Southern Concepts Restaurant Group, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Southern Concepts Restaurant Group, Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Southern Concepts Restaurant Group, Inc.	ex32x1.htm
EX-31.2 - EXHIBIT 31.2 - Southern Concepts Restaurant Group, Inc.	ex31x2.htm
EX-32.2 - EXHIBIT 32.2 - Southern Concepts Restaurant Group, Inc.	ex32x2.htm
EX-10.1 - EXHIBIT 10.1 - Southern Concepts Restaurant Group, Inc.	ex10x1.htm
EX-31.1 - EXHIBIT 31.1 - Southern Concepts Restaurant Group, Inc.	ex31x1.htm

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT

Commission file number: 000-538-53

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

(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 x No o

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 x No o

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

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 o Accelerated filer o Non-accelerated filer o Smaller reporting Company x

There were 9,629,220, shares of the issuer's common stock, no par value, outstanding as of November 14, 2013.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2013

CONTENTS

PART I – Financial Information	2

Item 1. Financial Statements	2

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	21

Item 3. Quantitative and Qualitative Disclosures About Market Risk	26

Item 4. Controls and Procedures	26

PART II – Other information	26

Item 1. Legal Proceedings	26

Item 1A. Risk Factors	26

Item 2. Unregistered Sales of Securities and Use of Proceeds	27

Item 3. Defaults Upon Senior Securities	27

Item 4. Mine Safety Disclosures	27

Item 5. Other Information	27

Item 6. Exhibits	28

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2013			2012
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,261		$	962,331
Prepaid expenses and other		64,636			242,807
Inventory		36,517			-
Total current assets		144,414			1,205,138

Deposit		18,034			18,034
Intangible asset		46,875			300,000
Property and equipment, net		2,501,316			1,451,659
Total assets	$	2,710,639		$	2,974,831

Liabilities and equity
Current liabilities:
Accounts payable	$	95,769		$	453,788
Related party payable		-			8,659
Accrued expenses		66,308			73,673
Related party note payable		131,486
Note payable and accrued interest		206,459			-
Convertible notes payable and accrued interest, current portion		81,250			55,795
Total current liabilities		581,272			591,915

Deferred rent		235,250			232,565
Convertible notes payable and accrued interest, net of current portion,
(net of $242,220 (2013) and $682,938 (2012) discount)		486,993			954,487
Total liabilities		1,303,515			1,778,967

Commitments and contingencies

Equity
Preferred stock, 1,000,000 shares authorized,
none issued or outstanding		-			-
Common stock - no par value;
Authorized shares - 50,000,000
Issued and outstanding shares - 9,629,220 (2013) and 6,980,270 (2012)		4,925,860			2,725,200
Additional paid-in capital		1,020,676			673,626
Accumulated deficit		(5,038,598	)		(2,734,895	)
Total Smokin Concepts Development Corporation ("SCDC") equity		907,938			663,931
Noncontrolling interest		499,186			531,933
Total equity		1,407,124			1,195,864
Total liabilities and equity	$	2,710,639		$	2,974,831

See notes to unaudited consolidated financial statements.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012

Revenue	$	596,766		$	-		$	1,553,052		$	-
Operating expenses:
Restaurant operating costs (exclusive of depreciation and amortizaton below)		611,238			-			1,713,256			-
General and administrative		134,681			303,833			1,121,668			601,539
Related party management services		114,512			138,169			349,388			348,169
Selling and marketing		199			9,776			19,065			80,116
Depreciation and amortization		74,216			-			176,541			-
Impairment of franchise fees		250,000			-			250,000			-
Total operating expenses		1,184,846			451,778			3,629,918			1,029,824

Loss from operations		(588,080	)		(451,778	)		(2,076,866	)		(1,029,824	)

Other expense:
Interest expense		(25,175	)		(55,346	)		(485,564	)		(78,035	)

Net loss	$	(613,255	)	$	(507,124	)	$	(2,562,430	)	$	(1,107,859	)

Net loss attributable to noncontrolling interest	$	(36,671	)	$	(62,642	)	$	(258,727	)	$	(62,642	)

Net loss attributable to SCDC		(576,584	)		(444,482	)		(2,303,703	)		(1,045,217	)

Net loss	$	(613,255	)	$	(507,124	)	$	(2,562,430	)	$	(1,107,859	)

Basis and diluted net loss per share attributable to SCDC common shareholders	$	(0.06	)	$	(0.08	)	$	(0.27	)	$	(0.22	)

Weighted average number of common shares outstanding - basic and diluted		9,611,542			5,318,606			8,612,059			4,817,939

See notes to unaudited consolidated financial statements.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	September 30,
	2013			2012
Cash flows from operating activities
Net loss	$	(2,562,430	)	$	(1,107,859	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of prepaid management services and guarantees		205,868			33,169
Amortization of debt discount		419,283			31,918
Stock-based compensation		257,580			-
Contributed services by related party		40,000			-
Stock issued for services		26,664			50,000
Depreciation and amortization		176,541			-
Impairment of franchise fees		250,000			-
Changes in operating assets and liabilities:
Prepaid expenses		(27,789	)		3,359
Deposit		-			(18,034	)
Inventory		(36,517	)		-
Accounts payable		(358,336	)		(1,083	)
Related party payable		(8,659	)		(41,541	)
Accrued expenses and accrued interest		13,658			61,971
Deferred rent		2,685			78,951
Net cash used in operating activities		(1,601,452	)		(909,149	)
Cash flows from investing activities
Cash restricted for leasehold improvements		-			(397,335	)
Purchase of property and equipment		(1,223,072	)		(271,301	)
Net cash used in investing activities		(1,223,072	)		(668,636	)
Cash flows from financing activities
Proceeds from exercise of a stock option		4,976			-
Proceeds from issuance of notes payable and common stock		-			1,936,001
Contribution to subsidiary by non-controlling interest		225,980			225,000
Advances from related party		135,000			-
Advances repaid to related party		(135,000	)		-
Proceeds from issuance of related party promissory note		131,486			-
Sale of common stock		1,368,012			-
Repurchase of shares for services from related party		(25,000	)		-
Proceeds from issuance of promissory note and warrant		200,000			250
Net cash provided by financing activities		1,905,454			2,161,251
Net (decrease) increase in cash		(919,070	)		583,466
Cash and cash equivalents, beginning		962,331			27,533
Cash and cash equivalents, ending	$	43,261		$	610,999
Supplemental disclosure of non-cash investing and financing activities:
Convertible notes and interest converted to common stock	$	830,984		$	-
Issuance of promissory note and common stock for services	$	-		$	50,000

