NOTE 7 – EQUITY

Preferred stock:

The Company authorized the issuance of up to 18,242,700 shares of Series A convertible preferred stock in January 2014, of which 18,242,687 shares were issued on January 22, 2014. As of March 1, 2014, the holders of 13,357,828 Series A preferred shares chose to convert their Series A preferred stock into shares of the Company's common stock at a ratio of one to one. These Series A preferred shares were then subsequently cancelled. As of September 30, 2014, 4,884,859 Series A convertible preferred shares remain issued and outstanding.

Each share of Series A convertible preferred is entitled to 25 votes and is convertible into shares of common stock on a one-for-one basis. Other rights of the Series A convertible preferred are identical to the common stock rights.

Common stock:

The Company's issued 3,474,333 common shares of stock at $0.30 per share for proceeds of $1,042,300 between March and September 30, 2014.

The Company issued 1,306,666 common shares at $0.30 per share for proceeds of $392,000 during the three months ended September 30, 2014.

In connection with services provided to the Company, the Company issued 30,000 common shares valued at $15,000 ($0.50 per share) during the nine months ended September 30, 2014. In addition, for services provided to the Company, the Company issued 21,678 common shares valued at $6,503 ($0.30 per share) during the three and nine months ended September 30, 2014.

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 3 million shares of common stock may be issued under the Plan (as amended on January 22, 2014).

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 options 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 options were to 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 option. In September 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 September 2013. The Company valued the modified options at the modification date which resulted in approximately $198,000 of stock option expense recorded during the nine months ended September 30, 2013. The CEO exercised these options in a cashless exercise, and the stock certificate was held by the Company per a lock-up provision until March 2014, at which time the certificate was released by the Company.

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. With the departure of two of these four employees in 2013, 40,000 stock options were forfeited and 50,000 stock options remained outstanding and vested as of March 31, 2014. None of these options were exercised by September 30, 2014.

In March 2014, the Company granted the COO options to purchase up to 300,000 shares of common stock of the Company, vesting in equal shares annually over four years, with the first tranche vested fully by March 1, 2015, with an exercise price of $0.50 per share with a five-year term. In addition, this person holds options for 18,243 common shares to vest evenly over two years with the first tranche vested fully by September 30, 2014, with an exercise price of $0.14 with a five-year term. In addition, this person holds options to purchase up to 30,000 shares of common stock vesting in equal parts annually over three years with the first tranche vested fully by February 5, 2015, with an exercise price of $0.45 with a five-year term.

In January 2014, the Company granted the Chairman of the Board options to purchase up to 729,707 shares of common stock of the Company vesting evenly over four years with the first tranche vested fully by January 9, 2015, with an exercise price of $0.0685 with a five-year term.

In February and March 2014, the Company granted certain members of the Denver-based restaurant management team, Colorado Springs-based restaurant management team and the corporate staff stock options to purchase an aggregate of 210,000 shares of common stock. These options were granted with a five-year term exercisable at ranges of approximately $0.45 to $0.55 per share with options vesting evenly in tranches over three to four years with the first tranche vesting fully in February 2015. Four persons from this management team with the granted options have since terminated with their options forfeited. In September 2014, 91,214 options were exercised by a member of the corporate staff for 91,214 common shares at an exercise price of $0.000274 per share. In May and June 2014, the Company granted certain members of the Denver-based restaurant staff and the Colorado Springs-based restaurant staff options to purchase an aggregate of 27,000 shares of common stock. These options were granted with a five-year term exercisable at ranges of approximately $0.50 to $0.70 per share with options vesting in one year from the issuance date. In July and August 2014, the Company granted certain members of the Denver-based restaurant staff and the Colorado Springs-based restaurant staff options to purchase an aggregate of 17,000 shares of common stock. These options were granted with a five-year term exercisable at ranges of approximately $0.40 to $0.46 per share with options vesting in one year from the issuance date. In August 2014, the Company granted a certain member of the Colorado Springs based restaurant management team options to purchase 50,000 shares of common stock. There options were granted with a five-year term exercisable at $0.45 per share with shares vesting over the next two years.

