XML 32 R15.htm IDEA: XBRL DOCUMENT v2.4.1.9
Subsequent Events
3 Months Ended
Mar. 30, 2015
Subsequent Events [Abstract]  
Subsequent Events
Note 9 – Subsequent Events
 
Hearthstone Merger

On April 1, 2015, we closed the previously-announced merger of Hearthstone Associates, LLC ("Hearthstone Associates") with and into a wholly-owned subsidiary of the Company, with Hearthstone Associates continuing as the surviving entity (the "Hearthstone Merger").  Upon consummation of the Hearthstone Merger, Hearthstone Associates became a wholly-owned subsidiary of the Company, and Hearthstone Partners, LLC ("Hearthstone Partners"), a wholly-owned subsidiary of Hearthstone Associates, became an indirect subsidiary of the Company.

In connection with the Hearthstone Merger, and as a condition of obtaining the consent of Hearthstone Partners' lender, the Company agreed to guarantee the obligations of Hearthstone Partners under those certain loan documents (the "Loan Documents") previously entered into by Hearthstone Partners with First Franchise Capital Corporation (the "("Lender"), as previously disclosed in the Company's filings with the SEC.
 
Accordingly, we entered into a Guaranty in favor of the Lender, pursuant to which the Company placed $5 million in a control account as cash collateral to secure the Company's obligations under the Guaranty,  and certain previously disclosed amendments to the Loan Documents.  As of April 1, 2015, the principal balance outstanding under the Loan Documents was approximately $4.7 million.

On April 1, 2015, as a condition to the Hearthstone Merger, the Company and R. J. Dourney, our CEO and President, entered into the previously-disclosed Indemnification and Holdback Agreement (the "Holdback Agreement") pursuant to which Mr. Dourney agreed to retain and indemnify the Company for certain liabilities.  The liabilities retained by Mr. Dourney include:  (a) the amount of $703,718, and all other amounts, if any, relating thereto, arising out or relating to that certain letter agreement dated April 17, 2013, entered into between Northland Securities, Inc., and Hearthstone Associates, which amount is being disputed in good faith by Mr. Dourney and Hearthstone Associates (the "Northland Claim"); and (b) accounts payable and other obligations owed to third parties for materials, inventory, utilities, supplies, labor or other goods and/or services received by Hearthstone Associates or Hearthstone Partners, which are past due as of the closing of the Hearthstone Merger or are otherwise not in compliance with the provisions of the previously disclosed Election to Cause Merger Agreement (as amended, the "Election Agreement"), which amount will be determined in good faith by the Company and Mr. Dourney, following consummation of the Hearthstone Merger (the "A/P Amounts").

Until resolution of the retained liabilities, the parties agree that the Company will hold in escrow a portion of the shares (the "("Holdback Shares") which would otherwise have been distributed to Mr. Dourney upon consummation of the Hearthstone Merger.  For the Northland Claim, the Company has held back shares equal to the amount of $0.5 million, to be held in escrow by the Company until such time as the Northland Claim is finally resolved by payment of any agreed upon liability or other settlement, as evidenced by proof of payment or in writing, at which time those shares will be promptly released to Mr. Dourney.  For the A/P Amounts, the Company has held back shares equal to the amount of $0.5 million, to be held in escrow by the Company until such time as the A/P Amounts are finally resolved by payment of any agreed upon liability or other settlement, as evidenced in writing, at which time those shares will be promptly released to Mr. Dourney.

Under the Holdback Agreement, Mr. Dourney will defend, indemnify and hold harmless the Company, its subsidiaries and affiliates, and their officers, directors, members, managers, stockholders, employees, agents, successors and assigns (collectively, the "Indemnified Parties") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses, including, without limitation, reasonable attorneys' fees and disbursements, incurred by any of the Indemnified Parties resulting from, consisting of or arising out of or in connection with the Northland Claim and the A/P Amounts or the failure of Mr. Dourney to perform any of his obligations under the Holdback Agreement. 