See notes to unaudited consolidated financial statements.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2013



							Additional					Non-
	Common Stock						paid-in		Accumulated			Controlling
	Shares			Amount			capital		Deficit			Interest			Total
Balances, January 1, 2013		6,980,270		$	2,725,200		$	673,626	$	(2,734,895	)	$	531,933		$	1,195,864
Issuance of common stock for cash		1,901,780			1,368,012			-		-			-			1,368,012
Conversion of notes payable to common shares		417,828			830,984			-		-			-			830,984
Stock issued for services		35,554			26,664			-		-			-			26,664
Warrant issued with a note payable		-			-			44,494		-			-			44,494
Contribution of cash by non-controlling members		-			-			-		-			225,980			225,980
Exercise of stock options		327,122			-			4,976		-			-			4,976
Stock-based compensation		-			-			257,580		-			-			257,580
Contributed services		-			-			40,000		-			-			40,000
Repurchase of shares for services		(33,334	)		(25,000	)		-		-			-			(25,000	)
Net loss		-			-			-		(2,303,703	)		(258,727	)		(2,562,430	)
Balances, September 30, 2013		9,629,220		$	4,925,860		$	1,020,676	$	(5,038,598	)	$	499,186		$	1,407,124

See notes to unaudited consolidated financial statements.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS

Organization

Smokin Concepts Development Corporation (“SCDC” or the “Company”) is a Colorado corporation formed for the purpose of owning and operating up to 30 Southern Hospitality restaurants in the United States, along with managing restaurants outside of the Southern Hospitality brand. The restaurants primarily serve southern or Memphis style barbeque and cuisine and alcoholic beverages (such as a range of bourbons and other spirits and cocktails) and sell certain related products and merchandise (such as meat rubs and memorabilia). The Company entered into a franchise agreement and area development agreement with SH Franchising & Licensing LLC, dba Southern Hospitality BBQ (the “Franchisor”) in November 2011. In May 2012, the Company formed Southern Hospitality Denver Holdings, LLC (“SHDH”), a wholly-owned subsidiary, and Southern Hospitality Denver, LLC (“SHD”). SHD was formed for the purpose of owning and operating the Company’s first franchised restaurant in Denver, Colorado. SHD is 51% owned by SHDH and 49% owned by non-controlling interest holders, of which a director of the Company is a 22% non-controlling interest holder.

On November 13, 2012, the Company, f/k/a Art Dimensions, Inc. (“ADI”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Southern Hospitality Franchisee Holding Corporation (“SH”) whereby the Company acquired SH in a reverse triangular merger (the “Acquisition”). On November 13, 2012, the parties closed the Acquisition, and a Statement of Merger was filed and effective with the Colorado Secretary of State on that day. Upon closing the Acquisition, the Company issued a total number of common shares to the SH shareholders in exchange for all of their ownership interests in SH such that they owned approximately 89% of the Company on the date of the Acquisition. The shareholders of the Company prior to the Acquisition owned approximately 11% of the Company after the closing of the Acquisition. On November 13, 2012, the Company and SH closed the Acquisition, and the Company’s wholly owned subsidiary, ADI Merger Corp., was merged with and into SH. An aggregate of 5,259,029 Company shares were issued in the Acquisition. The number of ADI common shares received by SH’s shareholder depended on the number of shares each held and that were outstanding at the closing of the Acquisition. Additionally, upon the effective date of the transaction all outstanding SH warrants, options and outstanding promissory notes were exchanged for options, warrants and promissory notes to acquire ADI common stock on equivalent terms. Pursuant to the Acquisition, on November 13, 2012, the Company changed its name from Art Dimensions, Inc. to Southern Hospitality Development Corporation.

The Registrant was a public shell company (as defined in Rule 12b-2 of the Exchange Act) at the date of the Acquisition. Therefore, the Acquisition was accounted for as a reverse acquisition and recapitalization. SH is the acquirer for accounting purposes and ADI is the acquired company. Accordingly, SH’s historical financial statements for periods prior to the transaction become those of ADI, retroactively restated for, and giving effect to the number of shares received in the Acquisition. The accumulated deficit of SH is carried forward after the acquisition. Operations reported for periods prior to the Acquisition are those of SH. Earnings per share for the period prior to the Acquisition are restated to reflect the equivalent number of shares outstanding.

The Company, on May 3, 2013, with approval of a majority of the Company’s shareholders, changed its name from Southern Hospitality Development Corporation to Smokin Concepts Development Corporation.

Basis of Presentation

Since inception through February 20, 2013, the Company devoted substantially all of its efforts to establishing its business. The Company’s planned principal operations commenced on February 21, 2013, with the opening of the Southern Hospitality Denver restaurant. As a result, the Company is no longer considered to be a development stage enterprise as of February 21, 2013.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)

Basis of Presentation (Continued)

The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Amounts as of December 31, 2012 are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which has previously been filed with the SEC.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2013 and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

Management’s Plans

The accompanying 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 $613,000 and $2.6 million for the three and nine months ended September 30, 2013, and has an accumulated deficit of approximately $5.0 million at September 30, 2013. The 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.

Since inception, the Company has devoted substantially all of its efforts to developing its business plan, raising capital, and opening and operating its first restaurant. For the three and nine months ended September 30, 2013, the Company has been largely focused on its first Denver-based restaurant and working to obtain profitable operations. Another focus for the Company’s senior management team and directors is in connection with the Company’s 2012 private placement offering to raise $1,500,000 for 2,000,000 shares at $0.75 per share that began in December 2012. Since December 2012, the Company has issued 1,979,542 shares for net proceeds of approximately $1,484,000.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS (CONTINUED)

Management estimates that the total investment necessary to begin operation of a single Southern Hospitality restaurant franchise is between $700,000 and $2.5 million. The Company began revenue generating activities in late February 2013, however, the Company does not have a revolving loan agreement with any financial institution, nor can the Company provide any assurance it will be able to enter into any such agreement in the future, or be able to raise funds through a future issuance of debt or equity. The Company’s continued implementation of its business plan is dependent on its future profitability and engaging in strategic transactions, or on additional debt or equity financing, which may not be available in amounts or on terms acceptable to the Company or at all. As a consequence, if the Company is unable to achieve and maintain profitability through the current restaurant operations, enter into strategic transactions, or obtain additional financing in the near term, the Company may be required to delay its business plan implementation, which would have a material adverse impact on the Company.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts, transactions, and profits are eliminated in consolidation.