In March 2014, the Company appointed certain officers and directors of the Company. At the same time, the CEO announced his resignation to be effective June 1, 2014. In connection with these changes, options were granted to two directors for 100,000 common shares each with a one year vesting term and an exercise price of $0.51 per share. The CEO's options had also been amended to have 304,854 shares of common stock to vest evenly over a three year vesting period with the first tranche to vest in August 2014 at an exercise price of approximately $0.000274 per share. This person exercised a vested portion of these options for 101,618 common shares in October 2014 at $0.000274 per share.

In August 2014, the Company granted the President of the Company options to purchase up to 300,000 shares of common stock of the Company vesting evenly over three years
with the first tranche vesting immediately, with an exercise price of $0.45 per share with a five-year term.

In May 2014, the Company appointed an additional director of the Company. In connection with the appointment, options were granted to the director for 100,000 common shares with a one year vesting term and an exercise price of $0.65 per share. In July 2014, the Company granted additional options to a director of the Company. Options were granted to this director for 150,000 options that vested immediately with an exercise price of $0.40 per share.

The stock-based compensation cost related to options that have been included as a charge to general and administrative expense in the statements of operations was approximately $118,900 and $227,600 for the three and nine months ended September 30, 2014, respectively, and $5.900 and $257,600 for the three and nine months ended September 30, 2013, respectively. As of September 30, 2014, there was approximately $431,100 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.

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, 2014 and 2013 was $0.96 and $0.51 per share. The assumptions utilized to determine the fair value of options granted during the nine months ended September 30, 2014 and 2013, are as follows:

	2014		2013
Risk free interest rate		0.79%		0.79%
Expected volatility		105%		105%
Expected term	5 years		2-5 years
Expected dividend yield		0		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. 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.

On January 22, 2014, in connection with the BB transaction, all BBHCLLC options were assumed applying a conversion rate of 1.82427, resulting in a total of 879,164 options granted.

The following tables set forth the activity in the Company's Plan for the nine months ended September 30, 2014:

							Weighted
				Weighted			average
	Shares			average			remaining		Aggregate
	under			exercise			contractual		intrinsic
	option			price			life		value
Outstanding at January 1, 2014		50,000		$	1.50				$	-
Granted		2,992,871			0.26			-		-
Exercised		(91,214)			-	*		-		-
Forfeited/cancelled		(223,000	)		0.32			-		-
Outstanding at September 30, 2014		2,718,657			0.29			4.20	$	647,666
Exercisable at September 30, 2014 *less than $0.01		401,617		$	0.67			3.67	$	59,339

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, 2014, 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, 2014.

The following table summarizes the activity and value of non-vested options as of and for the nine months ended September 30, 2014:

				Weighted
				average
	Number of			grant date
	options			fair value
Non-vested options outstanding at January 1, 2014		25,000		$	0.96
Granted		2,992,871			0.17
Vested		(467,831	)		0.52
Forfeited/cancelled		(223,000	)		0.34
Non-vested options outstanding at September 30, 2014		2,317,040		$	0.09

Warrants:

In December 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 0.62% and a volatility of 105%. There are no unrecognized expenses related to the warrants.

As of December 31, 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.

On September 1, 2013, BBHCLLC retained an individual to advertise and promote the Company. This individual was granted an aggregate of 600,000 Class B non-voting warrants that vested immediately. These warrants were granted with a three-year term exercisable at approximately $0.0005 per unit. These units converted into 1,094,562 warrants for common shares at the date of the BB Transaction. The Company used the contractual term of the warrant, a risk free interest rate of 0.79% and a volatility of 105%. Approximately $25,000 and $99,900 has been recognized as equity-based compensation for the three and nine months ended September 30, 2014. Approximately $25,000 was expensed by September 30, 2014. This individual exercised these warrants in September 2014 for 1,094,562 common shares.

In May 2014, in connection with services provided to the Company, the Company issued a warrant for 30,000 common shares to exercise at $0.30 per share cancellable by the Company at any time. The Company used the contractual term of the warrant, a risk-free interest rate of 0.39% and a volatility of 105% with a value of $12,247. In September 2014, in connection with appointments to the Board of Directors, the Company issued warrants for 200,000 common shares to exercise at $0.30 per share. The warrants vest on September 15, 2015, a risk-free interest rate of 0.79% and a volatility of 105% with values of $34,473.