On April 1, 2015, upon completion of the Hearthstone Merger and pursuant to the Election to Cause Merger Agreement, an aggregate of 1,790,993 shares of the Company's common stock, $0.01 par value, representing total consideration, were distributed to the owners of Hearthstone Associates, with the shares being allocated as follows:  1,701,050 shares to R. J. Dourney, the Company's CEO and President, 17,182 shares to Nancy Dourney, Mr. Dourney's spouse, and 72,761 shares to Richard Bagge, the Company's interim Chief Financial Officer. The Hearthstone Merger will be accounted for in accordance with FASB ASC 805 Business Combination.
 
Stock Purchase Agreement

On April 10, 2015, we entered into a Stock Purchase Agreement (the "2015 Purchase Agreement") with Trishield Special Situations Master Fund Ltd., which Trishield fund is managed by Trishield Capital Management LLC, a fund managed by Janus Capital Management, LLC ("Janus"), LKCM Micro-Cap Partnership L.P. and LKCM Private Discipline Master Fund, SPC, both of which LKCM funds are managed by Luther King Capital Management, Goose Hill Capital LLC, Bigger Capital Fund, LP, and Kenneth Vaughan (each, a "Purchaser" and collectively, the "Purchasers"), under which the Company sold to the Purchasers, and the Purchasers purchased from the Company, an aggregate of 7,160,766 unregistered shares of the Company's common stock, par value of $0.01 per share, at a purchase price of $2.16 per share, for aggregate gross proceeds of approximately $15.5 million (the "2015 Private Placement Transaction"). The closing of the 2015 Private Placement Transaction occurred on April 10, 2015.
 
Pursuant to that certain Senior Secured Note Purchase Agreement dated April 14, 2014, entered into between the Company and Milfam II L.P. ("Milfam"), Milfam had a right to participate in the 2015 Private Placement Transaction on the same terms as the Purchasers. Lloyd I. Miller, III, is the manager of Milfam LLC, the general partner of Milfam and Milfam LLC is also the investment advisor to the Lloyd I. Miller Trust C.  Mr. Miller is a significant shareholder of the Company through a variety of entities that he manages.  On April 24, 2015, Mr. Miller notified the Company that he would not be participating in the 2015 Private Placement Transaction.

The Company relied on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933 based in part on the representations made by the Purchasers, including the representations with respect to each Purchaser's status as an accredited investor, as such term is defined in Rule 501(a) under the Securities Act, and the investment intent of each Purchaser with respect to the shares of common stock acquired by such Purchaser pursuant to the 2015 Purchase Agreement.
 
Concurrently with entering into the 2015 Purchase Agreement, the Company and the Purchasers entered into a Registration Rights Agreement dated April 10, 2015 ("Registration Rights Agreement"), pursuant to which the Company agreed to file a registration statement within 30 days, subject to certain delays or extensions of time, covering the shares of the Company's common stock, acquired by each of the Purchasers, as well as unregistered shares previously acquired by Janus from the Company in the previously-disclosed private placement transaction closed on August 22, 2014.
 
The Company has also granted registration rights to other investors in the Company's securities that are substantially equivalent to those granted under the Registration Rights Agreement, including the shares issued in 2014 to each of Milfam and Lloyd I. Miller Trust C, as well as the shares issued on April 1, 2015, to in connection with completion of the previously-announced Hearthstone Merger.

The Company had also granted substantially equivalent registration rights to AB Value Partners, L.P., and AB Opportunity Fund LLC (collectively, the "AB Entities"), for shares issued in 2014 upon exercise of $.01 warrants that were acquired by the AB Entities in connection with the previously-disclosed Senior Secured Promissory Notes issued by the Company to the AB Entities on May 20, 2014; however, those shares have been sold under an exemption from registration and will not be covered by the registration rights agreement to be filed by the Company.