Use of Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates. Changes in estimates are recorded in the period of change.

Fair Value Measurements

The Company accounts for financial instruments pursuant to accounting guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair measurements. To increase consistency and comparability in fair value measurements, the accounting guidance established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 – quoted prices (unadjusted) in active markets of identical assets or liabilities;

Level 2 – observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and

Level 3 – assets and liabilities whose significant value drivers are unobservable.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgments or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment. There were no financial assets or liabilities measured at fair value, with the exception of cash and cash equivalents as of September 30, 2013.

The carrying amounts of accounts payable and notes payable approximate their fair values due to their short-term maturities.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Non-controlling Interest

The non-controlling interest represents capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities, and are reported in equity. From inception through September 30, 2013, in exchange for their interest in SHD, the non-controlling members contributed $897,465 in cash, of which $0 and $225,980 was contributed during the three and nine months ended September 30, 2013.

Pre-opening Costs

Pre-opening costs, such as travel and employee payroll and related training costs are expensed as incurred and included direct and incremental costs incurred in connection with the opening of each restaurant. Pre-opening costs also included non-cash rental costs under operating leases incurred during a construction period.

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2013 includes $43,261, of cash and cash equivalents with an original a maturity of three months or less when purchased. The majority of payments due from financial institutions for the settlement of debit card and credit card transactions process within two business days, and therefore are classified as cash and cash equivalents.

Inventory

Inventory consists of food and beverages and is stated at the lower of cost (first-in, first-out) or market.

Property and Equipment

In conjunction with the Company’s Denver-based restaurant, the Company began capitalizing certain leasehold improvements, as well as equipment the Company purchased in 2012 but did not place in service until February 2013. Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired. The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired. Management bases this assessment upon the carrying value versus the fair value of the asset and whether or not that difference is recoverable. Such assessment is to be performed on a restaurant-by-restaurant basis and is to include other relevant facts and circumstances including the physical condition of the asset. If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value.

Leasehold improvements are stated at cost. Property and equipment costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets

Intangible assets at September 30, 2013, represent franchise license costs for the Denver restaurant. On September 23, 2013, the Company terminated the Area Developer Agreement (“ADA”) with the Franchisor for the exclusive rights for the first 10 cities identified in the ADA, subject to customary conditions and exceptions, and for the ownership and operation of up to 30 Southern Hospitality restaurants in the United States. The Company originally paid $300,000 for the franchise license costs for ten planned restaurants. As a result of the termination of the ADA, the Company determined this event impaired the intangible assets and as a result, impairment expense of $250,000 was recorded in the quarter ended September 30, 2013 (Note 3).

Capitalized Interest

Interest on funds used to finance the acquisition and construction of a restaurant to the date the asset is placed in service is capitalized.

Leases and Deferred Rent

The Company intends to lease substantially all of its restaurant properties, and in April 2012, the Company entered into a ten-year lease for the restaurant in Denver, Colorado. For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period. A long-term deposit on the Denver lease in the amount of $18,034 is recorded as of September 30, 2013. Deferred rent also includes a tenant improvement allowance the Company received for $150,000, which is amortized as a reduction of rent expense, also on a straight-line basis over the initial term of the lease.

Revenue Recognition

The Company began revenue-generating activities through the Denver restaurant on February 21, 2013. The Company began accounting for such revenues pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and applicable related guidance. Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is reported on the Company's consolidated statements of income (loss) net of sales taxes collected. The amount of sales tax collected is included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.

Advertising Expenses

Advertising costs are expensed as incurred. Total advertising expenses were approximately $200, $19,100, $9,800 and $80,100, respectively for the three and nine months ended September 30, 2013 and 2012.

Stock-Based Compensation

The Company accounts for stock-based compensation under Accounting Standards Codification (“ASC”) 718, Share-Based Payment. ASC 718 requires the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718 also requires the stock-based compensation expense to be recognized over the period of service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using an option pricing model, typically the Black-Scholes model.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.

The Company determines its income tax expense in each of the jurisdictions in which it operates. The income tax expense includes an estimate of the current income tax expense, as well as deferred income tax expense, which results from the determination of temporary differences arising from the different treatment of items for book and tax purposes.

The Company files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions.

The Company’s subsidiaries (SHD and SHDH) are limited liability companies (“LLC’s”). As an LLC, management believes that these companies are not subject to income taxes, and such taxes are the responsibility of the respective members.

The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying financial statements. The Company recognizes tax related interest and penalties, if any, as a component of income tax expense.

Net loss per share

Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if dilutive securities were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, unless the effect of such inclusion would reduce a loss or increase earnings per share. For each of the periods presented in the accompanying consolidated financial statements, the effect of the inclusion of dilutive shares would have resulted in a decrease in loss per share. Common stock options, warrants and shares underlying convertible debt aggregating 1,364,179, 1,958,512, 5,177,186 and 5,507,368 for the three and nine months ended, respectively, September 30, 2013 and 2012, have been excluded from the calculation of diluted net loss per common share.

Recently Issued Accounting Standards

The Company reviews new accounting standards as issued. Management has not identified any recently issued accounting standards that it believes will have a significant impact on the Company’s consolidated financial statements.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 3 – INTANGIBLE ASSETS

Franchise Agreements

In 2011, the Company paid $300,000 for the non-exclusive rights and license to use the Southern Hospitality system and Southern Hospitality licensed marks in connection with the operation of ten restaurants to be owned and operated by the Company under franchise and related area development agreements.

Intangible assets at September 30, 2013, represent franchise license costs for the Denver restaurant. On September 23, 2013, the Company terminated the Area Developer Agreement (“ADA”) with the Franchisor for the exclusive rights for the first 10 cities identified in the ADA, subject to customary conditions and exceptions, and for the ownership and operation of up to 30 Southern Hospitality restaurants in the United States. The Company originally paid $300,000 for the franchise license costs for ten planned restaurants. As a result of the termination of the ADA, the Company determined this event impaired the intangible assets and a result of impairment expense was recorded in the quarter ended September 30, 2013 of $250,000.

