3. Notes Payable

12 Months Ended

Dec. 31, 2018

Debt Disclosure [Abstract]

Notes Payable

In September 2017, the Company entered into a loan agreement (the “Agreement”) with First Financial Bank (the “Bank”). The Agreement provides for a senior credit facility (the “Credit Facility”) to be provided by the Bank consisting of: (i) a term loan in the amount of $4.5 million (the “Term Loan”); and (ii) a development line of credit of up to $1.6 million (the “Development Line of Credit”). Borrowings under the Credit Facility bear interest at a variable annual rate equal to the London Interbank Offer Rate (“LIBOR”) plus 4.25%. The Term Loan and the Development Line of Credit are being repaid monthly based on a seven-year term. All outstanding amounts owed under the Agreement mature on September 13, 2022.

Proceeds of the Term Loan were used to repay the Company’s existing indebtedness to BMO Harris Bank, Super G Capital, LLC and certain officers of the Company, to pay certain expenses related to the Credit Facility and the remainder used for general corporate purposes. All of the Development Line of Credit was used in the development of three Craft Pizza & Pub locations.

At December 31, 2018, the balance of the Credit Facility was comprised of:

Principal Due	$	5,143,453
Unamortized Loan Closing Cost		(373,291	)
Carrying Value	$	4,770,162

The Agreement contains affirmative and negative covenants, including, among other things, covenants requiring the Company to maintain certain financial ratios. The Company’s obligations under the Agreement are secured by first priority liens on all of the Company’s and its subsidiaries’ assets and a pledge of all of the Company’s equity interest in such subsidiaries. In addition, Paul W. Mobley, the Company’s Executive Chairman and Chief Financial Officer, executed a limited guarantee only of borrowings under the Development Line of Credit which is to be released upon achieving certain financial ratios by the Company’s Craft Pizza & Pub locations.

The Agreement prohibits repayment of the Company’s subordinated debt, including the Notes (as defined below), prior to the Term Loan and the Development Loans being paid in full. Of the principal amount of the Notes outstanding, $700,000 matures in late 2019, $650,000 matures in January 2020 and $650,000 matures in January 2023. Included in the January 2020 maturity at December 31, 2018 is a $50,000 Note which was converted, in January 2019, to common stock consistent with the terms of the Agreement. The Notes that mature in 2019 and 2020 must either be converted to common stock, extended beyond the maturity of the senior debt or replaced with other like securities. The Company may not be able to accomplish any of those alternatives. If the Notes mature and the Company does not pay amounts due, it would cause a cross-default under the Agreement. The Company intends to extend or refinance with external capital the Notes maturing in 2019 and 2020. However, the Company may not be able to refinance its debt or sell additional debt or equity securities on favorable terms, or at all.

In the fourth quarter of 2016, the Company issued 32 Units, for a purchase price of $50,000 per Unit, or $1,600,000 in the aggregate and, in January 2017, the Company issued another 16 Units, or an additional $800,000 in the aggregate. Each $50,000 Unit consists of a convertible, subordinated, unsecured promissory note (the “Notes”) in an aggregate principal amount of $50,000 and warrants (the “Warrants”) to purchase up to 50,000 shares of the Company’s common stock, no par value per share. The Company issued Units to investors including the following related parties: Paul W. Mobley, the Company’s Executive Chairman, Chief Financial Officer and a director of the Company ($150,000); and Herbst Capital Management, LLC, the principal of which is Marcel Herbst, a director of the Company ($200,000).

Interest on the Notes accrues at the annual rate of 10% and is payable quarterly in arrears. Generally, the Notes mature, and the Warrants expire, three years after issuance. However, in December 2018, the Company offered to extend the maturity of the Notes and the expiration date of the Warrants to January 2023. Certain of the holders of the Notes and Warrants accepted the Company’s offer. Accordingly, of the principal amount of the Notes, $700,000 matures in late 2019, $650,000 matures in January 2020 and $650,000 matures in January 2023. Included in the January 2020 maturity at December 31, 2018 is a $50,000 Note which was converted, in January 2019, to common stock consistent with the terms of the Agreement.

Each holder of the Notes may convert them at any time into Common Stock of the Company at a conversion price of $0.50 per share (subject to anti-dilution adjustments). Subject to certain limitations, upon 30 days’ notice the Company may require the Notes to be converted into Common Stock if the daily average weighted trading price of the Common Stock equals or exceeds $1.50 per share for a period of 30 consecutive trading days. The Notes provide for customary events of default. The Notes are unsecured and subordinate to senior debt of the Company. Holders of $400,000 of the Notes have been converted to 800,000 shares of Common Stock prior to December 31, 2018 and another $50,000 of the Notes were converted to 100,000 shares of Common Stock in January 2019. In December 2018, all holders of the remaining Notes were offered an opportunity to extend the term of the Notes to January 2023 with all other conditions of the Notes remaining the same. Holders of $650,000 of the Notes have extended their Notes to mature on January 31, 2023.

The Warrants provide for an exercise price of $1.00 per share of Common Stock (subject to anti-dilution adjustments).Subject to certain limitations, the Company may redeem the Warrants at a price of $0.001 per share of Common Stock subject to the Warrant upon 30 days’ notice if the daily average weighted trading price of the Common Stock equals or exceeds $2.00 per share for a period of 30 consecutive trading days.

Divine Capital Markets LLC served as the placement agent for the offering of the Units (the “Placement Agent”). In consideration of the Placement Agent’s services, the Placement Agent was paid a cash fee and expense allowance equal to 10% and 3%, respectively, of the gross proceeds of the offering, as well as warrants (the “Placement Agent Warrants”) for 10% of Units sold. Each Placement Agent Warrant allows the Placement Agent to purchase a Unit for $60,000.

The Company evaluated the Notes, Warrants and Placement Agent Warrants to determine if those contracts or embedded components of those contracts qualified as derivatives to be separately accounted for in accordance with ASC 815, Derivatives and Hedging. Due to the anti-dilution features in the contracts, commonly referred to as “down-round protection”, the contracts did not meet the scope exception for treatment as a derivative under ASC 815 for 2017. As such, the embedded conversion feature in the Notes, the Warrants and the Placement Agent warrants were considered derivative financial instruments in 2017.

The accounting treatment of derivative financial instruments required that the Company record these instruments at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date in 2017. The changes in fair value were recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date during 2017.

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-11 which simplified the accounting for certain accounting instruments with down-round features. This update changed the classification analysis of certain equity-linked financial instruments such as warrants and imbedded conversion features such that a down-round feature is disregarded when assessing whether the instrument in indexed to an entity’s own stock. As a result of this change, in the quarter ended March 31, 2018, the Company removed all of the derivative accounting from its financial statements resulting in a gain of $142,857 recognized as accumulative adjustment to retained earnings on January 1, 2018.

Placement agent fees and other origination costs of the Notes are deducted from the carrying value of the Notes as original issue discount (“OID”). The OID is being amortized over the term of the Notes.

At December 31, 2018, the balance of the Notes is comprised of:

Face Value	$	2,000,000
Unamortized OID		(460,796	)
Carrying Value	$	1,539,204

The Company used the net proceeds of the Notes to fund the opening of a Craft Pizza & Pub restaurant and for general corporate purposes.

Total cash and non-cash interest accrued on the Company’s debts in 2018 was $655,000 and in 2017 was $1.5 million.