NOTE 6 – COMMITMENTS AND CONTINGENCIES

Commitments:

Franchise agreement

The Company operates its Denver restaurant property under a franchise agreement with the Franchisor under an initial ten-year term, renewable for two additional five-year terms. Pursuant to the franchise agreement, 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.

In September 2013, the Company amended the Franchise Agreement with the Franchisor. The amendment 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.

Commitments:

Franchise agreement

On December 30, 2014, SHD entered into a Fifth Amendment to its Franchise Agreement (the “FA”) with the Franchisor in connection with the opening of a new Southern Hospitality restaurant in Lone Tree, Colorado. Under the FA, SHD partially assigned its rights to Southern Hospitality Lone Tree, LLC, a wholly owned subsidiary of the Company (“SH Lone Tree”) to use the Franchisor's marks, business methods, proprietary products, confidential information and intellectual property to operate a Southern Hospitality restaurant. In addition, pursuant to the FA, the Franchisor waived certain initial fees in connection with SH Lone Tree opening a restaurant in Lone Tree, Colorado.

For the years ended December 31, 2014 and 2013, the Company incurred franchise royalty expense of $59,000 and $98,000, respectively.

Leases:

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 $194,120 and $190,000 for the years ended December 31, 2014 and 2013, respectively. A long-term deposit on the lease in the amount of $18,034 is recorded as of December 31, 2014.

The Company has a 10-year lease with Bourbon Brothers, LLC (“BBLLC”), a related party, for the real property in connection with the restaurant location in Colorado Springs. The lease commenced upon taking possession of the premises on January 11, 2014. Rent is approximately $33,340 per month for the first 60 months, and thereafter subject to adjustment every 60 months. This lease provides for one, ten-year renewal option. A long-term deposit on the lease in the amount of $32,083 is recorded as of December 31, 2014. Related party lease expense was approximately $383,000 for the year ended December 31, 2014, respectively.

In July 2014, the Company entered into a ten-year, non-cancellable lease for the restaurant in Lone Tree, Colorado. The lease provides for an initial lease term of ten years and for two, five-year renewal options. Rent payments are approximately $9,900 per month plus certain common area maintenance charges, and are subject to escalation provisions. This location is anticipated to open in April 2015 at which time the lease is to commence. A long-term deposit on the lease in the amount of $24,614 is recorded as of December 31, 2014.

On January 1, 2014, the Company assumed a lease from a related party for the corporate office in Colorado Springs. The lease is for 78 months with an unaffiliated party. Monthly rent is $5,800 per month escalating up to $6,000 per month in year six. A long-term deposit in the amount of $5,794 is recorded as of December 31, 2014. Lease expense for 2014 on this lease was $69,600.

Commitments:

Leases:

The future minimum lease payments are as follows:

	Third Party		Related Party		Total
2015	$	373,440	$	401,092	$	774,532
2016		381,663		401,092		782,755
2017		315,416		401,092		715,508
2018		320,780		401,092		721,872
2019		327,335		401,092		728,427
Thereafter		1,212,525		1,621,080		2,833,605
	$	2,931,159	$	3,626,540	$	6,556,699

Through July 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 $25,545 for the year ended December 31, 2013 (none in 2014), which is included in general and administrative expense.

Contingencies:

From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management provides for them if upon the advice of counsel, losses are determined to be both probable and estimable.