Amortization began in February 2013 with the opening of the Company’s Denver-based restaurant with amortization expense of $1,250 and $3,125 recorded for the three and nine months ended September 30, 2013. Amortization expense for the next five years is estimated to be as follows:

2013 (remaining three months)	$	1,250
2014		5,000
2015		5,000
2016		5,000
2017		5,000
Thereafter		25,625
	$	46,875

NOTE 4 – PROPERTY AND EQUIPMENT

As of September 30, 2013 and December 31, 2012, property and equipment consists of the following:

	September 30,			December 31,
	2013			2012
Leasehold improvements	$	2,146,322		$	1,290,723
Website development		13,500			10,800
Equipment		462,166			133,091
Computers and hardware		52,742			17,045
		2,674,730			1,451,659
Less accumulated depreciation		(173,414	)		-
	$	2,501,316		$	1,451,659

The Company’s first Denver-based restaurant opened in late February 2013, for which the Company began depreciating such assets. Depreciation expense for the three and nine months ended September 30, 2013, was $73,000 and $173,400.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 5 – NOTES PAYABLE

Convertible Notes:

Beginning in October 2011, the Company began selling 5% promissory notes (the “Notes”) along with shares of the Company’s common stock. Investors received one share of common stock for each one dollar of principal amount loaned to the Company. The Notes bear interest at 5% per annum, they are unsecured, and their maturity dates are seven years from their issue date. The Company sold $3,086,388 of notes from 2011 through November 2012. Quarterly payments are applied against accrued interest first, then principal. The minimum aggregate quarterly payment to Note holders is 2.5% of the Company’s portion of gross quarterly revenues from each restaurant. The first minimum quarterly payment of $7,297 was paid in May 2013 (45 days after the first calendar quarter in which the Denver restaurant opened which occurred on February 21, 2013). Payments made in the three and nine months ended September 30, 2013 were $14,300 and $21,600.

By their original terms, the Notes and accrued interest became convertible, at the option of the holder, upon the Company’s common stock becoming publicly traded on November 13, 2012. The conversion price is 80% of the 20-day average closing sales price on the date conversion is elected, but not less than $0.50 per share. The Company determined that there was a beneficial conversion feature associated with the Notes in the amount of $283,500 related to the intrinsic value of the conversion feature before the Company’s stock became public. The Company recorded the beneficial conversion feature as a discount to the note and is amortizing the amount to interest over the term of the notes. Approximately $217,600 and $40,200 has been amortized through September 30, 2013 and 2012. During the three and nine months ended September 30, 2013, there were $0 and $830,984 of Notes and accrued interest converted into 417,828 common shares at conversion prices between $1.82 and $2.30 per share. The unamortized debt discount that was expensed upon these conversions was $346,685.

Promissory Note:

During the nine months ended September 30, 2013, the Company issued a promissory note with an aggregate face amount of $200,000, along with a warrant to purchase 50,000 shares of the Company’s common stock. This note bears interest at 5% per annum, is unsecured, and has a maturity date which is concurrent with the date that the current common stock offering closes, which is expected to occur in the fourth quarter of 2013. The holder of the note received additional consideration in the form of a fully vested stock warrant for the purchase of 50,000 common shares at an exercise price of $0.50 per share exercisable for three years from the date of execution of the note. The Company determined the relative fair value of the warrant to be approximately $44,000, which has been recorded as a discount to the note payable and was amortized over approximately three months (Note 8).

Related Party Promissory Note:

On August 1, 2013, the Company entered into an unsecured promissory note with Bourbon Brothers Holding Company, LLC (“BBHC”). The note is for up to $200,000 with a maturity date of February 1, 2014. The Company received draws of $131,486 through the nine months ended September 30, 2013. The note includes a 5% annual interest rate and terms in case of default in which the loan maybe converted to common stock of the Company by the note holder at no less than $0.10 a share. The note and any unpaid interest will be forgiven if, and on the date, the Company and BBHC are able to successfully close on the merger (Note 9).

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Commitments:

Franchise agreement

The Company operates its 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, the Company is to pay royalty fees based on a percentage of gross revenues (generally between 3% and 5% of gross sales, as defined), plus additional fees and costs for marketing, training, inventory and other franchisor costs. Two officers of the Company have personally guaranteed royalty payments to the Franchisor.

On September 23, 2013, Smokin Concepts Development Corporation and its subsidiaries (the “Company”) amended the Franchise Agreement (“FA”) with SH Franchising & Licensing LLC (the “Franchisor”). The amendment to the FA resulted in a substantial reduction in the royalty fees for the Company’s Denver restaurant to be paid to the Franchisor beginning January 1, 2014. The reduced rate is 2.5% of gross sales, subject to a monthly floor of $5,000.

For the three and nine months ended September 30, 2013, the Company incurred franchise royalty expense of $27,700 and $71,200, respectively.

Lease agreement

In April 2012, the Company entered into a ten-year, non-cancellable lease for the restaurant in Denver, Colorado. This lease provides for two, five-year renewal options. Rent payments are approximately $16,000 per month plus certain common area maintenance charges, as defined, and are subject to escalation provisions. Lease expense was approximately $47,000 and $189,000 for the three and nine months ended September 30, 2013, respectively, and $62,600 and $131,000 for the three and nine months ended September 30, 2012.

During the three months ended September 30, 2013, the Company and its general contractor were in a dispute regarding the final payment on the leasehold improvements on the restaurant. The general contractor recorded a lien against the premises. This lien caused the Company to be in default of its lease agreement. In July 2013, the Company and its landlord entered into an agreement to satisfy the dispute with the general contractor so the full lien will be released. In turn, the entire lien was released on August 2, 2013. The Company made payments totaling $144,000 in full by September 30, 2013.

The Company also paid rent and rent-related expenses to Accredited Members Acquisition Corporation (“AMAC”), a related party (Note 9), on a month-to-month basis for office space at the AMAC corporate headquarters in Colorado Springs, Colorado. This arrangement began in October 2011 and terminated July 31, 2013, as the Management Service Agreement terminated. Base rental payments were approximately $3,500 per month. Related party rent expense was approximately $4,800 and $33,400 for the three and nine months ended September 30, 2013, respectively, and $10,900 and $36,300 for the three and nine months ended September 30, 2012, respectively.

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 reasonably estimable.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 7 – INCOME TAXES

Deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are carried on the balance sheet with the presumption that they will be realizable in future periods when pre-tax income is generated. A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The net operating loss carry-forwards may be subject to certain restrictions in the future, particularly in the event of a change in ownership under Internal Revenue Code Section 382.

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s expected income tax benefit was approximately $193,000, $797,500, $177,500 and $387,800 for the three and nine months ended September 30, 2012 and 2013, respectively. The expected income tax benefit differs from the actual benefit of $0 each period, due primarily to the change in valuation allowance.

