Company generated approximately $1,709,000, $5,570,000, $1,737,000 and $4,793,000 respectively, in net revenue.  The primary increase in 2016 over 2015 was due to the additional store openings of SHLT and CARVEG which increased 2016 revenues compared to the same period in 2015.

Operating Expenses – Restaurant Operating Costs

For the nine months ended September 30, 2016 and 2015, the Company's restaurant operating costs were approximately $1,839,000, $5,794,000, $1,771,000 and $4,857,000, respectively.  The restaurant operating costs was attributable to the four operating restaurants, including the cost of food, alcohol, labor and other costs of the restaurants.

Cost of revenue, comprised of operating expenses at the SHD, SHSK, SHLT and CARVEG restaurants, includes variable expenses that fluctuate with sales volumes for expenses such as food and beverage costs, payroll and franchise fees.  Fixed expenses, such as lease expenses at the restaurant locations, are also included.  The Company is working diligently to align food and beverage costs and payroll margins with industry best practices, while also pursuing marketing activities to increase revenues and streamlining restaurant expenses during the remainder of 2016 at all restaurant locations.


 
11



Operating Expenses – General and Administrative and Selling and Marketing

For the three and nine months ended September 30, 2016 and 2015, the Company's operating expenses were approximately $383,100, $1,422,600, $593,500 and $1,834,100. The operating expenses in 2016 were primarily related to ongoing operations while 2015 included pre-opening expenses for SHLT and CARVEG. The Company's largest operating expense, excluding restaurant operating expenses, during the three and nine months ended September 30, 2016 and 2015, were its general and administrative expenses totaling approximately $310,500, $1,209,200, $495,400 and $1,589,900. The general and administrative costs are due to ongoing expenses for four restaurant locations primarily, including recurring corporate costs (such as payroll and related expenses).  As part of operating expenses, the Company incurred approximately $72,600, $213,500, $98,000 and $244,300 in selling and marketing expenses during the three and nine months ended September 30, 2016 and 2015. The Company expects to incur general and administrative expenses going forward as it continues to grow its operations.  The Company anticipates that its consolidated net loss may continue throughout the remainder of 2016 due to the pursuing of marketing activities to increase revenues and to fund its corporate overhead.

Operating Expenses – Depreciation and Amortization

For the three and nine months ended September 30, 2016 and 2015, the Company's depreciation and amortization was approximately $187,500, $566,300, $152,900 and $405,100.  Depreciation on fixed assets and amortization of the intangible asset for franchise fees began in February 2013 with the opening of the SH Denver restaurant, the Company's first restaurant.

Other income (expense)

For the three and nine months ended September 30, 2016 and 2015, the Company recognized other expense of approximately $188,000, $557,000, $178,000 and $554,000 consisting of interest expense.  The increase in interest expense comparing year over year was primarily due to the increase in the amount of promissory notes in 2016 compared to 2015.

Liquidity and Capital Resources

As of September 30, 2016, the Company had a working capital deficit of approximately $1,813,300 and had approximately $65,000 of cash.  The Company's total assets decreased as of September 30, 2016, when compared to December 31, 2015, mostly due to cash used to prepay a portion of the related party note payable and to fund an increase in property and equipment for CARVEG. 
 
As noted above, the Company incurred a net loss during the three and nine months ended September 30, 2016.  Further, as of September 30, 2016, the Company had an accumulated deficit of approximately $14,509,100.  The Company believes its restaurant revenues from its four restaurants in Denver, Colorado Springs, Lone Tree and Glendale, offset by the overhead of the public company administration, requires the Company to seek additional capital to help fund its operations in the near term.  However, there can be no assurance that additional financing will be available to the Company on reasonable terms, if at all.  The Company's ability to continue to pursue its plan of operations is dependent upon its ability to increase revenues and/or raise the capital necessary to meet its financial requirements on a continuing basis. The Company's continued implementation of its business plan is dependent on its future profitability and on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all.  If such profitability and/or financing are not available, the Company may need to curtail its operations.  The Company believes the individual store performances reflect an ongoing effort to curb costs within food and labor, while also pursuing marketing activities to increase revenues and streamlining restaurant expenses during the remainder of 2016 at all restaurant locations.