NOTE 8 – EQUITY

Preferred stock:

The Company has authorized the issuance of up to 1,000,000 shares of preferred stock, none of which have been issued to date. The designations, preferences, limitations, restrictions, and relative rights of the preferred stock shall be established by the board of directors.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 8 – EQUITY (CONTINUED)

Common stock:

Notes payable and accrued interest of $830,984 were converted into 417,828 shares of common stock during the nine months ended September 30, 2013.

In connection with the Company’s 2012 private placement offering to raise $1,500,000 for 1,000,000 shares at $1.50 per share that began in December 2012, the Company changed the offering price to $0.75 per share on May 28, 2013. The change in offering price and the subscriptions sold through September 30, 2013, resulted in a maximum of 2,000,000 shares available for issuance in which 1,979,542 shares have been issued for proceeds of $1,484,000 since December 2012.

In connection with services provided to the Company, the Company issued an additional 35,554 common shares valued at $26,664 ($0.75 per share) during the nine months ended September 30, 2013.

Stock options:

Effective November 13, 2012, the Company adopted the 2012 Stock Option Plan (the “Plan”). Under the Plan, the Company may grant stock options, restricted and other equity awards to any employee, consultant, independent contractor, director or officer of the Company. A total of 1.5 million shares of common stock may be issued under the Plan (which number is subject to adjustment as described in the Plan).

In 2012, the Company granted stock options to the Company’s CEO to purchase an aggregate of 660,368 shares of common stock. The Company’s CEO was granted a five-year term option to acquire 660,368 shares of Company common stock at approximately $0.015 per share with 66,035 options vesting immediately and the remaining shares vesting upon the achievement of the performance objectives determined by management, as defined. During the three months ended March 31, 2013, the CEO exercised the vested options for $995. In March 2013, the board of directors modified the stock option agreement, revising the vesting conditions of the agreement from performance objectives to a service condition. Under the revised agreement, 264,149 shares vest in March 2014, and the remaining 330,184 shares vest in March 2015. The Company valued the modified options at the modification date. Based on the Black Scholes option pricing model, the fair value of the modified share option is $1.44 per share. On June 20, 2013, the Company’s CEO resigned his position. In connection with his resignation, the Company agreed to accelerate the vesting of a portion of his options for 264,149 shares from March 2014 to June 2013. The Company valued the modified options at the modification date which resulted in approximately $198,000 of stock option expense based on a value of $0.75 per share. He exercised these options in a cashless exercise, and the stock certificate is being held by the Company per a lock-up provision until March 2014.

In March 2013, the Company granted certain members of the Denver-based restaurant management team stock options to purchase an aggregate of 90,000 shares of common stock. These options were granted with a five-year term exercisable at approximately $1.50 per share with 45,000 options vesting immediately and the remaining shares to vest one year later in March 2014. During the three months ended September 30, 2013, a restaurant employee was terminated resulting in 20,000 shares being canceled. Stock option expense included a $3,000 credit that was previously recorded due to this forfeiture. None of these options were exercised by September 30, 2013.

The stock-based compensation cost related to options that has been included as a charge to general and administrative expense in the statements of operations was approximately $5,900 and $257,600 for the three and nine months ended September 30, 2013, respectively, (none for the three and nine months ended September 30, 2012). As of September 30, 2013, there was approximately $16,600 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 five years.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 8 – EQUITY (CONTINUED)

Stock options (continued):

The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The weighted-average fair value of options granted during the nine months ended September 30, 2013 was $0.96 per share. The assumptions utilized to determine the fair value of options granted during the nine months ended September 30, 2013, were as follows:

	2013
Risk free interest rate		0.79%
Expected volatility		105%
Expected term	2.5 years
Expected dividend yield		0

The expected term of stock options represents the period of time that the stock options granted are expected to be outstanding. The expected volatility is based on the historical price volatility of the common stock of similar companies since the Company does not have a sufficient history on the public stock exchange. The risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend yield represents the anticipated cash dividend over the expected term of the stock options.

The following tables set forth the activity in the Company's Plan for the nine months ended September 30, 2013:

						Weighted
				Weighted		Average
	Shares			average		Remaining		Aggregate
	under			exercise		contractual		intrinsic
	Option			price		Life		value
Outstanding at January 1, 2013		660,368		$	-			-
Granted		90,000		$	1.50	4.50		-
Exercised		(330,184	)	$	0.02	-		242,685
Forfeited/cncelled		(350,184	)	$	0.02	-		242,685
Outstanding at September 30, 2013		70,000		$	1.50	4.50		-
Exercisable at September 30, 2013		35,000		$	1.50		4.50		-

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s common stock on September 30, 2013, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they exercised their options on September 30, 2013.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 8 – EQUITY (CONTINUED)

The following table summarizes the activity and value of non-vested options as of and for the nine months ended September 30, 2013:

				Weighted
	Number			Average
	Of			grant date
	Options			fair value
Non-vested options outstsanding at January 1, 2013		594,333		$	-
Granted		90,000			0.96
Vested		(299,149	)		1.37
Forfeited/cancelled		(350,184	)		1.44
Non-vested options outstanding at September 30, 2013		35,000		$	0.96

Warrants:

On December 14, 2012, the Company entered into an indemnification agreement with JW Roth and Gary Tedder, both directors of the Company, for their personal risk regarding personal guarantees in favor of the Franchisor, which were the subject of an Area Development Agreement between the Franchisor and SH. The personal guarantees are still in effect for the royalty payments due to the Franchisor. In addition to the indemnification agreements, the Company compensated Messrs. Roth and Tedder for their personal guarantees in the form of a warrant to purchase up to 200,000 shares, per director, exercisable for ten years at $1.00 per share with the warrant vested immediately with a cashless exercise feature. The Company used the contractual term of the warrant, a risk free interest rate of 1.61% and a volatility of 105%. Approximately $55,500 and $166,500 has been recognized as stock-based compensation for the three and nine months ended September 30, 2013, respectively. The remaining prepaid balance of $27,750 is recorded at September 30, 2013, and is to be expensed through the remainder of 2013.

As of September 30, 2013, the Company had a promissory note with an aggregate face amount of $200,000 outstanding. By the original terms, the holder of the note received additional consideration in the form of an immediately vested stock warrant of 50,000 common shares at an exercise price of $0.50 per share exercisable for the three years from the date of execution of the note. The Company used the Black Scholes pricing model to determine the fair value of the warrants. The Company used the contractual term of the warrant, a risk free interest rate of 0.39% and a volatility of 105%. A relative fair value of approximately $44,000 was calculated based on the fair value of the warrant and note payable.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 9 – RELATED PARTY TRANSACTIONS

Related Party Management Agreement with AMHC Managed Services

Effective September 1, 2011, the Company entered into a management agreement (the “Management Agreement”) with AMHC Managed Services, Inc. (“AMMS”), a subsidiary of AMAC. The Company’s Chairman of the Board of Directors and officers of the Company are also officers/board members of AMAC. The significant terms of the Management Agreement provide for monthly payments to AMMS in exchange for the ability of the Company to fully utilize the management expertise, financial and accounting expertise, support staff and location of AMMS, including the expertise of the position of AMMS’ Chief Financial Officer and necessary support for compliance under the securities laws with respect to any private or public reports or registration statements the Company may file. The Management Agreement term was 12 months, and required the Company to pay AMMS a monthly fee equal to $35,000 per month. Additionally, under the Management Agreement, the Company granted AMMS a warrant to purchase 330,184 shares of Company’s common stock exercisable at $0.0007 per share, exercisable for a three-year term. The value of the warrant was determined to be approximately $49,700. The amount was recorded as a prepaid asset and was amortized over the one-year term of the Management Agreement as services are performed. AMMS exercised the warrant in full in July 2012.

The Management Agreement was renewed in October 2012 for an additional one-year period with terms similar to those of the 2011 Management Agreement. In connection with the renewed Management Agreement, the Company issued an additional warrant in October 2012 to AMMS to purchase 330,184 shares of the Company’s common stock at $0.0007 per share for a three-year term. The value of the warrant was determined to be approximately $49,700. The amount was recorded as a prepaid asset and was being amortized over the one-year term of the Management Agreement as services are performed, of which approximately $14,500 and $39,400 was expensed in the three and nine months ended September 30, 2013. AMMS exercised the warrant in full in October 2012. On May 17, 2013, the Company amended its terms with AMMS so that AMMS would no longer be the “Acting CFO” nor provide senior financial management services for the Company effective the same date. Further, on June 26, 2013, the Company notified AMMS that it would terminate the Management Agreement effective July 31, 2013. The remaining prepaid balance was expensed at the termination date. These functions are now handled by the interim CEO and interim CFO.

The Company also paid rent and rent-related expenses to Accredited Members Acquisition Corporation (“AMAC”), a related party, on a month-to-month basis for office space at the AMAC corporate headquarters in Colorado Springs, Colorado. This arrangement began in October 2011 and terminated July 31, 2013, as the Management Service Agreement terminated. Base rental payments were approximately $3,500 per month. Related party rent expense was approximately $4,800 and $33,400 for the three and nine months ended September 30, 2013, respectively, and $10,900 and $36,300 for the three and nine months ended September 30, 2012, respectively.

In addition to the management fee and the rent discussed above, the Company paid AMMS for reimbursable expenses and payments made to third parties on behalf of the Company. During the three and nine months ended September 30, 2013 and 2012, the Company paid reimbursable expenses of $2,200, $10,300, $42,200 and $41,800, respectively.

In July 2013, the Company repurchased 33,334 common shares owned by AMMS for $1.50 per share for a total price of $50,000. These shares were cancelled by the Company in July 2013. The difference between the $1.50 per share and the fair value of the shares at the transaction date of $0.75 per share ($25,000) is recorded as an expense to related party management fees.

SMOKIN CONCEPTS DEVELOPMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)

Related Party Services with Bourbon Brothers Holding Company, LLC

On August 1, 2013, the Company entered into an unsecured promissory note with BBHC (Note 5). The Company recognized $20,000 of contributed services per month for August and September 2013 for services provided by BBHC and recorded the expense in the income statement for the three and nine months ended September 30, 2013. No cash exchanged hands of either party in recognition.

NOTE 10 – SUBSEQUENT EVENTS

On August 1, 2013, the Company entered into a non-binding Letter of Intent (the “LOI”) with BBHC. Under the terms, if BBHC and the Company are able to successfully close on a definitive agreement, the Company will acquire BBHC by having each member of BBHC contribute his membership interest in BBHC to the Company in exchange for Company common stock (for BBHC Class B Non-Voting units) and Company Series A Convertible Preferred stock (for BBHC Class A Voting units) (the “Transaction”) such that 80% of the Company's post-transaction equity will be held by the current members of BBHC. The Company entered into an Acquisition Agreement with BBHC on September 30, 2013, which was amended on November 8, 2013.

The closing of the Transaction is subject to certain contingencies, including the absence of any material adverse change through the closing date in the businesses of BBHC and SCDC, respectively, a successful tax free spinout of 49% of the membership interests of Bourbon Brothers Southern Kitchen Colorado Springs, LLC to BBHC’s current members prior to the Transaction and approval of the Acquisition Agreement and Transaction by the vote of a majority of disinterested shareholders of the Company. Additionally, the Company’s shareholders will be asked to approve amendments to the Company’s articles of incorporation to increase its authorized capital and to effect a name change if the Transaction occurs.

The Transaction is anticipated to close within the next few months, as the Company will require a majority approval by disinterested shareholders for the Transaction to move forward.

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, 2013 and 2012;
·	Our liquidity and capital resources;
·	Any off balance sheet arrangements we utilize;
·	Any contractual obligations to which we are committed;
·	Our critical accounting policies;
·	The inflation and seasonality of our business; and
·	New accounting standards that affect our company.

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 annual report.

Overview

In May 2012, the Company formed Southern Hospitality Denver Holdings, LLC (“SHDH”), a wholly-owned subsidiary, and Southern Hospitality Denver, LLC (“SHD”). SHD was formed for the purpose owning and operating the Company’s first franchised restaurant in Denver, Colorado. SHD is 51% owned by SHDH and 49% owned by non-controlling interest holders, of which a director of the Company is a 22% non-controlling interest holder.

On November 13, 2012, Southern Hospitality Development Corporation f/k/a Art Dimensions, Inc. (“the Company”) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Southern Hospitality Franchisee Holding Corporation (“SH”) whereby the Company would acquire SH in a reverse triangular merger (the “Acquisition”). On November 13, 2012, the parties closed the Acquisition and a Statement of Merger was filed and effective with the Colorado Secretary of State on that day. Upon closing the Acquisition, the Company issued a total number of common shares to the SH shareholders in exchange for all of their ownership interests in SH such that they owned approximately 89% of the Company. The shareholders of the Company prior to the Acquisition own approximately 11% of the Company after the closing of the Acquisition. On November 13, 2012, the Company and SH closed the Acquisition, and the Company’s wholly owned subsidiary, ADI Merger Corp., was merged with and into SH. An aggregate of 5,259,129 Company shares were issued in the Acquisition.