The Company's unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016, 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 Report of our Independent Registered Public Accounting Firm on the Company's consolidated financial statements as of and for the year ended December 31, 2015, includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise substantial doubt about the Company's ability to continue as a going concern.
Liabilities

The Company's liabilities for notes payable and accrued interest as of September 30, 2016, is approximately $2,932,900 compared to approximately $2,506,600 as of December 31, 2015.  Accounts payable as of September 30, 2016, is approximately $155,000 compared to approximately $256,000 as of December 31, 2015.  Overall, total liabilities increased due to the accrued interest on the notes payables.       
 
 
12

 
Operating Activities
 
Net cash used in operating activities was approximately $1,576,800 in the nine months ended September 30, 2016, as compared to net cash used in operating activities of approximately $1,944,000 in the same period of 2015. The decrease in net cash used in operating activities in 2016 (compared to 2015) was primarily due to the increase in net loss offset by decreases in accounts payable. 

Investing Activities
 
Net cash used in investing activities in the nine months ended September 30, 2016, was approximately $55,700, as compared to net cash used in investing activities of approximately $1,604,200 for the nine months ended September 30, 2015.  Net cash used in investing activities for the nine months ended September 30, 2016 and 2015, was primarily the result of cash used for purchases of property and equipment for both periods, including purchases related to new store openings in 2015. 

Financing Activities
 
Net cash provided by financing activities for the nine months ended September 30, 2016, was approximately $591,000, compared to net cash provided by financing activities for the nine months ended September 30, 2015 of approximately $2,915,300.  Cash used in financing activities in 2016 primarily consisted of payments on long-term debt and related party promissory notes, offset by proceeds from the sale of common stock. 

Contractual Cash Obligations

In April 2012, the Company entered into a lease with a third party that expires in August 2022, with the option to extend for two, five year periods, and requires lease payments of approximately $15,550 per month for the first year, escalating up to approximately $20,289 per month in the tenth year.

In January 2014, the Company entered into a lease with a third party for its corporate office. The Company pays approximately $6,000 per month with the lease expiring on December 31, 2016.

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.

In July 2014, the Company entered into a ten-year, non-cancellable lease with a third party for the restaurant in Lone Tree, Colorado. The lease provides for an initial lease term of ten years with two, five year renewal options. Rent payments are approximately $9,900 per month plus certain common area maintenance charges, and are subject to escalation provisions. This location opened April 27, 2015.

In April 2015, the Company entered into a non-cancellable lease with a third party for the Company's first fast casual restaurant in Glendale, Colorado. The initial term of this lease is to expire July 31, 2020.  This lease includes three extension options, with the term of each extension option consisting of five years. Rent payments are approximately $11,000. This location opened November 5, 2015.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our shareholders.
  
 
13



Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

           Not applicable.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "1934 Act"), as of September 30, 2016, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that because of the material weaknesses in our internal control over financial reporting, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, that our disclosure controls and procedures were not effective as of September 30, 2016.  A material weakness is a deficiency or a combination of deficiencies in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual consolidated financial statements or interim unaudited condensed consolidated financial statements will not be prevented or detected on a timely basis

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the 1934 Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

During the most recent fiscal quarter covered by this Quarterly Report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) 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

None.

Item 1A.  RISK FACTORS

There have been no material changes to the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

 
14









Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Warrant and Share Issuances

The Company sold 5,031,730 shares of common stock in the quarter. For the period from January 1, 2016 through September 30, 2016, the Company issued 7,152,288 common shares of stock. The Company sold 225,000 shares of common stock subsequent to September 30, 2016. These securities were issued in reliance on the exemptions from registration under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated under the Securities Act.

Item 3. DEFAULTS UPON SENIOR SECURITIES
None.

Item 4. MINE SAFETY DISCLOSURES
None.

Item 5. OTHER INFORMATION
None.


 
15


 

Item 6.  EXHIBITS
 
 
Exhibit
Number
 
 
                                         Description
 
 
3.1
Articles of Incorporation, as amended through March 11, 2016. (1)
3.2
Bylaws, as amended through January 6, 2015. (1)
31.1
Rule 13a-14(a)/15d-14(a) - Certification of Principal Executive Officer.  Filed herewith.
32.1
Section 1350 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the SARBANES-OXLEY ACT of 2002. Filed herewith.
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
   
(1)   Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and filed on March 16, 2016.     

In accordance with the requirements of Section 13 or 15(d) Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
 


 
SOUTHERN CONCEPTS RESTAURANT GROUP, INC.
 
 
 
 
 
Date:  November 14, 2016
By:
/s/  James J. Fenlason
 
 
 
James J. Fenlason, CEO and CFO
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
16