The Company acquired SH in the Acquisition that closed November 13, 2012. SH is a Colorado corporation formed in August 2011. In November 2011 SH entered into an Area Developer Agreement (“ADA”) and a Franchise Agreement (“FA”) with SH Franchising & Licensing LLC (the “Franchisor”), for the exclusive rights for the first 10 cities identified in the ADA, subject to customary conditions and exceptions, and for the ownership and operation of up to 30 Southern Hospitality restaurants in the United States. The restaurants are intended to primarily serve southern or Memphis style barbeque and cuisine and alcoholic beverages (such as a range of bourbons and other spirits and cocktails) and certain related products and merchandise (such as meat rubs and memorabilia). Currently, one restaurant in New York City and the Denver, Colorado, restaurant that opened in late February 2013 operate under the Southern Hospitality name. The Company has a majority interest in the Denver, Colorado restaurant location but has no interest in the New York restaurant location.

Due to the high cost of opening the Denver restaurant, the Company is reconsidering its business plan with respect to the timetable for opening other restaurants. However, the Company remains focused on the Denver restaurant and will continue to focus on achieving and maintaining profitability at that location. The Denver location, with only being several months old, ended in a loss for the three and nine months ended September 30, 2013.

Results of Operations – Three and Nine Months ended September 30, 2013 and 2012

Revenues

During the three and nine months ended September 30, 2013, the Company generated approximately $597,000 and $1,553,000 in net revenue as the Company opened its first restaurant in Denver, Colorado on February 21, 2013. The Company had no revenue generating activities for the three and nine months ended September 30, 2012.

Cost of Revenue – Restaurant Operating Expenses

For the three and nine months ended September 30, 2013, the Company’s cost of revenue was $611,200 and $1,713,200. The cost of revenue was attributable to the Denver-based restaurant, including the cost of food, alcohol, labor and other costs of the restaurant. The Company had no cost of revenue activities for the three and nine months ended September 30, 2012.

Cost of revenue, comprised of operating expenses at the SH Denver restaurant, includes variable expenses and fluctuates with sales volumes for expenses such as food and beverage costs, payroll and franchise fees. Fixed expenses, such as lease expense at the SH Denver restaurant location, are also included.

Operating Expenses – General and Administrative, Related Party Management Services and Selling and Marketing

For the three and nine months ended September 30, 2013, the Company’s operating expenses were $249,400 and $1,490,100 compared to $451,800 and $1,030,000 in 2012. The operating expenses in 2013 were primarily related to expenses for pre-opening and ongoing operations. The expenses during the same period in 2012 were primarily associated with the organization costs of starting up the Company and its subsidiaries. The Company’s largest operating expense, excluding restaurant operating expenses, during the three and nine months ended September 30, 2013 and 2012, were its general and administrative expenses totaling approximately $134,700 and $1,121,700 compared to $303,800 and $601,500. The increase in general and administrative costs is due to pre-opening and ongoing expenses for the Denver-based restaurant primarily, including recurring corporate costs (such as payroll and related expenses). General and administrative for the three and nine months ended September 30, 2013, also included approximately $61,400 and $24,000 of (non-cash) stock-based compensation. Additionally, the Company incurred approximately $200 and $19,000 in selling and marketing expenses during the three and nine months ended September 30, 2013 compared to $9,800 and $80,100 for the same period in 2012. 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 will continue for the foreseeable future due to the overall expansion of SH and its subsidiaries and parent company overhead.

Depreciation and Amortization

For the three and nine months ended September 30, 2013, the Company’s depreciation was approximately $73,000 and $173,400. 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. Amortization on the intangible assets was approximately $1,250 and $3,125 for the three and nine months ended September 30, 2013. The impairment expense of the franchise fees was $250,000 for the three and nine months ended September 30, 2013.

Other income (expense)

For the three and nine months ended September 30, 2013 and 2012, the Company recognized other expense of approximately $25,200 and $485,600 compared to $55,300 and $78,000. The increase in interest expense was primarily due to the recognition of interest expense from the discount on the promissory notes being converted to common stock.

Liquidity and Capital Resources

As of September 30, 2013, the Company had working capital deficiency of approximately $436,900 and had $43,300 of cash and cash equivalents, which represents a $919,100 decrease in cash and cash equivalents, from December 31, 2012. The Company’s total assets decreased as of September 30, 2013, when compared to December 31, 2012, due to the impairment on the intangible assets and reduction in cash and cash equivalents.

As noted above, the Company incurred a net loss during the three and nine months ended September 30, 2013, and 2012. Further, as of September 30, 2013, the Company had an accumulated deficit of $5,039,000. The Company believes its Denver restaurant operations (which began in February 2013), which is 51% owned by the Company, the overhead of the public company administration, coupled with the high cost of build out required for each restaurant under the Southern Hospitality name, have created severe financial issues for the Company. The Company recently amended the Franchise Agreement to reduce the monthly royalty, and also terminated the Area Development Agreement with the franchisor. At least for the near term the Company is reconsidering its timeline for other restaurants, and is considering other strategic alternatives in the restaurant space for its business plan. As strategic alternatives present themselves the Company expects to adjust its business plan accordingly. Further, Robert B. Mudd, Manager at Bourbon Brothers Holding Company, LLC, joined the Company during the fiscal year. In connection with the continuing success of the Denver restaurant and Mr. Mudd taking on the role of interim CEO, the Board of Directors is exploring the following possible scenarios in lieu of the business plan previously envisioned by the Company:

1.	Substantially reduce the overhead expenses at the parent company level

2.	Substantially reduce the expenses at the Denver restaurant;

3.	Pursue other means to finance business operations; and

4.	Actively pursue alliances with similar brands.

The Company may continue 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.

The Company’s consolidated financial statements for the three and nine months ended September 30, 2013, 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, 2012, includes a “going concern” explanatory paragraph which means that the auditors stated that conditions exist that raise doubt about the Company’s ability to continue as a going concern.

Liabilities

The Company’s liabilities for convertible notes payable and accrued interest as of September 30, 2013, is $568,300 compared to $1,010,000 as of December 31, 2012. This decrease is due to the conversion of notes payable and accrued interest to common stock in 2013. Accounts payable as of September 30, 2013, is $95,800 compared to approximately $453,800 as of December 31, 2012. This decrease is due to the lessor amount of liabilities for the construction of the Denver-based restaurant.

Operating Activities

Net cash used in operating activities was approximately $1,601,000 in the nine months ended September 30, 2013, as compared to net cash used in operating activities of approximately $909,000 in the same period of 2012. The increase in net cash used in operating activities in 2013 (compared to 2012) was primarily due to: (i) the increase in net loss for the 2013 period, as compared to the 2012 period, and (ii) decreases in accounts payable and inventory, as well as the expansion of the business, as compared to the 2012 period.

Investing Activities

Net cash used in investing activities in the nine months ended September 30, 2013, was approximately $1,223,000, as compared to net cash used in investing activities of approximately $668,600 for the nine months ended September 30, 2012. Net cash used in investing activities for both periods was primarily the result of cash used for purchases of property and equipment.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2013, was approximately $1,905,000, compared to approximately $2,161,000 in the nine months ended September 30, 2012. Approximately $1,368,000 of cash provided by financing activities in 2013 was due from the sale of common stock and $200,000 of an issuance of a short-term promissory note. The non-controlling interest holders contributed $225,980 to the Company during the nine months ended September 30, 2013, with $225,000 in the same period of 2012.

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.

Contractual Cash Obligations

In April 2012, the Company entered into a lease 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.

Critical Accounting Policies

The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.

Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. Our significant accounting policies are disclosed in Note 2 to the Financial Statements included in this Form 10-Q. Our critical accounting policies are outlined below.

Fair Value Measurements

The carrying value of cash and non-related party payables approximates fair value due to their short maturities. The carrying value of non-related party notes payable approximates fair value based on effective interest rates estimated to approximate market. The carrying amount of payables to related parties are not practicable to estimate based on the related party nature of the underlying transactions.

Intangible assets

Intangible assets at September 30, 2013, represent franchise license costs for the Denver restaurant. On September 23, 2013, the Company terminated the Area Developer Agreement (“ADA”) with the Franchisor for the exclusive rights for the first 10 cities identified in the ADA, subject to customary conditions and exceptions, and for the ownership and operation of up to 30 Southern Hospitality restaurants in the United States. The Company originally paid $300,000 for the franchise license costs for ten planned restaurants. As a result of the termination of the ADA, the Company determined this event impaired the intangible assets and a result of impairment expenses was recorded in the quarter ended September 30, 2013 of $250,000.

Property and Equipment

The Company began capitalizing certain leasehold improvements, as well as equipment the Company purchased in 2012 and 2013 and began depreciating the assets when the Denver-based restaurant opened in February 2013. Management reviews property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired.

Property and Equipment (Continued)

The Company's management considers, or will consider, such factors as the Company's history of losses and the disruptions in the overall economy in preparing an analysis of its property, including leasehold improvements, to determine if events or circumstances have caused these assets to be impaired. Management bases this assessment upon the carrying value versus the fair value of the asset and whether or not that difference is recoverable. Such assessment is to be performed on a restaurant-by-restaurant basis and is to include other relevant facts and circumstances including the physical condition of the asset. If management determines the carrying value of the restaurant assets exceeds the projected future undiscounted cash flows, an impairment charge would be recorded to reduce the carrying value of the restaurant assets to their fair value.Leasehold improvements, property and equipment are stated at cost. Internal costs directly associated with the acquisition, development and construction of a restaurant are capitalized. Expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, and leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Construction in process (leasehold improvements in process) and other property and equipment are not depreciated/amortized until placed in service. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.

The estimated useful lives are as follows:

Leasehold improvements 10 years

Furniture and fixtures 3-10 years

Equipment 3-7 years

Leases and Deferred Rent

The Company intends to lease substantially all of its restaurant properties, and in April 2012, the Company entered into a ten-year lease for its planned restaurant in Denver, Colorado. For leases that contain rent escalation clauses, the Company records the total rent payable during the lease term and recognizes expense on a straight-line basis over the initial lease term, including the "build-out" or "rent-holiday" period where no rent payments are typically due under the terms of the lease. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Additionally, contingent rent expense based on a percentage of revenue is accrued and recorded to the extent it is expected to exceed minimum base rent per the lease agreement based on estimates of probable levels of revenue during the contingency period. Deferred rent also includes tenant improvement allowances the Company may receive, which is amortized as a reduction of rent expense, also on a straight-line basis over the initial term of the lease.

Revenue Recognition

The Company began revenue generating activities through the Denver restaurant as of February 21, 2013. The Company began revenue activities pursuant to Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and applicable related guidance. Revenue is derived from the sale of prepared food and beverage and select retail items. Revenue is recognized at the time of sale and is reported on the Company's consolidated statements of operations net of sales taxes collected. The amount of sales tax collected is included in accrued expenses until the taxes are remitted to the appropriate taxing authorities.

Stock-Based Compensation

Recently issued and adopted accounting pronouncements

The Company reviews new accounting standards as issued. Although some of the accounting standards issued are effective after the end of the Company’s previous fiscal year, and therefore may be applicable to the Company, management has not identified any standards that it believes will have a significant impact on the Company’s consolidated financial statements.

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, 2013, 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 Interim Chief Executive Officer and our Interim Chief Financial Officer. Based upon that evaluation, our Interim Chief Executive Officer and Interim 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, 2012, that our disclosure controls and procedures were not effective as of September 30, 2013. 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 or interim 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 Securities Exchange 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 Exchange 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 Exchange 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, 2012.

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

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

Exhibit Number	Description

3.1	Amended and Restated Articles of Incorporation. (1)
3.2 10.1	Bylaws. (1) Amendment and Release Agreement with Franchisor. (2)
31.1	Rule 13a-14(a)/15d-14(a) - Certification of Chief Executive Officer. (2)
31.2	Rule 13a-14(a)/15d-14(a) - Certification of Chief Financial Officer. (2)
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. (2)
32.2	Section 1350 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the SARBANES-OXLEY ACT of 2002. (2)
101	Interactive Data Files (2)


(1)	Incorporated by reference from the Company’s report on Form 8-K dated April 30, 2013 and filed May 3, 2013.

(2)	Filed herewith.

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.

	SMOKIN CONCEPTS DEVELOPMENT CORPORATION

Date: November 14, 2013	By:	/s/ Robert B. Mudd
		Robert B. Mudd, Interim CEO and Interim CFO

Date: November 14, 2013	By:	/s/ Gary Tedder
		Gary Tedder, President and Director

Attached files

Southern Concepts Restaurant Group, Inc. Reports

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